-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, gczNIeg2UWbnwBW9UCZAlTyQMPPt5/8pnH7arhKk3ooqZdf4OasqJdUxFKxMPfoq rTIaJOG2zRTavOlfXiyVPA== 0000950150-95-000267.txt : 19950428 0000950150-95-000267.hdr.sgml : 19950428 ACCESSION NUMBER: 0000950150-95-000267 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19950427 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS HOLDINGS INC /CA/ CENTRAL INDEX KEY: 0000898470 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 954407768 STATE OF INCORPORATION: CA FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-86356 FILM NUMBER: 95532107 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7147382000 MAIL ADDRESS: STREET 1: FOOD 4 LESS HOLDINGS INC /CA/ STREET 2: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD 4 LESS HOLDINGS INC /DE/ CENTRAL INDEX KEY: 0000936523 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 330642810 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-86356-01 FILM NUMBER: 95532108 BUSINESS ADDRESS: STREET 1: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 BUSINESS PHONE: 7147382000 MAIL ADDRESS: STREET 1: FOOD 4 LESS HOLDINGS INC /DE/ STREET 2: 777 S HARBOR BLVD CITY: LA HABRA STATE: CA ZIP: 90631 POS AM 1 POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1995 REGISTRATION NO. 33-86356 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ FOOD 4 LESS HOLDINGS, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 5411 95-4407768 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
777 SOUTH HARBOR BOULEVARD LA HABRA, CALIFORNIA 90631 (714) 738-2000 FOOD 4 LESS HOLDINGS, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5411 33-0642810 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
777 SOUTH HARBOR BOULEVARD LA HABRA, CALIFORNIA 90631 (714) 738-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES) ------------------------ MARK A. RESNIK, ESQ. VICE PRESIDENT AND SECRETARY FOOD 4 LESS HOLDINGS, INC. 777 SOUTH HARBOR BOULEVARD LA HABRA, CALIFORNIA 90631 (714) 738-2000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: THOMAS C. SADLER, ESQ. PAMELA B. KELLY, ESQ. LATHAM & WATKINS 633 WEST FIFTH STREET LOS ANGELES, CALIFORNIA 90071 (213) 485-1234 WILLIAM M. HARTNETT, ESQ. CAHILL GORDON & REINDEL 80 PINE STREET NEW YORK, NEW YORK 10005 (212) 701-3000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FOOD 4 LESS HOLDINGS, INC. CROSS-REFERENCE SHEET PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
ITEM NO. FORM S-4 CAPTION OFFER TO PURCHASE CAPTION - -------- ----------------------------------------- ----------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................... Facing Page; Cross Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front Cover Page; Outside Back Cover Page 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information............ Summary; Risk Factors; Business; Selected Historical Financial Data of Ralphs; Selected Historical Financial Data of Holdings 4. Terms of the Transaction................. The Offer to Purchase and Solicitation; The Merger and the Financing; Certain Federal Income Tax Considerations; The Proposed Amendments 5. Pro Forma Financial Information.......... Unaudited Pro Forma Combined Financial Statements 6. Material Contracts with the Company Being Acquired................................. * 7. Additional Information Required for Reoffering by Person and Parties Deemed to Be Underwriters....................... * 8. Interests of Named Experts and Counsel... Legal Matters; Experts 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. * 10. Information with Respect to S-3 Registrants.............................. * 11. Incorporation of Certain Information by Reference................................ * 12. Information with Respect to S-2 or S-3 Registrants.............................. *
13. Incorporation of Certain Information by Reference................................ * 14. Information with Respect to Registrants Other than S-3 or S-2 Registrants........ Inside Front Cover Page; Summary; Pro Forma Capitalization; Selected Historical Financial Data of Ralphs; Selected Historical Financial Data of Holdings; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Consolidated Financial Statements of Ralphs; Consolidated Financial Statements of Holdings 15. Information with Respect to S-3 Companies................................ * 16. Information with Respect to S-2 or S-3 Companies................................ *
3
ITEM NO. FORM S-4 CAPTION OFFER TO PURCHASE CAPTION - -------- ----------------------------------------- ----------------------------------------- 17. Information with Respect to Companies Other than S-2 or S-3 Companies.......... * 18. Information If Proxies, Consents or Authorizations Are to Be Solicited....... The Offer to Purchase and Solicitation; Management; Executive Compensation; Principal Stockholders; Certain Relationships and Related Transactions 19. Information If Proxies, Consents or Authorizations Are not to Be Solicited, or in an Exchange Offer.................. *
- --------------- * Inapplicable 4 OFFER TO PURCHASE AND SOLICITATION STATEMENT FOOD 4 LESS HOLDINGS, INC. [LOGO] OFFER TO PURCHASE FOR CASH AND [LOGO] SOLICITATION OF CONSENTS WITH RESPECT TO ITS 15.25% SENIOR DISCOUNT NOTES DUE 2004 ------------------------------ Food 4 Less Holdings, Inc. ("Holdings") hereby amends and restates its Prospectus and Solicitation Statement dated January 25, 1995 (the "Old Prospectus") and hereby offers (the "Offer to Purchase") to holders of its 15.25% Senior Discount Notes due 2004 (the "Discount Notes") to purchase for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date (as defined) (the "Cash Consideration") for every $1,000 principal amount (at maturity) of Discount Notes (which, as of May 1, 1995 had an accreted value of $680.26 per $1,000) accepted for purchase. The Offer to Purchase is subject to the terms and conditions set forth in this Offer to Purchase and Solicitation Statement and in the accompanying Consent and Letter of Transmittal (the "Letter of Transmittal"). Concurrently with the Offer to Purchase, Holdings is soliciting (the "Solicitation") consents ("Consents") from holders of the Discount Notes (the "Discount Noteholders") representing not less than a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates (the "Requisite Consents") to certain amendments described herein (the "Proposed Amendments") to the indenture under which the Discount Notes were issued (the "Discount Note Indenture"). As of May 1, 1995, there was $103.6 million aggregate principal amount (at maturity) of the Discount Notes issued and outstanding, with an aggregate Accreted Value (as defined) of $70.5 million. HOLDERS OF DISCOUNT NOTES WHO DESIRE TO ACCEPT THE OFFER TO PURCHASE MUST CONSENT TO THE PROPOSED AMENDMENTS. The Proposed Amendments will only become operative upon consummation of the Offer to Purchase. The primary purpose of the Proposed Amendments is to permit the Merger (as defined) and to eliminate substantially all of the restrictive covenants in the Discount Note Indenture. The Discount Notes, as so amended upon effectiveness of the Proposed Amendments, are referred to herein as the "Amended Discount Notes." The Offer to Purchase and the Solicitation are part of the financing required to consummate the proposed merger (the "RSI Merger") of Holdings' subsidiary Food 4 Less Supermarkets, Inc. ("Food 4 Less") with and into Ralphs Supermarkets, Inc. ("RSI"). Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), a wholly-owned subsidiary of RSI, will merge with and into RSI (the "RGC Merger," and together with the RSI Merger, the "Merger") and RSI will change its name to Ralphs Grocery Company ("Ralphs Grocery Company" or the "Company"). Prior to the Merger, Holdings' parent corporation, Food 4 Less, Inc. ("FFL") will merge with and into Holdings, which will be the surviving corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly-formed, wholly-owned subsidiary ("New Holdings"), incorporated in Delaware (the "Reincorporation Merger"). As a result of the Merger, the FFL Merger and the Reincorporation Merger, the Company will become a wholly-owned subsidiary of New Holdings and any Discount Notes not accepted for purchase pursuant to the Offer to Purchase will become the obligation of New Holdings. THE OFFER TO PURCHASE AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 30, 1995, UNLESS EXTENDED (THE "EXPIRATION DATE"). CONSENTS MAY BE REVOKED AND TENDERS MAY BE WITHDRAWN AT ANY TIME UNTIL SUCH TIME AS THE REQUISITE CONSENTS HAVE BEEN RECEIVED AND THE SUPPLEMENTAL INDENTURE (AS DEFINED) WITH RESPECT TO THE DISCOUNT NOTES HAS BEEN EXECUTED. ------------------------------ SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING THE OFFER TO PURCHASE AND THE SOLICITATION. ------------------------------ The Dealer Managers for the Offer to Purchase and the Solicitation are: BT SECURITIES CORPORATION CS FIRST BOSTON DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ------------------------------- The date of this Offer to Purchase and Solicitation Statement is May 2, 1995 5 (cover page continued) Holdings and Food 4 Less have revised certain terms and conditions of certain elements of the financing required for the Merger since the date of the Old Prospectus. As set forth in more detail in this Offer to Purchase and Solicitation Statement, Holdings and Food 4 Less have: (i) amended the Consent Solicitation with respect to the Discount Notes made pursuant to the Old Prospectus to provide for the commencement of the Offer to Purchase and the Solicitation of Requisite Consents to eliminate substantially all of the restrictive covenants in the Discount Note Indenture; (ii) amended the terms of the offers to the holders of Old RGC Notes (as defined) to (A) increase the exchange payment from $10.00 to $20.00 for each $1,000 principal amount of Old RGC Notes accepted in exchange for New RGC Notes (as defined), (B) change the consideration offered by providing holders of Old RGC Notes the option to tender all or any part of such Old RGC Notes for $1,010.00 in cash for each $1,000 principal amount of Old RGC Notes accepted for purchase, (C) revise the formula for establishing the interest rate on the New RGC Notes as set forth herein under "The RGC Offers, the F4L Exchange Offers and the Public Offerings" and (D) amend certain conditions of the RGC Offers (as defined) to decrease the amount of Old RGC Notes required to be tendered for exchange from 80% to a majority in principal amount of the Old RGC Notes; (iii) amended the Merger Agreement (as defined) with respect to the RSI Merger to (A) decrease the cash consideration to be paid to the stockholders of RSI from $425 million to $375 million, (B) increase the amount of 13 5/8% Senior Subordinated Pay-In-Kind Debentures due 2007 (the "Seller Debentures") to be issued as part of the consideration to be paid to the stockholders of RSI from $100 million principal amount to $131.5 million principal amount, (C) increase the interest rate on the Seller Debentures from 13% per annum to 13 5/8% per annum and (D) provide for the issuance of $18.5 million in initial accreted value of 13 5/8% Senior Discount Debentures due 2005 (the "New Discount Debentures") of New Holdings as consideration to the stockholders of RSI; (iv) increased the size of Food 4 Less' public debt offering for cash proceeds from an offering of $400 million principal amount of New F4L Senior Notes (as defined) to a total offering of $495 million principal amount of debt securities consisting of $295 million principal amount of New F4L Senior Notes and $200 million principal amount of New RGC Notes; (v) amended the terms of the New Equity Investment (as defined) to decrease the aggregate investment from $150 million to $140 million and to provide that the liquidation preference and conversion ratio of the convertible preferred stock issued pursuant to the New Equity Investment will accrete at the rate of 7% per annum, compounded quarterly (and subject to increase upon certain events), until the later of the fifth anniversary of the issue date or the date the Company satisfies certain performance criteria; and (vi) committed to effect a placement (the "New Discount Debenture Placement") of up to $100 million in initial accreted value of New Discount Debentures, which includes the $18.5 million of New Discount Debentures to be issued to the RSI stockholders, $22.5 million of New Discount Debentures to be issued in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing and $59 million of New Discount Debentures to be issued for cash. In addition, since the date of the Old Prospectus, Holdings has filed with the Securities and Exchange Commission (the "Commission") its quarterly report on Form 10-Q for the 28 weeks ended January 7, 1995 and RGC has filed with the Commission its annual report on Form 10-K for the 52 weeks ended January 29, 1995. This Offer to Purchase and Solicitation Statement sets forth the terms and conditions of the Offer to Purchase, the Solicitation and the other financing transactions described above as well as updated quarterly financial information of Holdings, updated year-end financial information of RGC and updated pro forma combined financial information. ii 6 (cover page continued) If Holdings shall decide to decrease the amount of Discount Notes being sought in the Offer to Purchase or to increase or decrease the consideration offered to holders of Discount Notes, and if, at the time that notice of such increase or decrease is first published, sent or given to holders of Discount Notes in the manner specified in this Offer to Purchase and Solicitation Statement, the Offer to Purchase is scheduled to expire at any time earlier than the expiration of a period ending on the tenth Business Day from and including the date that such notice is first so published, sent or given, then the Offer to Purchase will be extended for such purposes until the expiration of such period of ten Business Days. As used in this Offer to Purchase and Solicitation Statement, "Business Day" has the meaning set forth in Rule 14d-1 (and applicable to Regulation 14E) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Concurrently with the Offer to Purchase and the Solicitation, Food 4 Less is (i)(A) offering to holders of its 10.45% Senior Notes due 2000 (the "Old F4L Senior Notes") to exchange such Old F4L Senior Notes for new Senior Notes due 2004 (the "New F4L Senior Notes") plus $5.00 in cash for each $1,000 principal amount of Old F4L Senior Notes exchanged and to holders of its 13.75% Senior Subordinated Notes due 2001 (the "Old F4L Senior Subordinated Notes," and together with the Old F4L Senior Notes, the "Old F4L Notes") to exchange such Old F4L Senior Subordinated Notes for new 13.75% Senior Subordinated Notes due 2005 (the "New F4L Senior Subordinated Notes") plus $20.00 in cash for each $1,000 principal amount of Old F4L Senior Subordinated Notes exchanged and (B) soliciting consents from holders of the Old F4L Notes to certain amendments to the indentures (collectively, the "Old F4L Indentures") under which the Old F4L Notes were issued (such transactions being referred to herein collectively as the "F4L Exchange Offers"), and (ii)(A) offering to holders of the 9% Senior Subordinated Notes due 2003 of RGC (the "Old RGC 9% Notes") and to holders of the 10 1/4% Senior Subordinated Notes due 2002 of RGC (the "Old RGC 10 1/4% Notes," and together with the Old RGC 9% Notes, the "Old RGC Notes") (1) to exchange such Old RGC Notes for new Senior Subordinated Notes due 2005 (the "New RGC Notes") plus $20.00 in cash for each $1,000 principal amount of Old RGC Notes exchanged and (2) to purchase any or all of such holders' Old RGC Notes for $1,010.00 in cash per $1,000 principal amount accepted for purchase, plus accrued and unpaid interest thereon and (B) soliciting consents from holders of the Old RGC Notes to certain amendments to the indentures (collectively, the "Old RGC Indentures") under which the Old RGC Notes were issued (such transactions being referred to herein collectively as the "RGC Offers"). See "The Merger and the Financing" and "The RGC Offers, the F4L Exchange Offers and the Public Offerings." The New F4L Senior Notes and any Old F4L Senior Notes not exchanged in the F4L Exchange Offers are collectively referred to herein as the "F4L Senior Notes." The New F4L Senior Subordinated Notes and any Old F4L Senior Subordinated Notes not exchanged in the F4L Exchange Offers are collectively referred to herein as the "F4L Senior Subordinated Notes." The New RGC Notes and any Old RGC Notes not exchanged or purchased in the RGC Offers are collectively referred to herein as the "RGC Senior Subordinated Notes." See "The Merger and the Financing." In addition to the Offer to Purchase, the Solicitation, the RGC Offers and the F4L Exchange Offers, Food 4 Less is offering up to $295 million principal amount of additional New F4L Senior Notes (which will be part of the same issue as the New F4L Senior Notes offered pursuant to the F4L Exchange Offers) pursuant to a public offering (the "Senior Note Public Offering") and is offering up to $200 million principal amount of additional New RGC Notes (which will be part of the same issue as the New RGC Notes offered pursuant to the RGC Offers) pursuant to a public offering (the "Subordinated Note Public Offering," and together with the Senior Note Public Offering, the "Public Offerings"), each registered under the Securities Act of 1933, as amended (the "Securities Act"). The Public Offerings are expected to price ten business days preceding the final Expiration Date of the RGC Offers and the F4L Exchange Offers. See "The RGC Offers, the F4L Exchange Offers and the Public Offerings." The RGC Offers, the F4L Exchange Offers, the Public Offerings and the New Discount Debenture Placement are sometimes hereinafter referred to as the "Other Debt Financing Transactions." Concurrently with the consummation of the Offer to Purchase, the Solicitation and the Other Debt Financing Transactions, Food 4 Less and RGC intend to obtain new senior financing (the "Bank Financing") pursuant to a senior bank facility of up to $1,075 million (the "New Credit Facility") and to obtain iii 7 (cover page continued) $140 million in cash equity financing (the "New Equity Investment"). In addition, New Holdings will issue as part of the consideration for the RSI Merger $131.5 million aggregate principal amount of the Seller Debentures and will issue $100 million in initial accreted value of New Discount Debentures pursuant to the New Discount Debenture Placement. See "The Merger and the Financing." Standard & Poor's Ratings Group ("Standard & Poor's") has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline (as defined) under the Old RGC Indentures. The consummation of the Merger (which is conditioned on, among other things, successful consummation of the Offer to Purchase, the Other Debt Financing Transactions, the New Equity Investment, and the Bank Financing) and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline would constitute a Change of Control Triggering Event (as defined) under the Old RGC Indentures. Although Food 4 Less does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the RGC Offers, upon such a Change of Control Triggering Event the Company would be obligated to make a change of control purchase offer following the consummation of the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase (the "Change of Control Offer"). The Merger will not constitute a change of control under the Discount Note Indenture or the Old F4L Indentures and no change of control purchase offer will be made with respect to the Discount Notes or the Old F4L Notes. Notwithstanding any other provision of the Offer to Purchase or the Solicitation, the obligation of Holdings to accept for purchase any validly tendered Discount Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) the receipt of the Requisite Consents with respect to the Discount Notes on or prior to the Expiration Date, (ii) the satisfaction or waiver, in Holdings' sole discretion, of all conditions precedent to the Merger, (iii) the prior or contemporaneous successful completion of the Other Debt Financing Transactions and (iv) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. There can be no assurance that such conditions will be satisfied or waived. For additional information regarding other conditions to the consummation of the Offer to Purchase and the Solicitation, see "The Offer to Purchase and Solicitation -- Conditions." Although it has no obligation to do so, New Holdings reserves the right in the future to seek to acquire Discount Notes not tendered in the Offer to Purchase by means of open market purchases, privately negotiated acquisitions, subsequent exchanges or tender offers, redemptions or otherwise, at prices or on terms which may be higher or lower or more or less favorable than those in the Offer to Purchase. THE OFFER TO PURCHASE IS NOT BEING MADE TO, AND NO CONSENTS ARE BEING SOLICITED FROM, HOLDERS OF DISCOUNT NOTES IN ANY JURISDICTION IN WHICH THE OFFER TO PURCHASE OR THE SOLICITATION WOULD NOT BE IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. iv 8 (cover page continued) HOLDINGS IS TERMINATING THE CONSENT SOLICITATION DESCRIBED IN THE OLD PROSPECTUS. HOLDERS OF DISCOUNT NOTES THAT TENDERED CONSENTS IN CONNECTION WITH SUCH CONSENT SOLICITATION MUST COMPLY WITH THE PROCEDURES SET FORTH IN THIS AMENDED AND RESTATED PROSPECTUS AND SOLICITATION STATEMENT UNDER "THE OFFER TO PURCHASE AND SOLICITATION -- PROCEDURES FOR TENDERING AND CONSENTING" TO PARTICIPATE IN THE OFFER TO PURCHASE AND THE SOLICITATION. Any Holder of Discount Notes desiring to accept the Offer to Purchase should either (i) complete and sign the Letter of Transmittal or facsimile thereof, have his signature thereon guaranteed and forward the Letter of Transmittal with the certificate(s) evidencing his Discount Notes and any other required documents to the Solicitation Agent (as defined), (ii) comply with the guaranteed delivery procedures, (iii) tender such Discount Notes pursuant to the procedure for book entry transfer or (iv) request his broker, dealer, commercial bank, trust company or other nominee to effect the transaction for him, in each case on or prior to the Expiration Date. Holders of Discount Notes having Discount Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such person if they desire to tender such Discount Notes. HOLDERS OF DISCOUNT NOTES WHO DESIRE TO ACCEPT THE OFFER TO PURCHASE MUST CONSENT TO THE PROPOSED AMENDMENTS. A HOLDER OF DISCOUNT NOTES WHO DESIRES TO TENDER INTO THE OFFER TO PURCHASE WITH RESPECT TO ANY DISCOUNT NOTES MUST TENDER ALL OF SUCH HOLDERS' DISCOUNT NOTES. See "The Offer to Purchase and Solicitation -- Procedures for Tendering and Consenting." Questions and requests for assistance or for additional copies of this Offer to Purchase and Solicitation Statement or the accompanying Letter of Transmittal or any other required documents may be directed to the Dealer Managers or the Information Agent at the addresses and telephone numbers set forth on the back cover hereof. This Offer to Purchase and Solicitation Statement, together with the accompanying Letter of Transmittal, is being sent to Holders of the Discount Notes who are registered holders as of April 28, 1995. AVAILABLE INFORMATION Holdings and New Holdings have filed a Registration Statement on Form S-4 (the "Registration Statement") with the Commission under the Securities Act, with respect to the Amended Discount Notes. Each of Holdings, Food 4 Less and RGC is subject to the reporting and other informational requirements of the Exchange Act, and the rules and regulations promulgated thereunder, and in accordance therewith files reports and other information with the Commission. Such reports and other information filed by Holdings, Food 4 Less or RGC with the Commission can be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60601. Copies of such materials can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. This Offer to Purchase and Solicitation Statement summarizes the contents and terms of documents not included herewith. These documents are available upon request from, as applicable, Holdings and Food 4 Less at 777 South Harbor Blvd., La Habra, California 90631, telephone number (714) 738-2000, Attn: Linda McLoughlin Figel, Investor Relations; RGC at 1100 West Artesia Blvd., Compton, California 90220, telephone number (310) 884-4000, Attn: Jan Charles Gray Esq., Senior Vice President, General Counsel and Secretary; or D.F. King & Co., Inc., at the address and telephone number set forth on the back cover hereof. In order to ensure timely delivery of the documents, any request for such documents should be made at least five business days prior to the Expiration Date. v 9 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION................................................................. v SUMMARY............................................................................... 1 RISK FACTORS.......................................................................... 20 THE MERGER AND THE FINANCING.......................................................... 25 PRO FORMA CAPITALIZATION.............................................................. 29 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 31 SELECTED HISTORICAL FINANCIAL DATA OF RALPHS.......................................... 39 SELECTED HISTORICAL FINANCIAL DATA OF HOLDINGS........................................ 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 43 BUSINESS.............................................................................. 58 MANAGEMENT............................................................................ 72 EXECUTIVE COMPENSATION................................................................ 74 PRINCIPAL STOCKHOLDERS................................................................ 80 DESCRIPTION OF CAPITAL STOCK.......................................................... 81 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 84 THE OFFER TO PURCHASE AND SOLICITATION................................................ 88 MARKET PRICES OF THE DISCOUNT NOTES................................................... 101 THE PROPOSED AMENDMENTS............................................................... 101 THE RGC OFFERS, THE F4L EXCHANGE OFFERS AND THE PUBLIC OFFERINGS...................... 102 DESCRIPTION OF THE NEW CREDIT FACILITY................................................ 109 DESCRIPTION OF OTHER INDEBTEDNESS..................................................... 112 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................................. 114 LEGAL MATTERS......................................................................... 115 EXPERTS............................................................................... 115 INDEX TO FINANCIAL STATEMENTS......................................................... F-1 DESCRIPTION OF DISCOUNT NOTES......................................................... A-1
vi 10 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the Financial Statements and notes thereto appearing elsewhere in this Offer to Purchase and Solicitation Statement. Unless the context otherwise requires, (i) the terms "Food 4 Less" and "Ralphs," as used herein, refer to Food 4 Less and RSI and their consolidated subsidiaries, respectively, prior to the consummation of the Merger, (ii) the term "Holdings," as used herein, refers to Holdings and its consolidated subsidiaries (including Food 4 Less) prior to the consummation of the Reincorporation Merger, (iii) the term "FFL," as used herein, refers to FFL and its consolidated subsidiaries prior to the consummation of the FFL Merger, and (iv) the term "New Holdings," as used herein, refers to New Holdings (which will be the successor to Holdings following the consummation of the Reincorporation Merger) and its consolidated subsidiaries. The "Company" refers to Ralphs Grocery Company as the surviving and renamed subsidiary corporation of New Holdings following the consummation of the Merger and includes, unless the context otherwise requires, all of its consolidated subsidiaries. As used herein, "Southern California" means Los Angeles, Orange, Ventura, San Bernardino, Riverside and San Diego counties. Except as otherwise stated, references in this Offer to Purchase and Solicitation Statement to numbers of stores prior to the consummation of the Merger are as of October 1, 1994. References to the "pro forma" number of stores to be operated by the Company following the consummation of the Merger are based on October 1, 1994 totals, but give effect to certain anticipated store conversions, divestitures and closings. Holdings was incorporated in California on December 8, 1992, under the direction of its parent corporation, Food 4 Less, Inc. Holdings does not have any business operations of its own and its assets consist solely of all of the outstanding capital stock of Food 4 Less. Following the Merger, the FFL Merger and the Reincorporation Merger, New Holdings, as successor by merger to Holdings, will own all of the outstanding stock of the Company. THE COMPANY The combination of Ralphs Grocery Company and Food 4 Less Supermarkets, Inc. will create the largest food retailer in Southern California. Pro forma for the Merger, the Company will operate approximately 332 Southern California stores with an estimated 26% market share among the area's supermarkets. The Company will operate the second largest conventional supermarket chain in the region under the "Ralphs" name and the largest warehouse supermarket chain under the "Food 4 Less" name. In addition, the Company will operate approximately 24 conventional format stores and 39 warehouse format stores in Northern California and the Midwest. Management believes that by the end of the fourth full year of combined operations, approximately $90 million in net annual cost savings will be achieved as a result of the Merger. Pro forma for the Merger, Holdings would have had sales of approximately $5.1 billion and $2.8 billion, operating income of approximately $183 million and $90 million and EBITDA (as defined) of approximately $343 million and $189 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. Management believes the Merger will enhance the growth and profitability of Ralphs and Food 4 Less by providing the Company with the following benefits: - - TWO LEADING COMPLEMENTARY FORMATS. The Company will operate its conventional supermarkets in Southern California under the "Ralphs" name and all of its price impact warehouse format stores in Southern California under the "Food 4 Less" name. Pro forma for the Merger and certain planned store conversions, the Company will operate 264 Ralphs conventional format stores and 68 Food 4 Less warehouse format stores in the region. The Ralphs stores will continue to emphasize a broad selection of merchandise, high quality fresh produce, meat and seafood and service departments, including bakery and delicatessen departments in most stores. The Company's conventional stores will also benefit from Ralphs' strong private label program and its strengths in merchandising, store operations and systems. Passing on format-related efficiencies, the price impact warehouse format stores will continue to offer consumers the lowest overall prices while providing product selections comparable to conventional supermarkets. Management believes the Food 4 Less warehouse format has demonstrated its appeal to a wide range of demographic groups in Southern California and offers a significant opportunity for future growth. The 1 11 Company plans to open nine new Food 4 Less warehouse stores and 21 new Ralphs stores over the next two years. - - SUBSTANTIAL COST SAVINGS OPPORTUNITIES. Management believes that approximately $90 million of net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) will be achieved by the end of the fourth full year of combined operations. It is also anticipated that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the same period. Although a portion of the anticipated cost savings is premised upon the completion of such capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. The following anticipated savings are based on estimates and assumptions made by the Company that are inherently uncertain, though considered reasonable by the Company, and are subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of management. There can be no assurance that such savings will be achieved. The sum of the components of the estimated annual cost savings exceeds $90 million; however, management's estimate of $90 million in net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. See "Risk Factors -- Ability to Achieve Anticipated Cost Savings." -- REDUCED ADVERTISING EXPENSES. Consolidating the conventional format stores in Southern California under the "Ralphs" name will eliminate most of the separate advertising associated with Food 4 Less' existing Alpha Beta, Boys and Viva formats. Since Ralphs' current advertising program covers the Southern California region, the Company will be able to advertise for all of its Southern California stores under the existing Ralphs program. Management estimates that there will be annual advertising cost savings of approximately $28 million as compared to such costs for the pro forma combined fiscal year ended June 25, 1994. Because of reductions in certain advertising expenses that Food 4 Less has already begun to implement and certain refinements in the post-Merger advertising plan, actual cost savings related to advertising expenses are presently expected to be $19 million in the first full year of combined operations following the Merger as compared to the current annualized costs. -- REDUCED STORE OPERATIONS EXPENSE. Management expects to reduce store operations costs as a result of both reduced labor and benefit costs and reduced non-labor expenses. Store-level labor savings will be achieved when Ralphs' labor scheduling, computerized record keeping and other advanced store systems are applied to the Food 4 Less store base. In addition, management believes that the adoption of Ralphs' store systems in non-labor areas, such as energy management, safety programs and pooled supply purchasing, will produce further annual cost savings. Management estimates that annual store operations cost savings of approximately $21 million will be achieved by the fourth full year of combined operations after certain required capital expenditures are made. -- INCREASED VOLUME PURCHASING EFFICIENCIES. The combined volume requirements and leading market position of the Company should generally allow the Company to obtain improved terms from vendors, including suppliers of products carried on an exclusive or promoted basis, and to convert some less-than-truckload shipping quantities to full truckload quantities. Management estimates that annual purchasing cost savings of approximately $19 million will be achieved by the second full year of combined operations. -- WAREHOUSING AND DISTRIBUTION EFFICIENCIES. Consolidating the Company's warehousing and distribution operations into Ralphs' two primary facilities located in Compton, California and in the Atwater district of Los Angeles and Food 4 Less' primary facility located in La Habra, California will result in lower outside storage, transportation and labor costs. In addition, occupancy costs will be reduced as a result of the closure of certain existing facilities. Management estimates that annual warehousing and distribution cost savings of approximately $16 million will be achieved by the third full year of combined operations after certain capital expenditures on existing facilities are completed. 2 12 -- CONSOLIDATED MANUFACTURING. Ralphs and Food 4 Less operate manufacturing facilities that produce similar products or have excess capacity. Management believes that consolidating meat, bakery, dairy, and other manufacturing and processing operations, and discontinuing external purchases of certain goods that can be manufactured internally, will achieve annual cost savings of approximately $10 million by the second full year of combined operations. -- CONSOLIDATED ADMINISTRATIVE FUNCTIONS. The Company expects to achieve savings from the elimination of redundant administrative staff, the consolidation of management information systems and a decreased reliance on certain outside services and consultants. Management estimates that annual savings of approximately $15 million associated with consolidating administrative functions will be achieved by the second full year of combined operations. - - TECHNOLOGICALLY ADVANCED WAREHOUSING AND DISTRIBUTION. The Company will utilize Ralphs' technologically advanced warehousing and distribution systems, which include a 17 million cubic foot high-rise automated storage and retrieval system warehouse (the "ASRS") for non-perishable items and a 5.4 million cubic foot perishable service center (the "PSC") designed for processing, storing and distributing all perishable items. These facilities will provide the Company with substantial operating benefits, including: (i) enhanced turnover to further improve the freshness and quality of in-store products, (ii) added opportunities in forward buying programs and (iii) an increased percentage of inventory supplied by the Company's own warehousing and distribution system. Management believes the utilization of these facilities and Food 4 Less' La Habra warehouse will enable the Company to meet the combined inventory requirements of all stores with fewer employees and lower operating and occupancy-related expenses. - - STORE LOCATIONS. As a result of Ralphs' 122-year history and Alpha Beta Company's ("Alpha Beta") 91-year history in Southern California, the Company will have valuable and well established store locations, many of which are in densely populated metropolitan areas. - - RECENTLY REMODELED AND NEW STORE BASE. The Company will have a modern, technologically advanced store base. During the five years ended June 25, 1994, on a combined basis, Ralphs and Food 4 Less opened 74 new stores and remodeled 211 stores. Approximately 84% of the Company's stores have been opened or remodeled during the last five years. - - EXPERIENCED MANAGEMENT TEAM. The executive officers of the Company have extensive experience in the supermarket industry. The strength of Ralphs management expertise is evidenced by Ralphs' reputation for quality and service, technologically advanced systems, strong store operations and high historical EBITDA margins. The Food 4 Less management team will provide valuable experience in operating warehouse supermarkets and in effectively integrating companies into a combined operation. Following the acquisition of Alpha Beta in 1991, Food 4 Less management successfully integrated Alpha Beta with its existing Southern California operations and (within three years) achieved annual cost savings in excess of $40 million (compared to a pre-acquisition estimate of approximately $33 million). THE YUCAIPA COMPANIES Food 4 Less was organized in 1989 by its sponsor, The Yucaipa Companies ("Yucaipa"), a private investment group which specializes in the supermarket industry. Yucaipa has a successful track record in acquiring, integrating and improving the cash flow of supermarket companies. Since 1986, Yucaipa and its affiliated companies have completed eleven acquisition transactions, including five acquisitions by Food 4 Less and its subsidiaries. Following completion of the Merger, Yucaipa and its affiliates will control the Board of Directors of New Holdings and the Company. THE MERGER AND THE FINANCING On September 14, 1994, Food 4 Less, Inc. ("FFL"), Food 4 Less Supermarkets, Inc. ("Food 4 Less") and Food 4 Less Holdings, Inc. ("Holdings"), entered into a definitive Agreement and Plan of Merger (the 3 13 "Merger Agreement") with Ralphs Supermarkets, Inc. ("RSI") and its stockholders. Pursuant to the terms of the Merger Agreement, Food 4 Less will be merged with and into RSI (the "RSI Merger"). Immediately following the RSI Merger, RGC, which is currently a wholly-owned subsidiary of RSI, will merge with and into RSI (the "RGC Merger," and together with the RSI Merger, the "Merger"), and RSI will change its name to Ralphs Grocery Company ("Ralphs Grocery Company" or the "Company"). Prior to the Merger, FFL will merge with and into Holdings, which will be the surviving corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly-formed, wholly-owned subsidiary ("New Holdings"), incorporated in Delaware (the "Reincorporation Merger"). As a result of the Merger, the FFL Merger and the Reincorporation Merger, the Company will become a wholly-owned subsidiary of New Holdings. See "-- Corporate Structure." Conditions to the consummation of the RSI Merger include the receipt of regulatory approvals and other necessary consents and the completion of financing. The purchase price for RSI is approximately $1.5 billion, including the assumption of debt. The consideration payable to the stockholders of RSI consists of $375 million in cash, $131.5 million principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures to be issued by New Holdings. New Holdings will use $100 million of the cash received from the New Equity Investment, together with the Seller Debentures and such New Discount Debentures, to acquire approximately 48% of the capital stock of RSI immediately prior to consummation of the RSI Merger. New Holdings will then contribute the $250 million of purchased shares of RSI stock to Food 4 Less, and pursuant to the RSI Merger the remaining shares of RSI stock will be acquired for $275 million in cash. As a result of the Reincorporation Merger, any Amended Discount Notes that remain outstanding following the Merger will become the obligations of New Holdings. As currently contemplated, the Merger will be financed through the following transactions (collectively, the "Financing"): - Borrowings of up to $750 million aggregate principal amount pursuant to the New Term Loans (as defined) under the New Credit Facility to be provided by a syndicate of banks led by Bankers Trust Company ("Bankers Trust"). The New Credit Facility will also provide for a $325 million revolving credit facility (the "New Revolving Facility"), $12.7 million of which is anticipated to be drawn at closing. - The issuance of up to $295 million of New F4L Senior Notes pursuant to the Senior Note Public Offering. - The issuance of up to $200 million of New RGC Notes pursuant to the Subordinated Note Public Offering. - The issuance of preferred stock in a private placement by New Holdings to a group of investors (the "New Equity Investors") led by Apollo Advisors, L.P. (on behalf of one or more managed entities) or its affiliates and designees ("Apollo") and including affiliates of BT Securities Corporation ("BT Securities"), CS First Boston Corporation ("CS First Boston") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and other institutional investors, yielding cash proceeds of $140 million pursuant to the New Equity Investment. Concurrently with the New Equity Investment, the New Equity Investors will purchase outstanding shares of New Holdings capital stock from a stockholder of New Holdings for a purchase price of $57.8 million. See "Description of Capital Stock -- New Equity Investment." - The exchange by Food 4 Less pursuant to the F4L Exchange Offers of (a) up to $175 million aggregate principal amount of the Old F4L Senior Notes for up to $175 million aggregate principal amount of New F4L Senior Notes plus $5.00 in cash per $1,000 principal amount exchanged and (b) up to $145 million aggregate principal amount of the Old F4L Senior Subordinated Notes for up to $145 million aggregate principal amount of the New F4L Senior Subordinated Notes plus $20.00 in cash per $1,000 principal amount exchanged, together with the solicitation of consents from the holders of the Old F4L Notes to certain amendments to the Old F4L Indentures. It is a condition to the F4L Exchange Offers that at least 80% of the outstanding principal amount of the Old F4L Notes are exchanged pursuant to the F4L Exchange Offers. 4 14 - The RGC Offers by Food 4 Less to (i) exchange up to $450 million aggregate principal amount of the Old RGC Notes for up to $450 million aggregate principal amount of the New RGC Notes plus $20.00 in cash per $1,000 principal amount of Old RGC Notes exchanged and (ii) purchase Old RGC Notes for $1,010.00 in cash per $1,000 principal amount of Old RGC Notes accepted for purchase, together with the solicitation of consents from the holders of the Old RGC Notes to certain amendments to the Old RGC Indentures. It is a condition to the RGC Offers that at least a majority of the outstanding principal amount of the Old RGC Notes are exchanged for New RGC Notes pursuant to the RGC Offers (the "RGC Minimum Exchange"). - The purchase by New Holdings of approximately 48% of the outstanding common stock of RSI for an aggregate consideration of $250 million, consisting of $100 million of the cash proceeds from the New Equity Investment, $131.5 million principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures, followed by the contribution of such common stock of RSI to Food 4 Less. Pursuant to the RSI Merger, the remaining shares of RSI stock will be acquired for $275 million in cash. - The placement by New Holdings of $100 million initial accreted value of New Discount Debentures to a partnership including Yucaipa, the selling stockholders of Ralphs, an affiliate of George Soros, Apollo, and an affiliate of each of BT Securities, CS First Boston and DLJ. The $100 million initial accreted value of New Discount Debentures includes (a) $18.5 million that will be issued to the RSI stockholders, (b) $15 million, $5 million and $2.5 million that will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing and (c) $59 million that will be issued for cash to the partnership described above. The $41 million initial accreted value of New Discount Debentures to be issued to the RSI stockholders, Apollo, BT Securities and Yucaipa will be contributed to such partnership by the recipients thereof. - The assumption by the Company, pursuant to the Merger, of approximately $166.8 million of other indebtedness of RGC and Food 4 Less. - The Offer to Purchase and the Solicitation made hereunder to the holders of the Discount Notes. 5 15 The following table illustrates the sources and uses of funds to consummate the Merger, assuming the transaction occurs as of May 30, 1995. This presentation assumes that $225.5 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New RGC Notes (representing 50.1% of the outstanding aggregate principal amount of Old RGC Notes), $224.5 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash (representing 49.9% of the outstanding aggregate principal amount of Old RGC Notes), $256 million principal amount of Old F4L Notes is tendered into the F4L Exchange Offers (representing 80% of the outstanding aggregate principal amount of Old F4L Notes) and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Offer to Purchase (representing 100% of the outstanding aggregate principal amount (at maturity) of Discount Notes). Although management believes such assumptions are reasonable under the circumstances, actual sources and uses may differ from those set forth below depending upon the outcome of the Offer to Purchase, the F4L Exchange Offers and the RGC Offers. For additional information regarding the Financing, see "The Merger and the Financing." SOURCES AND USES (in millions)
CASH SOURCES CASH USES - --------------------------------------------- --------------------------------------------- New Term Loans(a)............... $ 750.0 Purchase RSI Common Stock(j)...... $ 375.9 New Revolving Facility(b)....... 12.7 Purchase Old RGC Notes(k)......... 226.8 New F4L Senior Notes(c)......... 295.0 Purchase Discount Notes........... 83.9 Repay Ralphs 1992 Credit New RGC Notes(d)................ 200.0 Agreement...................... 255.1 New Equity Investment(e)........ 140.0 Repay F4L Credit Agreement........ 161.5 New Discount Debentures(f)...... 59.0 Pay Accrued Interest(l)........... 29.3 EAR Related Payments(m)........... 22.8 Repay Mortgage Indebtedness(n).... 191.5 Fees and Expenses(o).............. 109.9 --------- --------- Total Cash Sources........... $ 1,456.7 Total Cash Uses................... $ 1,456.7 ========= ========= NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes(g)......... $ 140.0 Old F4L Senior Notes Exchanged.... $ 140.0 Assumed Old F4L Senior Notes.... 35.0 Assumed Old F4L Senior Notes...... 35.0 New F4L Senior Subordinated Old F4L Senior Subordinated Notes Notes........................ 116.0 Exchanged...................... 116.0 Assumed Old F4L Senior Assumed Old F4L Senior Subordinated Notes........... 29.0 Subordinated Notes............. 29.0 New RGC Notes(h)................ 225.5 Old RGC Notes Exchanged........... 225.5 New Discount Debentures(f)...... 41.0 Fees and Expenses(o).............. 22.5 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt......................... 166.8 Debt........................... 166.8 Seller Debentures(i)............ 131.5 Purchase RSI Common Stock(i)...... 150.0 --------- --------- Total Non-Cash Sources....... $ 884.8 Total Non-Cash Uses............... $ 884.8 ========= =========
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) term loans in the aggregate amount of up to $750 million, comprised of a $375 million tranche with a six year term (the "Tranche A Loan"), a $125 million tranche with a seven year term (the "Tranche B Loan"), a $125 million tranche with an eight year term (the "Tranche C Loan"), and a $125 million tranche with a nine year term (the "Tranche D Loan," and, together with the Tranche A Loan, Tranche B Loan and Tranche C Loan, the "New Term Loans"); and (ii) a $325 million revolving credit facility (the "New Revolving Facility"). The New Term Loans and the New Revolving Facility are referred to collectively as the "New Credit Facility." The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. See "Description of the New Credit Facility." (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for 6 16 approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. (c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. (d) Represents New RGC Notes issued pursuant to the Subordinated Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering. It is not anticipated that the amount of New RGC Notes offered pursuant to the Subordinated Note Public Offering will be reduced below $100 million principal amount. (e) Does not include the $10 million equity contribution by Ralphs management. See note (m) below. Concurrently with the New Equity Investment, certain existing stockholders of New Holdings (formerly stockholders of FFL), including affiliates of George Soros, will sell outstanding shares of New Holdings stock to CLH Supermarket Corp. ("CLH"), a corporation owned by certain Yucaipa partners, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million (which represents the same price per share as will be paid in the New Equity Investment). In connection with the New Equity Investment, the New Equity Investors will contribute the common stock so acquired to New Holdings in consideration for newly-issued preferred shares. See "Description of Capital Stock -- New Equity Investment." (f) Represents $100 million initial accreted value of New Discount Debentures, $59 million of which will be issued for cash, $18.5 million of which will be issued to the RSI stockholders as Merger consideration and $15 million, $5 million and $2.5 million of which will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing. (g) Represents New F4L Senior Notes issued pursuant to the F4L Exchange Offers, which will be part of the same issue as the New F4L Senior Notes issued pursuant to the Senior Note Public Offering. (h) Represents New RGC Notes issued pursuant to the RGC Offers, which will be part of the same issue as the New RGC Notes issued pursuant to the Subordinated Note Public Offering. (i) In connection with the RSI Merger, New Holdings will issue $131.5 million principal amount of the Seller Debentures as part of the purchase price for the RSI common stock, up to $10 million of which may be put to Yucaipa on the closing date of the Merger at a purchase price equal to their principal amount pursuant to the Put Agreement (as defined). In addition, Yucaipa will be reimbursed by the Company for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. See "The Merger and the Financing" and "Description of Other Indebtedness -- The Seller Debentures." (j) Includes $375 million to be paid in cash to stockholders of RSI and $0.9 million to be paid in cash to holders of RSI management stock options. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." (k) Represents the purchase of Old RGC Notes tendered for cash pursuant to the RGC Offers. In addition, to the extent any Old RGC Notes remain outstanding following consummation of the RGC Offers, a portion of the Tranche A Loan not fully funded at the Closing Date will be available to fund the purchase of Old RGC Notes pursuant to the Change of Control Offer. See "The RGC Offers, the F4L Exchange Offers and the Public Offerings." (l) Represents accrued interest payable on all debt securities assumed to be tendered pursuant to the F4L Exchange Offers and the RGC Offers. (m) Represents payments to or for the benefit of Ralphs management with respect to outstanding equity appreciation rights (the "EARs" or "Equity Appreciation Rights") in connection with the Merger. Ralphs management will receive New Holdings stock options in exchange for the cancellation of the remaining EAR liability of $10 million. See "Executive Compensation -- Equity Appreciation Rights Plan" and "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." (n) Represents the repayment of outstanding mortgage indebtedness of Ralphs in the principal amount of $174.1 million, plus the estimated amount of the prepayment fees payable with respect thereto. (o) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of $5 million to be paid to BT Securities and commitment fees of $5 million to be paid to Apollo, upon closing of the Merger. Of such amounts, $15 million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT Securities' $5 million fee will be paid through the issuance of New Discount Debentures in lieu of cash. Such New Discount Debentures will be contributed by them to the partnership that will acquire all of the New Discount Debentures. Yucaipa anticipates that it in turn will pay a cash fee of approximately $3.5 million to Soros Fund Management in consideration for advisory services which Soros Fund Management has rendered since 1991. See "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." 7 17 CORPORATE STRUCTURE The following tables illustrate (i) the corporate structures of FFL, Holdings, Food 4 Less and Ralphs immediately prior to the RSI Merger, the RGC Merger, the FFL Merger and the Reincorporation Merger and (ii) the corporate structure of New Holdings and the Company, and the anticipated outstanding indebtedness of New Holdings and the Company, immediately after such mergers. Prior to the RSI Merger, FFL will merge with and into Holdings, and Holdings (which will be the surviving corporation) will reincorporate in Delaware as New Holdings. Pursuant to the terms of the Merger Agreement, Food 4 Less will merge with and into RSI and RSI will be the surviving corporation in the RSI Merger. Immediately following the RSI Merger, RGC will merge with and into RSI and RSI will be the surviving corporation in the RGC Merger and will change its name to Ralphs Grocery Company. BEFORE MERGER [See Edgar Appendix] 8 18 AFTER MERGER, FFL MERGER AND REINCORPORATION MERGER [See Edgar Appendix] 9 19 PURPOSES OF THE OFFER TO PURCHASE AND CONSENT SOLICITATION The Offer to Purchase and the Solicitation, together with the other financing and solicitation transactions described under "The Merger and the Financing," are part of the transactions required to consummate the Merger of Food 4 Less with and into RSI. Immediately following the RSI Merger, RGC, a wholly-owned subsidiary of RSI, will merge with and into RSI and RSI will change its name to Ralphs Grocery Company. As a result of the Reincorporation Merger, any Amended Discount Notes that remain outstanding following the consummation of the Offer to Purchase will become the obligation of New Holdings. In connection with the consummation of the Merger, Holdings is making the Offer to Purchase in order to retire the Discount Notes and is seeking Consents to the Proposed Amendments in the Solicitation in order to permit the consummation of the Merger and to eliminate substantially all of the restrictive covenants in the Discount Note Indenture. See "The Proposed Amendments." If adopted by the holders of not less than a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates, the Proposed Amendments will become effective immediately prior to the consummation of the Merger, upon Holdings' acceptance of properly tendered Discount Notes for purchase pursuant to the Offer to Purchase. THE OFFER TO PURCHASE AND THE SOLICITATION The Offer to Purchase......... Holdings is offering to holders of the Discount Notes to purchase for $785.00 in cash, plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date for every $1,000 principal amount (at maturity) of Discount Notes (which, as of May 1, 1995 had an accreted value of $680.26 per $1,000) accepted for purchase. See "The Offer to Purchase and Solicitation -- Terms of the Offer to Purchase." Holders of the Discount Notes may choose to participate in the Offer to Purchase by completing the appropriate boxes on the Letter of Transmittal. See "The Offer to Purchase and Solicitation -- Procedures for Tendering and Consenting." The Solicitation.............. Concurrently with the Offer to Purchase, Holdings is soliciting Consents from each of the Discount Noteholders representing not less than a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates to the Proposed Amendments to the Discount Note Indenture. See "The Proposed Amendments." HOLDERS OF DISCOUNT NOTES WHO DESIRE TO ACCEPT THE OFFER TO PURCHASE MUST CONSENT TO THE PROPOSED AMENDMENTS. HOLDERS DO NOT HAVE THE OPTION TO CONSENT TO THE PROPOSED AMENDMENTS WITHOUT TENDERING INTO THE OFFER TO PURCHASE. See "The Offer to Purchase and Solicitation -- Procedures for Tendering and Consenting." The Company and the trustee under the Discount Note Indenture (the "Trustee") will execute the Supplemental Indenture implementing the Proposed Amendments to the Discount Note Indenture after certification to the Trustee that Holdings has received the Requisite Consents. The Proposed Amendments will only become operative upon the execution of the Supplemental Indenture and consummation of the Offer to Purchase. If the Proposed Amendments become operative, the non-tendering holders of Dis- 10 20 count Notes will be bound thereby regardless of whether they consented to the Proposed Amendments. All references herein to the Offer to Purchase shall be deemed to include the Solicitation. As of May 1, 1995, there was issued and outstanding $103.6 million aggregate principal amount (at maturity) of Discount Notes with an accreted value of $70.5 million. See "The Offer to Purchase and Solicitation -- The Consent Solicitation." The Proposed Amendments....... The Proposed Amendments would make the following changes to the Discount Note Indenture: 1. Eliminate the covenant entitled "Disposition of Proceeds of Public Offering Sale." 2. Eliminate the covenant entitled "Limitation on Change of Control." 3. Eliminate the covenant entitled "Limitation on Restricted Payments." 4. Eliminate the covenant entitled "Limitation on Incurrences of Additional Indebtedness." 5. Eliminate the covenant entitled "Limitation on Liens." 6. Eliminate the covenant entitled "Limitation on Disposition of Assets." 7. Eliminate the covenant entitled "Restrictions on Sale of Stock of Subsidiaries." 8. Eliminate the covenant entitled "Limitation on Transactions with Affiliates." 9. Eliminate the covenant entitled "SEC Reports and Other Information." 10. Amend the provisions regarding when Holdings may consolidate or merge with or sell all or substantially all of its assets to, any other person or entity, to eliminate the subsections thereof which require that immediately after giving effect to such transaction and the incurrence of any indebtedness in connection therewith, Holdings or the surviving entity, as the case may be, has a Net Worth (as defined) that meets the standards set forth therein. 11. The definitions relating solely to such eliminated covenants will be eliminated. The Supplemental Indenture will provide that the New Credit Facility constitutes a refinancing of the Loan Documents (as defined). The remaining sections of the Discount Note Indenture will not be changed by the Proposed Amendments. Expiration Date............... The Offer to Purchase and the Solicitation will expire at 12:00 Midnight, New York City time, on May 30, 1995, unless extended by Holdings. Holdings reserves the right to extend the Offer to Purchase or the Solicitation at its discretion, in which event the term "Expiration Date" shall mean the latest time and date at 11 21 which the Offer to Purchase or the Solicitation, as the case may be, as so extended by Holdings, shall expire. Withdrawal Rights and Revocation of Consents...... Tenders of Discount Notes pursuant to the Offer to Purchase may be withdrawn and Consents may be revoked at any time until the Requisite Consents with respect to the Discount Notes have been received and the Supplemental Indenture has been executed. Thereafter, such tenders may be withdrawn and Consents may be revoked if the Offer to Purchase is terminated without any Discount Notes being accepted for purchase thereunder. Any valid revocation of Consents will automatically constitute a withdrawal of the Discount Notes to which such Consents relate. See "The Offer to Purchase and Solicitation -- Withdrawal of Tenders and Revocation of Consents." Conditions.................... Notwithstanding any other provision of the Offer to Purchase or the Solicitation, the obligation of Holdings to accept for purchase any validly tendered Discount Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) the receipt of the Requisite Consents (i.e., Consents from Discount Noteholders representing at least a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates) on or prior to the Expiration Date, (ii) satisfaction or waiver, in Holdings' sole discretion, of all conditions precedent to the Merger, (iii) the prior or contemporaneous consummation of the Other Debt Financing Transactions and (iv) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. There can be no assurance that such conditions will be satisfied or waived. Holdings reserves the right to waive certain of the conditions to the Offer to Purchase and, subject to certain limitations, to extend, terminate, cancel or otherwise modify or amend the Offer to Purchase in any respect. See "The Offer to Purchase and Solicitation -- Conditions." Procedures for Tendering and Consenting.................. Any Discount Noteholder desiring to accept the Offer to Purchase should either (i) complete and sign the Letter of Transmittal or facsimile thereof, have his signature thereon guaranteed and forward the Letter of Transmittal, together with the certificate(s) evidencing his Discount Notes and any other required documents, to the Depositary, (ii) comply with the guaranteed delivery procedure described under the heading "The Offer to Purchase and Solicitation -- Guaranteed Delivery Procedure," (iii) tender such Discount Notes pursuant to the procedure for book-entry transfer, or (iv) request his broker, dealer, commercial bank, trust company or other nominee to effect the transaction for him, in each case prior to the Expiration Date. Discount Noteholders having Discount Notes registered in the name of a broker, dealer, commercial 12 22 bank, trust company or other nominee must contact such person if such holder desires to tender such Discount Notes. HOLDERS OF DISCOUNT NOTES WHO DESIRE TO ACCEPT THE OFFER TO PURCHASE MUST CONSENT TO THE PROPOSED AMENDMENTS. A HOLDER OF DISCOUNT NOTES WHO DESIRES TO TENDER INTO THE OFFER TO PURCHASE WITH RESPECT TO ANY DISCOUNT NOTES MUST TENDER ALL OF SUCH HOLDERS' DISCOUNT NOTES. See "The Offer to Purchase and Solicitation -- Procedures for Tendering and Consenting." HOLDINGS IS TERMINATING THE CONSENT SOLICITATION DESCRIBED IN THE OLD PROSPECTUS. HOLDERS OF DISCOUNT NOTES THAT TENDERED CONSENTS IN CONNECTION WITH SUCH CONSENT SOLICITATION MUST COMPLY WITH THE PROCEDURES SET FORTH IN THIS OFFER TO PURCHASE AND SOLICITATION STATEMENT UNDER "THE OFFER TO PURCHASE AND SOLICITATION -- PROCEDURES FOR TENDERING AND CONSENTING" TO PARTICIPATE IN THE OFFER TO PURCHASE AND SOLICITATION. Payment of the Cash Consideration............... Upon satisfaction or waiver of the conditions to the Offer to Purchase, Holdings will accept all Discount Notes which are properly tendered and not withdrawn, and promptly following such acceptance, New Holdings will pay, or cause to be paid, the Cash Consideration in accordance with the instructions of the tendering Discount Noteholder. See "The Offer to Purchase and Solicitation -- Acceptance of Discount Notes for Payment; Payment of the Cash Consideration." Certain Consequences to Non-Tendering Discount Noteholders................. Consummation of the Offer to Purchase and the effectiveness of the Proposed Amendments may have adverse consequences to non-tendering Discount Noteholders, including that non-tendering holders of Amended Discount Notes will no longer be entitled to the benefit of certain of the restrictive covenants currently contained in the Discount Note Indenture and that the reduced amount of outstanding Amended Discount Notes as a result of the Offer to Purchase may adversely affect the trading market, liquidity and market price of the Amended Discount Notes. If the Requisite Consents are received and accepted, the Proposed Amendments will be binding on all non-tendering Discount Noteholders. See "Risk Factors -- Potential Adverse Effects of the Offer to Purchase and the Solicitation on Holders of Untendered Discount Notes" and "-- Effect of the Proposed Amendments on Holders That Do Not Tender." 13 23 No Appraisal Rights........... No appraisal rights are available to holders of Discount Notes in connection with the Offer to Purchase. Certain Federal Income Tax Considerations.............. Holders whose Discount Notes are purchased for Cash Consideration will recognize gain or loss for federal income tax purposes equal to the difference between (i) the amount of Cash Consideration received and (ii) the holder's adjusted tax basis in the Discount Notes purchased. See "Certain Federal Income Tax Considerations." Risk Factors.................. See "Risk Factors" for a discussion of certain factors that should be considered in evaluating the Offer to Purchase and the Solicitation. Dealer Managers............... BT Securities Corporation ("BT Securities"), CS First Boston Corporation ("CS First Boston") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") are serving as Dealer Managers in connection with the Offer to Purchase and the Solicitation. Their telephone numbers are (212) 775-2166, (212) 909-2873 and (212) 504-4753, respectively. Depositary.................... Bankers Trust, an affiliate of BT Securities, is serving as Depositary in connection with the Offer to Purchase and the Solicitation. Its telephone number is (212) 250-6270. Information Agent............. D.F. King & Co., Inc. is serving as Information Agent in connection with the Offer to Purchase and the Solicitation. Requests for additional copies of this Offer to Purchase and Solicitation Statement, the Letter of Transmittal and any other required documents should be directed to the Information Agent or any Dealer Manager at one of its addresses set forth on the back cover page of this Offer to Purchase and Solicitation Statement. The telephone number of the Information Agent is (800) 669-5550. 14 24 SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA The following table sets forth summary unaudited pro forma combined financial data for the 52 weeks ended June 25, 1994 and for the 28 weeks ended January 7, 1995, after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), as if such transactions had occurred on June 27, 1993 with respect to the pro forma operating and other data, and as of January 7, 1995, with respect to the pro forma balance sheet data. Such pro forma information combines the results of operations of Holdings for the 52 weeks ended June 25, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 7, 1995, with the results of operations of Ralphs for the 52 weeks ended July 17, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 29, 1995, respectively. See "The Merger and the Financing." Prior to consummation of the Merger, FFL will merge with and into Holdings, and Holdings (which will be the surviving corporation) will reincorporate in Delaware as New Holdings. FFL is a holding company and the assets of FFL consist solely of its investment in the capital stock of Holdings. For purposes of the pro forma financial presentation set forth below, the minority ownership interest in Holdings that existed prior to the FFL Merger has been classified with the majority ownership interest in Holdings as a result of its elimination in the FFL Merger. The merger of FFL into Holdings has no effect on Holdings. The pro forma financial data set forth below is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of the dates indicated, or that may be achieved in the future. The following pro forma financial data should be read in conjunction with the "Unaudited Pro Forma Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Holdings and Ralphs and related notes thereto, included elsewhere in this Offer to Purchase and Solicitation Statement.
52 WEEKS ENDED 28 WEEKS ENDED JUNE 25, 1994 JANUARY 7, 1995 ---------------------- ------------------ (DOLLARS IN MILLIONS) OPERATING DATA: Sales.................................................... $5,053.5 $2,767.6 Gross profit............................................. 1,048.2 553.0 Selling, general and administrative expenses............. 833.1 442.1 Interest expense: Cash.................................................. 223.9 122.3 Non-cash.............................................. 47.8 27.4 Amortization of debt issuance costs................... 13.4 6.9 ---------- ---------- Total interest expense................................... 285.1 156.6 Net loss(a).............................................. (119.1) (67.1) Ratio of earnings to fixed charges(b).................... -- -- BALANCE SHEET DATA (END OF PERIOD): Working capital.................................................................. $ 18.4 Total assets..................................................................... 3,096.2 Total debt....................................................................... 2,225.1 Stockholders' equity............................................................. 56.2 OTHER DATA: Depreciation and amortization............................ $ 150.8 $ 76.4 Capital expenditures(c).................................. 123.2 78.1 Stores open at end of period(d).......................... -- 395 EBITDA (as defined)(a)(e)(f)............................. $ 342.5 $ 189.3 EBITDA margin(g)......................................... 6.8% 6.8%
- --------------- (a) The summary unaudited pro forma combined financial data and the results of operations and EBITDA (as defined) for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 do not include certain one-time non-recurring costs related to (i) severance payments under certain employment contracts with Food 4 Less management totaling $1.4 million that are subject to change of control provisions and the achievement of earnings and sales targets, (ii) costs related to the integration of the Company's operations, which are estimated to be $50.0 million over a three-year period, (iii) $1.8 million in costs related to the cancellation of an employment agreement, and (iv) other costs related to warehouse closures, which costs are not presently determinable. (b) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary items and fixed charges before capitalized interest. "Fixed charges" consist of 15 25 interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Holdings' pro forma earnings were insufficient to cover pro forma fixed charges by approximately $119.1 million and $67.1 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. However, such pro forma earnings included non-cash charges of $221.6 million and $119.4 million, respectively, primarily consisting of depreciation and amortization. (c) Does not include Merger-related capital expenditures of $55.0 million and $37.5 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. It is estimated that the gross capital expenditures to be made by the Company in the first fiscal year following the closing will be approximately $153 million (or $106 million net of expected capital leases), of which approximately $98 million relate to ongoing expenditures for new stores, equipment and maintenance and approximately $55 million relate to store conversions and other Merger-related and non-recurring items. (d) The pro forma number of stores is based on October 1, 1994 totals, but gives effect to the closing or divestiture of 32 stores (29 Food 4 Less conventional supermarkets or warehouse stores and 3 Ralphs stores) in connection with the Merger and the closure of 2 additional Food 4 Less conventional stores open at October 1, 1994 which were subsequently closed. The pro forma financial information presented herein has been based upon the actual number of stores open as of the beginning of each period presented, adjusted for the closing or divestiture of the 32 stores which have yet to be consummated and does not include any pro forma adjustment attributable to the 2 stores closed subsequent to October 1, 1994. (e) "EBITDA," as defined and presented historically by RGC, represents net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provision for Equity Appreciation Rights, provision for tax indemnification payments to Federated Department Stores, Inc. ("Federated"), provision for postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Holdings' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (f) Pro forma EBITDA does not give any effect to $90 million of anticipated net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) which management believes are achievable by the end of the fourth full year of combined operations. It is anticipated that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the same period. Although a portion of the anticipated cost savings is premised upon the completion of such capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. As shown below, the sum of the components of the estimated annual cost savings exceeds $90 million; however, management's estimate of $90 million in net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. These anticipated savings are based on estimates and assumptions made by the Company that are inherently uncertain, though considered reasonable by the Company, and are subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of management. As a result, there can be no assurance that such savings will be achieved. See "Business -- The Merger" and "Risk Factors -- Ability to Achieve Anticipated Cost Savings." The components of the estimated cost savings are as follows:
(IN MILLIONS) Pro forma EBITDA for the 52 weeks ended June 25, 1994........................ $ 342.5 Estimated net annual cost savings: Reduced advertising expenses............................................... 28.0 Reduced store operations expense........................................... 21.0 Increased volume purchasing efficiencies................................... 19.0 Warehousing and distribution efficiencies.................................. 16.0 Consolidated manufacturing................................................. 10.0 Consolidated administrative functions...................................... 15.0 Less: Annual reinvestment of cost savings.................................. (19.0) ------ Total estimated net annual cost savings...................................... $ 90.0 ------ Sum of EBITDA (as defined) and full amount of estimated annual cost savings to be realized over four years............................................. $ 432.5 ===========
Because of reductions in certain advertising expenses that Food 4 Less has already begun to implement and certain refinements in the post-Merger advertising plan, actual cost savings related to advertising expenses are expected to be approximately $19 million in the first full year following the Merger as compared to the current annualized costs. (g) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 16 26 SUMMARY HISTORICAL FINANCIAL DATA OF RALPHS The following table sets forth summary historical financial data of RGC (as the predecessor of RSI) as of and for the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992, and summary historical financial data of RSI as of and for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29, 1995, which have been derived from the financial statements of RSI and RGC audited by KPMG Peat Marwick LLP, independent certified public accountants. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of RSI and RGC and related notes thereto included elsewhere in this Offer to Purchase and Solicitation Statement.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, 1991 1992 1993 1994 1995 ----------- ----------- ----------- ----------- ---------- (DOLLARS IN MILLIONS) OPERATING DATA: Sales.................................................... $ 2,799.1 $ 2,889.2 $ 2,843.8 $ 2,730.2 $2,724.6 Gross profit............................................. 573.7 614.0 626.6 636.5 623.6 Selling, general and administrative expenses(a).......... 438.0 459.2 470.0 471.0 467.0 Interest expense(b)...................................... 128.5 130.2 125.6 108.8 112.7 Net earnings (loss)(c)................................... (51.4) (41.2) (76.1) 138.4(i) 32.1 Ratio of earnings to fixed charges(d).................... --(d) --(d) 1.02x 1.24x 1.24x BALANCE SHEET DATA (end of period): Working capital surplus (deficit)........................ $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (119.5) Total assets............................................. 1,406.4 1,357.6 1,388.5 1,483.7 1,509.9 Total debt(e)............................................ 986.1 941.9 1,029.8 998.9 1,018.5 Redeemable stock......................................... 3.0 3.0 -- -- -- Stockholders' equity (deficit)........................... (16.0) (57.2) (133.3) 5.1 27.2 OTHER DATA: Depreciation and amortization(f)......................... $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 76.0 Capital expenditures..................................... 87.6 50.4 102.7 62.2 64.0 Stores open at end of period............................. 150 158 159 165 173 EBITDA (as defined)(g)................................... $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 230.2 EBITDA margin(h)......................................... 7.4% 7.8% 8.0% 8.4% 8.4%
- --------------- (a) Includes provision for post retirement benefits other than pensions of $2.2 million, $2.6 million, $3.3 million, $3.4 million, and $2.6 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. (b) Interest expense includes non-cash charges related to the amortization of deferred debt issuance costs of $4.1 million for the 53 weeks ended February 3, 1991, $5.0 million for the 52 weeks ended February 2, 1992, $5.5 million for the 52 weeks ended January 31, 1993, $6.5 million for the 52 weeks ended January 30, 1994 and $6.1 million for the 52 weeks ended January 29, 1995, respectively. (c) Net earnings (loss) includes expenses relating to provisions for Equity Appreciation Rights and for tax indemnification payments to Federated, extraordinary item relating to debt refinancing, loss on disposal of assets, provisions for postretirement and pension benefits and provision for earthquake losses. (d) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary item and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992 by approximately $25.5 million and $27.7 million, respectively. (e) Total debt includes long-term debt, current maturities of long-term debt, short-term debt and capital lease obligations. (f) For the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, depreciation and amortization includes amortization of the excess of cost over net assets acquired of $11.0 million, $11.0 million, $11.0 million, $11.0 million and $11.0 million, respectively. (g) "EBITDA," as defined and presented historically by RGC, represents earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provisions for Equity Appreciation Rights, provision for tax indemnification payments to Federated, provision for postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Ralphs' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (h) EBITDA margin represents EBITDA (as defined) as a percentage of sales. (i) Includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993 (see Note 11 of Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc.). 17 27 SUMMARY HISTORICAL FINANCIAL DATA OF HOLDINGS The following table sets forth summary historical financial data of Holdings and its predecessor, Food 4 Less. Because Holdings acquired the capital stock of Food 4 Less in a reorganization, which occurred December 31, 1992, the financial data presented below for periods ending prior to such date represent data of Food 4 Less. Operating data of Holdings for the 52 weeks ended June 26, 1993 reflects the operating results of Food 4 Less only until December 31, 1992, and reflects the consolidated operating results of Holdings for the remainder of the period. The historical financial data of Food 4 Less presented below as of and for the 52 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991 and the 52 weeks ended June 27, 1992, and the historical financial data of Holdings presented below as of and for the 52 weeks ended June 26, 1993 and the 52 weeks ended June 25, 1994 have been derived from the financial statements of Holdings and Food 4 Less audited by Arthur Andersen LLP, independent public accountants. The summary historical financial data of Holdings presented below as of and for the 28 weeks ended January 8, 1994 and January 7, 1995 have been derived from unaudited interim financial statements of Holdings which, in the opinion of management, reflect all material adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Holdings and related notes thereto included elsewhere in this Offer to Purchase and Solicitation Statement.
FOOD 4 LESS HOLDINGS ------------------------------ --------------------------------------------- 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 28 WEEKS 28 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1990 1991(a) 1992 1993 1994(b) 1994 1995 -------- -------- -------- -------- -------- ---------- ---------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales.......................................... $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $1,416.2 $1,404.7 Gross profit................................... 204.8 265.7 520.8 484.2 469.3 262.2 237.5 Selling, general, administrative and other expenses..................................... 157.8 213.1 469.7 434.9 388.8 221.5 199.2 Interest expense(c)............................ 50.8 50.1 70.2 73.6 77.0 41.5 43.2 Net loss....................................... (10.1) (9.6) (33.8) (31.2) (11.5) (5.7) (14.3) Ratio of earnings to fixed charges(d).......... --(d) --(d) --(d) --(d) --(d) --(d) --(d) BALANCE SHEET DATA (end of period)(e): Working capital surplus (deficit).............. $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (14.9) $ (44.8) Total assets................................... 574.7 980.0 998.5 957.8 980.1 969.6 984.6 Total debt(f).................................. 360.7 558.9 525.3 588.3 576.9 576.2 615.9 Redeemable stock............................... 5.1 -- -- -- -- -- -- Stockholder's equity (deficit)................. 20.6 84.6 50.8 22.6 10.0 16.2 (4.1) OTHER DATA: Depreciation and amortization(g)............... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8 Capital expenditures........................... 36.4 34.7 60.3 53.5 57.5 20.4 39.0 Stores open at end of period................... 115 259 249 248 258 249 266 EBITDA (as defined)(h)......................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4 EBITDA margin(i)............................... 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
- --------------- (a) Operating data for the 52 weeks ended June 29, 1991 include the results of Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha Beta's sales for the two weeks ended June 29, 1991 were $59.2 million. (b) Operating data for the 52 weeks ended June 25, 1994 include the results of the Food Barn stores, which were not material, from March 29, 1994, the date of the Food Barn acquisition. (c) Interest expense includes non-cash charges related to the amortization of deferred financing costs of $4.1 million for the 53 weeks ended June 30, 1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June 26, 1993, $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks ended January 7, 1995. (d) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of loss before provision for income taxes and extraordinary charges plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred debt financing costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 and January 7, 1995, by approximately $9.1 million, $3.4 million, $25.6 million, $29.8 million, $8.8 million, $5.0 million and $13.8 million, respectively. However, such earnings included non-cash charges of $29.9 million for the 53 weeks ended June 30, 1990, $37.0 million for the 52 weeks ended June 29, 1991, $61.2 million for the 52 weeks ended June 27, 1992, $66.4 million for the 52 weeks ended June 26, 1993, $71.3 million for the 52 weeks ended June 25, 1994, $38.0 million for the 28 weeks ended January 8, 1994 and $44.6 million for the 28 weeks ended January 7, 1995, primarily consisting of depreciation, amortization and accretion of interest. 18 28 (e) Balance sheet data as of June 30, 1990 include the effect of the acquisition of Breco Holding Company (the "BHC Acquisition"), as well as the acquisitions of Bell Markets, Inc. and certain assets of ABC Market Corp. Balance sheet data as of June 29, 1991, June 27, 1992, June 26, 1993 and January 8, 1994 reflect the Alpha Beta acquisition and the financings and refinancings associated therewith. Balance sheet data as of June 25, 1994 and January 7, 1995 reflect the acquisition of the Food Barn stores. (f) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. (g) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994, and for the 28 weeks ended January 8, 1994 and January 7, 1995, depreciation and amortization includes amortization of excess of cost over net assets acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and $4.2 million, respectively. (h) "EBITDA," as defined and presented historically by Food 4 Less, represents income before interest expense, depreciation and amortization expense, the LIFO provision, provision for income taxes, provision for earthquake losses and a one-time charge for Teamsters Union sick pay benefits. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Holdings' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (i) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 19 29 RISK FACTORS Before deciding whether or not to tender Discount Notes in the Offer to Purchase and the Solicitation or to retain Amended Discount Notes, each holder of Discount Notes should carefully consider the following factors, in addition to the other matters described in this Offer to Purchase and Solicitation Statement. LEVERAGE AND DEBT SERVICE Following the consummation of the Merger and the Financing, New Holdings will be highly leveraged. At January 7, 1995, pro forma for the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), New Holdings' total indebtedness (including current maturities) and stockholder's equity would have been $2,225.1 million and $56.2 million, respectively, and the Company would have had an additional $173.1 million available to be borrowed under the New Revolving Facility. In addition, as of January 7, 1995, after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), scheduled payments under operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been $125.0 million. On the same pro forma basis, for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, New Holdings' earnings before fixed charges would have been inadequate to cover fixed charges by $119.1 million and $67.1 million, respectively. However, such earnings include non-cash charges of $221.6 million and $119.4 million, respectively, primarily consisting of depreciation and amortization. New Holdings will be required to make semi-annual cash payments of interest on the New Discount Debentures and the Seller Debentures commencing five years from their date of issuance in the amount of $61.0 million per annum. In addition, New Holdings will be required to commence semi-annual cash payments of interest on any Amended Discount Notes that remain outstanding following the Merger commencing June 15, 1998. New Holdings' ability to make scheduled payments of the principal of, or interest on, or to refinance its Indebtedness (including any Amended Discount Notes that remain outstanding following the Merger) and to make scheduled payments under its operating leases depends on its future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond its control. The pro forma financial information presented in this Offer to Purchase and Solicitation Statement is based on, among other things, the assumption that the interest rate borne by the New F4L Senior Notes and the New RGC Notes will be 11% and 11.50%, respectively. In the event that the interest rates on the New F4L Senior Notes and the New RGC Notes are higher than the respective assumed interest rates, the Company's interest expense and deficiency of earnings to fixed charges would increase over the amounts reflected in such pro forma financial information. For a description of the effects on the pro forma financial information of varying acceptance levels in the RGC Offers and the F4L Exchange Offers and of varying interest rates, see Note (l) to the Notes to Unaudited Pro Forma Combined Statement of Operations. Based upon the current level of operations and anticipated cost savings, Holdings believes that the Company's cash flow from operations, together with borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments over the next several years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated cost savings can be fully achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital expenditures, or if its future earnings growth is insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt following the Merger and the fact that substantially all of its assets will be pledged to secure the borrowings under the New Credit Facility and other secured obligations. 20 30 New Holdings' high level of debt will have several important effects on its future operations, including the following: (a) New Holdings will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities of the Company and increasing the Company's vulnerability to adverse general economic and industry conditions; (b) the financial covenants and other restrictions contained in the New Credit Facility and other agreements relating to the indebtedness of New Holdings and the Company will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends; and (c) because of New Holdings' debt service requirements, funds available for working capital, capital expenditures, acquisitions and general corporate purposes, may be limited. New Holdings' leveraged position may increase the Company's vulnerability to competitive pressures. The Company's continued growth depends, in part, on its ability to continue its expansion and store conversion efforts, and, therefore, its inability to finance capital expenditures through borrowed funds could have a material adverse effect on the Company's future operations. Moreover, any default under the documents governing the indebtedness of New Holdings could have a significant adverse effect on the market value of any Amended Discount Notes that remain outstanding following the Merger. HOLDING COMPANY STRUCTURE Following the Merger, the FFL Merger and the Reincorporation Merger, New Holdings will be a holding company and the assets of New Holdings will consist solely of 100% of the outstanding shares of capital stock of the Company, which will be pledged to secure New Holdings' guarantee obligations under the New Credit Facility. New Holdings will be the sole obligor on any Amended Discount Notes that remain outstanding following the Merger, and any such Amended Discount Notes will not be guaranteed by any subsidiary of New Holdings. Therefore, any such Amended Discount Notes will be effectively subordinated to all indebtedness and other liabilities of the Company and its subsidiaries. New Holdings will rely on dividends and other advances and transfers of funds from the Company to provide the sole source of funds necessary to meet its debt service obligations under any such Amended Discount Notes. The ability of the Company to pay such dividends and make such advances and transfers will be subject to applicable state laws regulating the payment of dividends and to restrictions in the New Credit Facility, the indentures governing the RGC Senior Subordinated Notes, the F4L Senior Notes and the F4L Senior Subordinated Notes, and other agreements governing indebtedness of the Company and its subsidiaries. Claims of creditors of the Company and subsidiaries, including general trade creditors, will generally have priority as to the assets of the Company and its subsidiaries over the claims of New Holdings and the holders of the Discount Notes. At January 7, 1995 on a pro forma basis after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), the aggregate amount of indebtedness and other liabilities of the Company and its subsidiaries that would effectively rank senior to any Amended Discount Notes that remain outstanding following the Merger would have been approximately $2,808.5 million, excluding letters of credit, and the Company would have had $173.1 million available to be borrowed under the New Revolving Facility. In addition, at January 7, 1995, the Company and its subsidiaries had significant commitments under operating leases. See "-- Leverage and Debt Service." ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS Management of the Company has estimated that approximately $90 million of annualized net cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) can be achieved over a four year period as a result of integrating the operations of Ralphs and Food 4 Less. See "Business -- The Merger." The cost savings estimates have been prepared solely by members of the management of each company. The estimates necessarily make numerous assumptions as to future sales levels and other operating results, the availability of funds for capital expenditures as well as general industry and business conditions and other matters, many of which are beyond the control of the Company. Several of the cost savings estimates are premised on the assumption that certain levels of efficiency presently maintained by either Food 4 Less or Ralphs can be achieved by the combined Company following the Merger. Other estimates are based on a management consensus as to what levels of purchasing and similar efficiencies should be achievable by an entity the size of the Company. Certain of the estimates relating to the consolidation of warehousing and distribution facilities assume the completion of certain capital expenditures to expand the 21 31 capacity of the continuing facilities. It is anticipated that $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the four year period following the Merger, without which the estimated cost savings may not be fully achievable. Management expects that the non-recurring integration costs will effectively offset any cost savings in the first year following the Merger. Because the assumptions underlying the cost savings estimates are numerous and detailed, management believes that it would be impractical to specify all such assumptions in this Offer to Purchase and Solicitation Statement. However, management also believes that all such assumptions are reasonable in light of existing business conditions and prospects. Investors are cautioned that the actual cost savings realized by the Company may vary considerably from the estimates contained herein and that undue reliance should not be placed upon such estimates. There also can be no assurance that unforeseen costs and expenses or other factors will not offset the projected cost savings in whole or in part. REGIONAL ECONOMIC CONDITIONS Following the consummation of the Merger, a substantial percentage of the Company's business (representing approximately 90% of pro forma sales) will be conducted in Southern California. Southern California began to experience a significant economic downturn in 1991 and has only recently begun a mild recovery. The economy in Southern California has been affected by substantial job losses in the defense and aerospace industries and other adverse economic trends. These adverse regional economic conditions have resulted in declining sales levels at Ralphs and Holdings in recent periods. For the 52 weeks ended June 25, 1994, and the 52 weeks ended January 29, 1995, Holdings and Ralphs experienced 6.9% and 3.7% declines, respectively, in comparable store sales as compared with the comparable period in the prior year, primarily reflecting the weak economy in Southern California, lower levels of price inflation in certain food product categories, and increased competitive store openings in Southern California. For the 28 weeks ended January 7, 1995 and the 28 weeks ended January 29, 1995, Holdings and Ralphs experienced 4.5% and 3.4% declines, respectively, in comparable store sales. However, both Holdings' and Ralphs' comparable store sales declines have begun to moderate in recent months. Although data indicate a mild recovery in the Southern California economy and management believes that overall sales trends in Southern California should improve along with the economy, there can be no assurance that improvement will occur or that substantial future declines in same store sales will not occur. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors in each of its operating divisions include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse club stores, deep discount drug stores and "super centers." Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use these resources to take steps which could adversely affect the Company's competitive position. See "Business -- Competition." CONTROL OF THE COMPANY Pro forma for the Merger, the FFL Merger, the Reincorporation Merger and certain related events, affiliates of Yucaipa and Apollo will have beneficial ownership of approximately 41.8% and 33.9%, respectively, of the outstanding capital stock of New Holdings. Pursuant to a new stockholders' agreement (the "1995 Stockholders Agreement") which will be entered into by the New Equity Investors and certain current FFL stockholders and Holdings warrantholders upon completion of the Merger, New Holdings and the Company will have boards consisting of nine and ten members, respectively, and (i) Yucaipa will have the right to elect six directors to the board of New Holdings and seven directors to the board of the Company, (ii) Apollo will have the right to elect two directors to the board of each of New Holdings and the Company, and (iii) the other New Equity Investors will have the right to elect one director to the board of each of New 22 32 Holdings and the Company. Under the 1995 Stockholders Agreement, unless and until New Holdings has effected an initial public offering of its equity securities meeting certain criteria, New Holdings and its subsidiaries, including the Company, may not take certain actions without the approval of the New Holdings directors which the New Equity Investors are entitled to elect, including but not limited to certain mergers, sale transactions, transactions with affiliates, issuances of capital stock and payments of dividends on or repurchases of capital stock. As a result of the ownership structure of New Holdings and the contractual rights described above, the voting and management control of New Holdings is highly concentrated. Yucaipa, acting with the consent of the directors elected by the New Equity Investors, has the ability to direct the actions of New Holdings with respect to matters such as the payment of dividends, material acquisitions and dispositions and other extraordinary corporate transactions. Yucaipa will be a party to a consulting agreement with the Company, pursuant to which Yucaipa will render certain management and advisory services to the Company, and will receive fees for such services. Yucaipa will also receive certain fees in connection with the consummation of the Merger, including an advisory fee of $19 million, of which $15 million will be paid through the issuance of New Discount Debentures. In addition, as a result of the Merger, certain officers and former officers of Ralphs will redeem the EARs for $17.8 million in cash and a deferred payment of up to $5 million and will cancel certain options to purchase common stock of RSI for $880,000. An additional $10 million of the EARs, however, will be reinvested in New Holdings by such officers and former officers. Yucaipa also will be reimbursed for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. In addition, on the Closing Date the Company and EJDC will enter into a Consulting Agreement, pursuant to which EJDC will act as a consultant to the Company with respect to certain real estate and general commercial matters for a period of five years from the Closing Date in exchange for the payment of a one-time consulting fee of $9 million, of which $4 million will be used to purchase interests in the partnership that will purchase the New Discount Debentures. See "Certain Relationships and Related Transactions," "Principal Stockholders" and "Description of Capital Stock." POTENTIAL ADVERSE EFFECTS OF THE OFFER TO PURCHASE AND THE SOLICITATION ON HOLDERS OF AMENDED DISCOUNT NOTES There currently is a limited trading market for the Discount Notes, which from time to time trade in the over-the-counter market. See "Market Prices of the Discount Notes." To the extent that Discount Notes are tendered and accepted for purchase in the Offer to Purchase the trading market for the remaining Amended Discount Notes may become even more limited. A debt security with a smaller outstanding principal amount available for trading (a smaller "float") may command a lower price than would a comparable debt security with a greater float. Therefore, the market price for the Amended Discount Notes not tendered for purchase may be adversely affected to the extent that the principal amount of the Discount Notes tendered pursuant to the Offer to Purchase reduces the float. The reduced float may also tend to make the trading price more volatile. Holders of unpurchased Amended Discount Notes may attempt to obtain quotations for the Amended Discount Notes from their brokers; however, there can be no assurance that any trading market will exist for the Amended Discount Notes following consummation of the Offer to Purchase. The extent of the public market for the Amended Discount Notes following consummation of the Offer to Purchase will depend upon, among other things, the remaining outstanding principal amount of the Amended Discount Notes after the Offer to Purchase, the number of holders remaining at such time and the interest in maintaining a market in the Amended Discount Notes on the part of securities firms. EFFECT OF THE PROPOSED AMENDMENTS ON HOLDERS THAT DO NOT TENDER If the Offer to Purchase is consummated and the Proposed Amendments become operative, holders of Discount Notes that are not purchased pursuant to the Offer to Purchase for any reason will no longer be entitled to the benefits of certain of the restrictive covenants contained in the Discount Note Indenture after they have been modified by the Proposed Amendments. The modification of the restrictive covenants would permit New Holdings to take actions that could increase the credit risks with respect to New Holdings faced by such holders or that could otherwise be adverse to the interest of such holders. See "The Proposed Amendments." 23 33 NET LOSSES Holdings has reported a net loss of $11.5 million for the 52 weeks ended June 25, 1994, $31.2 million for the 52 weeks ended June 26, 1993, $33.8 million for the 52 weeks ended June 27, 1992, $9.6 million for the 52 weeks ended June 29, 1991 and $10.1 million for the 53 weeks ended June 30, 1990. On a pro forma basis for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, after giving effect to the Merger, the FFL Merger and the Financing (and certain related assumptions), Holdings would have reported a net loss of approximately $119.1 million and $67.1 million, respectively. There can be no assurance that Holdings will not continue to report net losses in the future. 24 34 THE MERGER AND THE FINANCING On September 14, 1994, Food 4 Less, Holdings and FFL entered into the Merger Agreement with RSI and the stockholders of RSI. Pursuant to the terms of the Merger Agreement, Food 4 Less will, subject to certain conditions being satisfied or waived, be merged with and into RSI pursuant to the RSI Merger. Immediately following the RSI Merger, RGC, which is currently a wholly-owned subsidiary of RSI, will merge with and into RSI pursuant to the RGC Merger, and RSI will change its name to Ralphs Grocery Company. Prior to the Merger, FFL will merge with and into Holdings, which will be the surviving corporation in the FFL Merger. Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly-formed, wholly-owned subsidiary, New Holdings, incorporated in Delaware, pursuant to the Reincorporation Merger. As a result of the Merger, the FFL Merger and the Reincorporation Merger, the Company will become a wholly-owned subsidiary of New Holdings. As a result of the Reincorporation Merger, any Amended Discount Notes that remain outstanding following the Merger will be the obligations of New Holdings. Conditions to the consummation of the RSI Merger include the receipt of regulatory approvals and other necessary consents and the completion of financing. The purchase price for RSI is approximately $1.5 billion, including the assumption of debt. The consideration payable to the stockholders of RSI consists of $375 million in cash, $131.5 million principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures to be issued by New Holdings. New Holdings will use $100 million of the cash received from the New Equity Investment, together with the Seller Debentures and such New Discount Debentures, to acquire approximately 48% of the capital stock of RSI immediately prior to consummation of the RSI Merger. New Holdings will then contribute the $250 million of purchased shares of RSI stock to Food 4 Less, and pursuant to the RSI Merger the remaining shares of RSI stock will be acquired for $275 million in cash. Pursuant to an agreement (the "Put Agreement") entered into in connection with the execution of the Merger Agreement, the Edward J. DeBartolo Corporation, an Ohio corporation ("EJDC"), which currently owns approximately 60.3% of the outstanding common stock of RSI, will have the right to put to Yucaipa, which controls Food 4 Less, on the closing date of the Merger (the "Closing Date"), up to $10 million aggregate principal amount of Seller Debentures acquired by EJDC in connection with the Merger, at a purchase price equal to their principal amount. Yucaipa will be reimbursed for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. In addition, on the Closing Date the Company and EJDC will enter into a Consulting Agreement, pursuant to which EJDC will act as a consultant to the Company with respect to certain real estate and general commercial matters for a period of five years from the Closing Date in exchange for the payment of a consulting fee of $9 million, of which $4 million will be used to purchase interests in the partnership that will purchase the New Discount Debentures. See "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." The Merger Agreement, as amended, provides that Food 4 Less will pay the stockholders of RSI interest on the aggregate purchase price of $525 million at a rate equal to the prime rate plus 1% from and after March 16, 1995 through the Closing Date. The Merger Agreement may be terminated by the parties if the Merger has not been consummated on or prior to June 6, 1995. As currently contemplated, the Merger will be financed through the following transactions: - Borrowings of up to $750 million aggregate principal amount pursuant to the New Term Loans under the New Credit Facility to be provided by a syndicate of banks led by Bankers Trust. The New Credit Facility will also provide for the $325 million New Revolving Facility, $12.7 million of which is anticipated to be drawn at closing. - The issuance of up to $295 million of New F4L Senior Notes pursuant to the Senior Note Public Offering. - The issuance of up to $200 million of New RGC Notes pursuant to the Subordinated Note Public Offering. - The issuance of preferred stock in a private placement by New Holdings to a group of investors led by Apollo and including affiliates of BT Securities, CS First Boston and DLJ and other institutional investors, yielding cash proceeds of $140 million pursuant to the New Equity Investment. Concurrently with the New Equity Investment, the New Equity Investors will purchase outstanding shares of 25 35 New Holdings capital stock from a stockholder of New Holdings for a purchase price of $57.8 million. See "Description of Capital Stock -- New Equity Investment." - The exchange by Food 4 Less pursuant to the F4L Exchange Offers of (a) up to $175 million aggregate principal amount of the Old F4L Senior Notes for up to $175 million aggregate principal amount of New F4L Senior Notes plus $5.00 in cash per $1,000 principal amount exchanged and (b) up to $145 million aggregate principal amount of the Old F4L Senior Subordinated Notes for up to $145 million aggregate principal amount of the New F4L Senior Subordinated Notes plus $20.00 in cash per $1,000 principal amount exchanged, together with the solicitation of consents from the holders of the Old F4L Notes to certain amendments to the Old F4L Indentures. It is a condition to the F4L Exchange Offers that at least 80% of the outstanding principal amount of Old F4L Notes are exchanged pursuant to the F4L Exchange Offers. - The RGC Offers by Food 4 Less to (i) exchange up to $450 million aggregate principal amount of the Old RGC Notes for up to $450 million aggregate principal amount of New RGC Notes plus $20.00 in cash per $1,000 principal amount of Old RGC Notes exchanged and (ii) purchase Old RGC Notes for $1,010.00 in cash per $1,000 principal amount of Old RGC Notes accepted for purchase, together with the solicitation of consents from holders of Old RGC Notes to certain amendments to the Old RGC Indentures. The RGC Minimum Exchange condition to the RGC Offers provides that at least a majority of the outstanding principal amount of the Old RGC Notes are exchanged for New RGC Notes pursuant to the RGC Offers. - The purchase by New Holdings of approximately 48% of the outstanding common stock of RSI for an aggregate consideration of $250 million, consisting of $100 million of the cash proceeds from the New Equity Investment, $131.5 million principal amount of the Seller Debentures and $18.5 million initial accreted value of the New Discount Debentures, followed by the contribution of such common stock of RSI to Food 4 Less. Pursuant to the RSI Merger the remaining shares of RSI stock will be acquired for $275 million in cash. - The placement by New Holdings of $100 million initial accreted value of New Discount Debentures to a partnership including Yucaipa, the selling stockholders of Ralphs, an affiliate of George Soros, Apollo, and an affiliate of each of BT Securities, CS First Boston and DLJ. The $100 million initial accreted value of New Discount Debentures includes (a) $18.5 million that will be issued to the RSI stockholders, (b) $15 million, $5 million and $2.5 million that will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing and (c) $59 million that will be issued for cash to the partnership described above. The $41 million initial accreted value of New Discount Debentures to be issued to the RSI stockholders, Apollo, BT Securities and Yucaipa will be contributed to such partnership by the recipients thereof. - The assumption by the Company, pursuant to the RGC Merger, of approximately $166.8 million of other indebtedness of RGC and Food 4 Less. - The Offer to Purchase and the Solicitation made hereunder to the holders of the Discount Notes. 26 36 The following table illustrates the sources and uses of funds to consummate the Merger, assuming the transaction occurs as of May 30, 1995. This presentation assumes that $225.5 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New RGC Notes (representing 50.1% of the outstanding aggregate principal amount of Old RGC Notes), $224.5 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash (representing 49.9% of the outstanding aggregate principal amount of Old RGC Notes), $256 million principal amount of Old F4L Notes is tendered into the F4L Exchange Offers (representing 80% of the outstanding aggregate principal amount of Old F4L Notes) and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Offer to Purchase (representing 100% of the outstanding aggregate principal amount (at maturity) of Discount Notes). Although management believes such assumptions are reasonable under the circumstances, actual sources and uses may differ from those set forth below depending upon the outcome of the Offer to Purchase, the F4L Exchange Offers and the RGC Offers. SOURCES AND USES (in millions) CASH SOURCES CASH USES - --------------------------------------------- --------------------------------------------- New Term Loans(a)................. $ 750.0 Purchase RSI Common Stock(j)...... $ 375.9 New Revolving Facility(b)......... 12.7 Purchase Old RGC Notes(k)......... 226.8 New F4L Senior Notes(c)........... 295.0 Purchase Discount Notes........... 83.9 Repay Ralphs 1992 Credit New RGC Notes(d).................. 200.0 Agreement....................... 255.1 New Equity Investment(e).......... 140.0 Repay F4L Credit Agreement........ 161.5 New Discount Debentures(f)........ 59.0 Pay Accrued Interest(l)........... 29.3 EAR Related Payments(m)........... 22.8 Repay Mortgage Indebtedness(n).... 191.5 Fees and Expenses(o).............. 109.9 --------- --------- Total Cash Sources........... $ 1,456.7 Total Cash Uses................... $ 1,456.7 ========= ========= NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes(g)........... $ 140.0 Old F4L Senior Notes Exchanged.... $ 140.0 Assumed Old F4L Senior Notes...... 35.0 Assumed Old F4L Senior Notes...... 35.0 New F4L Senior Subordinated Old F4L Senior Subordinated Notes Notes........................... 116.0 Exchanged....................... 116.0 Assumed Old F4L Senior Assumed Old F4L Senior Subordinated Notes.............. 29.0 Subordinated Notes.............. 29.0 New RGC Notes(h).................. 225.5 Old RGC Notes Exchanged........... 225.5 New Discount Debentures(f)........ 41.0 Fees and Expenses(o).............. 22.5 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt............................ 166.8 Debt............................ 166.8 Seller Debentures(i).............. 131.5 Purchase RSI Common Stock(i)...... 150.0 --------- --------- Total Non-Cash Sources....... $ 884.8 Total Non-Cash Uses............... $ 884.8 ========= =========
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) the New Term Loans in the aggregate amount of up to $750 million, comprised of the $375 million Tranche A Loan, the $125 million Tranche B Loan, the $125 million Tranche C Loan, and the $125 million Tranche D Loan and (ii) the $325 million New Revolving Facility. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. See "Description of the New Credit Facility." (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. (c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. 27 37 (d) Represents New RGC Notes issued pursuant to the Subordinated Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering. It is not anticipated that the amount of New RGC Notes offered pursuant to the Subordinated Note Public Offering will be reduced below $100 million principal amount. (e) Does not include the $10 million equity contribution by Ralphs management. See note (m) below. Concurrently with the New Equity Investment, certain existing stockholders of New Holdings (formerly stockholders of FFL), including affiliates of George Soros, will sell outstanding shares of New Holdings stock to CLH, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million (which represents the same price per share as will be paid in the New Equity Investment). In connection with the New Equity Investment, the New Equity Investors will contribute the common stock so acquired to New Holdings in consideration for newly-issued preferred shares. See "Description of Capital Stock -- New Equity Investment." (f) Represents $100 million initial accreted value of New Discount Debentures, $59 million of which will be issued for cash, $18.5 million of which will be issued to the RSI stockholders as Merger consideration and $15 million, $5 million and $2.5 million of which will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing. (g) Represents New F4L Senior Notes issued pursuant to the F4L Exchange Offers, which will be part of the same issue as the New F4L Senior Notes issued pursuant to the Senior Note Public Offering. (h) Represents New RGC Notes issued pursuant to the RGC Offers, which will be part of the same issue as the New RGC Notes issued pursuant to the Subordinated Note Public Offering. (i) In connection with the RSI Merger, New Holdings will issue $131.5 million principal amount of the Seller Debentures as part of the purchase price for the RSI common stock, up to $10 million of which may be put to Yucaipa on the Closing Date at a purchase price equal to their principal amount pursuant to the Put Agreement. In addition, Yucaipa will be reimbursed by the Company for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. See "Certain Relationships and Related Transactions -- Food 4 Less." (j) Includes $375 million to be paid in cash to stockholders of RSI and $0.9 million to be paid in cash to holders of RSI management stock options. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." (k) Represents the purchase of Old RGC Notes tendered for cash pursuant to the RGC Offers. In addition, to the extent any Old RGC Notes remain outstanding following consummation of the RGC Offers, a portion of the proceeds of the Tranche A Loan not fully funded at the Closing Date will be available to fund the purchase of Old RGC Notes pursuant to the Change of Control Offer. (l) Represents accrued interest payable on all debt securities assumed to be tendered pursuant to the F4L Exchange Offers and the RGC Offers. (m) Represents payments to or for the benefit of Ralphs management with respect to outstanding EARs in connection with the Merger. Ralphs management will receive New Holdings stock options in exchange for the cancellation of the remaining EAR liability of $10 million. See "Executive Compensation -- Equity Appreciation Rights Plan" and "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." (n) Represents the repayment of outstanding mortgage indebtedness of Ralphs in the principal amount of $174.1 million, plus the estimated amount of the prepayment fees payable with respect thereto. (o) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of $5 million to be paid to BT Securities and commitment fees of $5 million to be paid to Apollo upon the closing of the Merger. Of such amounts, $15 million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT Securities' $5 million fee will be paid through the issuance of New Discount Debentures in lieu of cash. Such New Discount Debentures will be contributed by them to the partnership that will acquire all of the New Discount Debentures. Yucaipa anticipates that it in turn will pay a cash fee of approximately $3.5 million to Soros Fund Management in consideration for advisory services which Soros Fund Management has rendered since 1991. See "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." For additional information, see "Description of the New Credit Facility," "The RGC Offers, the F4L Exchange Offers and the Public Offerings" and "Description of Other Indebtedness." 28 38 PRO FORMA CAPITALIZATION The following table sets forth the pro forma combined capitalization of Holdings as of January 7, 1995, adjusted to give effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions) and the application of the proceeds therefrom. This presentation assumes that $225.5 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New RGC Notes, $224.5 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash, $256 million principal amount of Old F4L Notes is tendered into the F4L Exchange Offers and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Offer to Purchase. This presentation also assumes that any Old RGC Notes not tendered into the RGC Offers are repurchased after the Closing Date pursuant to the Change of Control Offer. The table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements and the historical consolidated financial statements of Ralphs and Holdings and related notes thereto included elsewhere in this Offer to Purchase and Solicitation Statement.
PRO FORMA CAPITALIZATION --------------- (IN MILLIONS) Cash............................................................................ $ 50.9 ========= Short-term and current portion of long-term debt: New Term Loans................................................................ $ 3.8 Other indebtedness............................................................ 23.0 --------- Total short-term and current portion of long-term debt................ $ 26.8 ========= Long-term debt: New Term Loans(a)............................................................. $ 746.2 New Revolving Facility(b)..................................................... 50.8 Other indebtedness............................................................ 129.3 New F4L Senior Notes(c)....................................................... 435.0 Old F4L Senior Notes.......................................................... 35.0 New RGC Notes(d).............................................................. 425.5 New F4L Senior Subordinated Notes............................................. 116.0 Old F4L Senior Subordinated Notes............................................. 29.0 New Discount Debentures (initial accreted value).............................. 100.0 Seller Debentures............................................................. 131.5 --------- Total long-term debt.................................................. 2,198.3 --------- Stockholders' equity(e): Series A Preferred Stock(f)................................................... 161.8 Series B Preferred Stock(f)................................................... 31.0 Common stock, $.01 par value.................................................. 0.0 Additional paid-in capital.................................................... 59.9 Notes receivable(g)........................................................... (0.7) Retained deficit.............................................................. (193.6) Treasury stock................................................................ (2.2) --------- Total stockholders' equity................................................. 56.2 --------- Total capitalization.................................................. $ 2,254.5 =========
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) the New Term Loans in the aggregate amount of up to $750 million, comprised of the $375 million Tranche A Loan, the $125 million Tranche B Loan, the $125 million Tranche C Loan and the $125 million Tranche D Loan and (ii) the $325 million New Revolving Facility. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. See "Description of the New Credit Facility." 29 39 (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers' compensation self-insurance. (c) Includes New F4L Senior Notes issued pursuant to both the Senior Note Public Offering and the F4L Exchange Offers. (d) Includes New RGC Notes issued pursuant to both the Subordinated Note Public Offering and the RGC Offers. In accordance with the terms of the Old RGC Indentures, holders of Old RGC Notes not exchanged for New RGC Notes or purchased pursuant to the RGC Offers will be entitled to have such Old RGC Notes repurchased by the Company pursuant to the Change of Control Offer which will occur up to 91 days following the closing of the Merger. A portion of the Tranche A Loan not fully funded at the Closing Date will be available to fund the purchase of Old RGC Notes pursuant to the Change of Control Offer. (e) Prior to consummation of the Merger, FFL will merge with and into Holdings pursuant to the FFL Merger. FFL is a holding company and the assets of FFL consist solely of its investment in the capital stock of Holdings. Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into its wholly-owned subsidiary, New Holdings, incorporated in Delaware, pursuant to the Reincorporation Merger. For purposes of the pro forma financial presentation set forth above, the minority ownership interest in Holdings that existed prior to the FFL Merger has been classified with the majority ownership interest in Holdings as a result of its elimination in the FFL Merger. (f) Reflects the issuance of the Series A Preferred Stock (liquidation preference $166.8 million) and Series B Preferred Stock (liquidation preference $31.0 million) in the New Equity Investment for cash net of, in the case of the Series A Preferred Stock, $5 million in related commitment fees (of which $2.5 million is being satisfied through the issuance of New Discount Debentures). (g) Represents notes receivable from shareholders of Holdings with respect to the purchase of Holdings' common stock. See "Executive Compensation -- Food 4 Less Stock Plan." 30 40 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements of Holdings for the 52 weeks ended June 25, 1994 and as of and for the 28 weeks ended January 7, 1995, give effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions set forth below) and the application of the proceeds therefrom as if such transactions occurred on June 27, 1993, with respect to the pro forma operating and other data, and as of January 7, 1995, with respect to the pro forma balance sheet data. Such pro forma information combines the results of operations of Holdings for the 52 weeks ended June 25, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 7, 1995, with the results of operations of Ralphs for the 52 weeks ended July 17, 1994 and the results of operations and balance sheet data as of and for the 28 weeks ended January 29, 1995, respectively. For information regarding the Merger, the FFL Merger, the Reincorporation Merger and the Financing, see "The Merger and the Financing." Prior to consummation of the Merger, FFL will merge with and into Holdings pursuant to the FFL Merger. The Merger of FFL into Holdings has no effect on Holdings. FFL is a holding company and the assets of FFL consist solely of its investment in the capital stock of Holdings. Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly-formed, wholly-owned subsidiary, New Holdings, incorporated in Delaware, pursuant to the Reincorporation Merger. For purposes of the pro forma financial presentation set forth below, the minority ownership interest in Holdings that existed prior to the FFL Merger has been classified with the majority ownership interest in Holdings as a result of its elimination in the FFL Merger. The pro forma adjustments are based upon the following assumptions: (i) $225.5 million principal amount of Old RGC Notes are tendered into the RGC Offers in exchange for New RGC Notes, (ii) $224.5 million principal amount of Old RGC Notes are tendered into the RGC Offers for cash, (iii) $256 million principal amount of Old F4L Notes are tendered into the F4L Exchange Offers, and (iv) $103.6 million principal amount (at maturity) of Discount Notes are tendered into the Offer to Purchase. The presentation also assumes that $200 million principal amount of New RGC Notes are issued pursuant to the Subordinated Note Public Offering and that $295 million principal amount of New F4L Senior Notes are issued pursuant to the Senior Note Public Offering. In addition, the unaudited pro forma combined financial statements have been prepared based upon the assumption that upon consummation of the Merger, the Company will divest or close 32 stores. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable. The Merger will be accounted for by Holdings as a purchase of Ralphs by Holdings and Ralphs' assets and liabilities will be recorded at their estimated fair market values at the date of the Merger. The adjustments included in the unaudited pro forma combined financial statements represent Holdings' preliminary determination of these adjustments based upon available information. There can be no assurance that the actual adjustments will not differ significantly from the pro forma adjustments reflected in the pro forma financial information. The unaudited pro forma combined financial statements are not necessarily indicative of either future results of operations or results that might have been achieved if the foregoing transactions had been consummated as of the indicated dates. The unaudited pro forma combined financial statements should be read in conjunction with the historical consolidated financial statements of Holdings and Ralphs, together with the related notes thereto, included elsewhere in this Offer to Purchase and Solicitation Statement. 31 41 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (DOLLARS IN MILLIONS)
52 WEEKS ENDED -------------------------- RALPHS HOLDINGS (HISTORICAL) (HISTORICAL) (UNAUDITED) (AUDITED) JULY 17, JUNE 25, PRO FORMA PRO FORMA 1994 1994 ADJUSTMENTS COMBINED ----------- ------------ ----------- --------- Sales........................................... $ 2,709.7 $2,585.2 $(241.4)(a) $ 5,053.5 Cost of sales................................... 2,076.3 2,115.9 (194.7)(a) 4,005.3 4.2 (b) 2.8 (c) 0.8 (d) --------- -------- ------- --------- Gross profit............................... 633.4 469.3 (54.5) 1,048.2 Selling, general and administrative expenses.... 469.1 388.8 (36.4)(a) 833.1 8.1 (b) 1.4 (d) 1.6 (e) 0.5 (f) Amortization of excess cost over net assets acquired...................................... 11.0 7.7 10.7 (g) 29.4 Provision for restructuring..................... 2.4 0.0 -- 2.4 --------- -------- ------- --------- Operating income........................... 150.9 72.8 (40.4) 183.3 Other expenses: Interest expense -- cash(l)................... 93.2 57.0 73.7 (h) 223.9 Interest expense -- non-cash(l)............... 9.4 14.6 23.8 (h) 47.8 Amortization of debt issuance costs(l)........ 6.4 5.5 1.5 (h) 13.4 Loss on disposal of assets.................... 1.8 -- -- 1.8 Provision for earthquake loss................. 11.0 4.5 -- 15.5 --------- -------- ------- --------- Earnings (loss) before income tax provision................................ 29.1 (8.8) (139.4) (119.1) Income tax expense (benefit).................... (108.0) 2.7 105.3 (i) -- --------- -------- ------- --------- Net earnings (loss)(j)..................... $ 137.1 $ (11.5) $(244.7) $ (119.1) ========= ======== ======= ========= Ratio of earnings to fixed charges(k)(l)... 1.2x -- -- ========= ======== ========= Other Data: EBITDA (as defined) (j)(m).................... $ 228.1 $ 130.5 $ (16.1)(n) $ 342.5 EBITDA margin(o).............................. 8.4% 5.0% 6.8%
See Notes to Unaudited Pro Forma Combined Statement of Operations. 32 42 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED (DOLLARS IN MILLIONS)
28 WEEKS ENDED --------------------------- RALPHS HOLDINGS (HISTORICAL) (HISTORICAL) (UNAUDITED) (UNAUDITED) JANUARY 29, JANUARY 7, PRO FORMA PRO FORMA 1995 1995 ADJUSTMENTS COMBINED ----------- ------------- ----------- --------- Sales.......................................... $1,483.6 $ 1,404.7 $(120.7)(a) $2,767.6 Cost of sales.................................. 1,144.5 1,167.2 (99.3)(a) 2,214.6 2.3 (b) (0.8)(c) 0.7 (d) -------- --------- ------- -------- Gross profit.............................. 339.1 237.5 (23.6) 553.0 Selling, general and administrative expenses... 254.7 199.2 (18.7)(a) 442.1 4.4 (b) 1.3 (d) 0.9 (e) 0.3 (f) Amortization of excess cost over net assets acquired..................................... 5.9 4.2 5.8 (g) 15.9 Provision for restructuring.................... 0.0 5.1 -- 5.1 -------- --------- ------- -------- Operating income.......................... 78.5 29.0 (17.6) 89.9 Other expenses: Interest expense -- cash(l).................. 53.2 31.6 37.5 (h) 122.3 Interest expense -- non-cash(l).............. 4.9 8.5 14.0 (h) 27.4 Amortization of debt issuance costs(l)....... 3.2 3.1 0.6 (h) 6.9 Loss (gain) on disposal of assets............ 0.8 (0.4) -- 0.4 -------- --------- ------- -------- Earnings (loss) before income tax provision............................... 16.4 (13.8) (69.7) (67.1) Income tax expense (benefit)................... 0.0 0.5 (0.5)(i) 0.0 -------- --------- ------- -------- Net earnings (loss)(j).................... $ 16.4 $ (14.3) $ (69.2) $ (67.1) ======== ========= ======= ======== Ratio of earnings to fixed charges(k)(l)........................... 1.2x -- -- ======== ========== ======== Other Data: EBITDA (as defined)(j)(m).................... $ 126.0 $ 69.4 $ (6.1)(n) $ 189.3 EBITDA margin(o)............................. 8.5% 4.9% 6.8%
See Notes to Unaudited Pro Forma Combined Statement of Operations. 33 43 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (a) Reflects the anticipated closing or divestiture of 32 stores. Does not give effect to the closure of 2 Food 4 Less stores open at October 1, 1994 which were subsequently closed. Food 4 Less has determined that there is no impairment of existing goodwill related to the store closures based on its projection of future undiscounted cash flows. (b) Represents the additional depreciation expense associated with the purchase price allocation to property, plant and equipment of $160.0 million based on the current estimate of fair market value. Property, plant and equipment is being depreciated over an average useful life of 13 years. Depreciation expense has been allocated among cost of sales and selling, general and administrative expenses. (c) Reflects the elimination of Ralphs historical LIFO provision. (d) Reflects depreciation expense associated with approximately $36.8 million of additional fixed assets required for the conversion of 23 Ralphs stores to the Food 4 Less warehouse format and 122 Alpha Beta, Boys and Viva stores to the Ralphs format. (e) Reflects additional Yucaipa management fees ($2.0 million for the 52 weeks ended June 25, 1994 and $1.1 million for the 28 weeks ended January 7, 1995) and the elimination of an annual guarantee fee ($0.4 million for the 52 weeks ended June 25, 1994 and $0.2 million for the 28 weeks ended January 7, 1995) paid by Ralphs to EJDC. (f) Reflects increased compensation resulting from new employment agreements with certain of the current executive officers of Ralphs. (g) Reflects the amortization of the excess of cost over net assets acquired in the Merger ($21.7 million for the 52 weeks ended June 25, 1994 and $11.7 million for the 28 weeks ended January 7, 1995) and elimination of Ralphs' historical amortization ($11.0 million for the 52 weeks ended June 25, 1994 and $5.9 million for the 28 weeks ended January 7, 1995). Amortization has been calculated on the straight line basis over a period of 40 years. (h) The following table presents a reconciliation of pro forma interest expense and amortization of deferred financing costs:
28 WEEKS 52 WEEKS ENDED ENDED JANUARY 7, JUNE 25, 1994 1995 ------------- ---------- Historical interest expense -- cash.................. $ 150.2 $ 84.8 ------- ------- Plus: Interest on borrowings under: New Credit Facility.............................. 79.4 42.7 New F4L Senior Notes............................. 33.2 17.9 New RGC Notes.................................... 48.9 26.4 Other bank fees.................................. 3.5 1.9 Other debt....................................... 2.0 1.8 Less: Interest on borrowings under: Old bank term loans: Ralphs......................................... (21.3) (13.7) Food 4 Less.................................... (11.5) (6.9) Old RGC Notes.................................... (43.9) (23.6) Other debt....................................... (16.6) (9.0) ------- ------- Pro forma adjustment............................... 73.7 37.5 ------- ------- Pro forma interest expense -- cash................... $ 223.9 $ 122.3 ======= ======= Historical interest expense -- non-cash.............. $ 24.0 $ 13.4 Plus: Interest on Seller Debentures.................... 18.5 11.1 Accretion of New Discount Debentures............. 14.1 8.4 Less: Accretion of Discount Notes...................... (8.8) (5.5) ------- ------- Pro forma interest expense -- non-cash............... $ 47.8 $ 27.4 ======= ======= Historical amortization of debt issuance costs....... $ 11.9 $ 6.3 Plus: Financing and exchange/consent fees.............. 9.0 4.8 Other fees and expenses.......................... 3.9 2.1 Less: Historical financing costs: Ralphs........................................... (6.1) (3.2) Food 4 Less...................................... (5.3) (3.1) ------- ------- Pro forma adjustment............................... 1.5 0.6 ------- ------- Pro forma amortization of debt issuance costs........ $ 13.4 $ 6.9 ======= =======
(i) Represents the elimination of the historical income tax benefit of Ralphs ($108.0 million for the 52 weeks ended June 25, 1994) and Holdings income tax expense ($2.7 million for the 52 weeks ended June 25, 1994 and $0.5 million for the 28 weeks ended January 7, 1995) given expected pro forma losses. Holdings' ability to recognize income tax benefits may be limited in accordance with Financial Accounting Standard No. 109 "Accounting for Income Taxes." As such, no income tax benefit has been reflected in these pro forma financial statements. See "Certain Federal Income Tax Considerations." (j) The unaudited pro forma results of operations and EBITDA for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 do not include one-time non-recurring costs related to (i) severance payments under certain employment contracts with Food 4 Less management totalling $1.4 million that are subject to change of control provisions and the achievement of earnings 34 44 and sales targets, (ii) costs related to the integration of the Company's operations which are estimated to be $50.0 million over a three-year period, (iii) $1.8 million in costs related to the cancellation of an employment agreement, or (iv) other costs related to warehouse closures, which costs are not presently determinable. (k) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary item and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Holdings' pro forma earnings were inadequate to cover pro forma fixed charges for the 52 weeks ended June 25, 1994 and for the 28 weeks ended January 7, 1995 by approximately $119.1 million and $67.1 million, respectively. However, such pro forma earnings included non-cash charges of $221.6 million for the 52 weeks ended June 25, 1994 and $119.4 million for the 28 weeks ended January 7, 1995, primarily consisting of depreciation and amortization. (l) Supplemental Pro Forma Adjustments: The table below shows the variations that would occur in the pro forma cash and non-cash interest expense, the amortization of debt issuance costs and the amount of the deficiency of earnings to fixed charges at different participation levels of Old RGC Notes tendered in exchange for New RGC Notes in the RGC Offers (50.1%, 55.1%, 60.1% and 65.1%) and of Old F4L Notes tendered into the F4L Exchange Offers (80%, 85%, 90% and 95%). The table also indicates the changes in the foregoing items (at each participation level) that would result from each 25 basis point increase in the interest rate on the New F4L Senior Notes over the assumed rate of 11% and each 25 basis point increase in the interest rate on the New RGC Notes over the assumed rate of 11.50%.
52 WEEK PERIOD 28 WEEK PERIOD ----------------------------------------- ----------------------------------------- PARTICIPATION LEVEL(1) PARTICIPATION LEVEL(1) ----------------------------------------- ----------------------------------------- 50.1/80% 55.1/85% 60.1/90% 65.1/95% 50.1/80% 55.1/85% 60.1/90% 65.1/95% -------- -------- -------- -------- -------- -------- -------- -------- Interest expense -- cash............ $223.9 $224.5 $225.1 $225.7 $122.3 $122.6 $122.9 $123.2 Interest expense -- non-cash........ 47.8 47.8 47.8 47.8 27.4 27.4 27.4 27.4 Amortization of debt issuance costs............................. 13.4 13.5 13.6 13.7 6.9 7.0 7.0 7.1 Deficiency of earnings to fixed charges(2)........................ 119.1 119.8 120.5 121.2 67.1 67.5 67.8 68.2 EFFECT OF EACH 25 BASIS POINT INCREASE IN THE INTEREST RATE ON THE NEW F4L SENIOR NOTES AND NEW RGC NOTES Additional interest expense -- cash................... $ 2.2 $ 2.2 $ 2.3 $ 2.4 $ 1.2 $ 1.2 $ 1.2 $ 1.3 Additional interest expense -- non-cash............... -- -- -- -- -- -- -- -- Additional amortization of debt issuance costs.................... -- -- -- -- -- -- -- -- Additional deficiency of earnings to fixed charges(2)............... 2.2 2.2 2.3 2.4 1.2 1.2 1.2 1.3
------------------- (1) If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering and/or decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. (2) "Earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary item and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). (m) "EBITDA," as defined and presented historically by RGC, represents net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, post-retirement benefits, the LIFO charge, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of the Holdings' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (n) Reflects primarily EBITDA (as defined) associated with closed or divested stores and the adjustments referred to in notes (e) and (f) above. (o) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 35 45 UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN MILLIONS)
RALPHS HOLDINGS (HISTORICAL) (HISTORICAL) (AUDITED) (UNAUDITED) PRO FORMA JANUARY 29, 1995 JANUARY 7, 1995 ADJUSTMENTS PRO FORMA ---------------- --------------- ----------- --------- ASSETS Current assets: Cash and cash equivalents.................... $ 35.1 $ 15.8 $ 0.0(a) $ 50.9 Accounts receivable.......................... 43.6 26.8 -- 70.4 Inventories.................................. 221.4 223.2 39.9(b) 484.5 Prepaid expense and other current assets..... 19.8 17.6 -- 37.4 -------- ------- ------- -------- Total current assets.................. 319.9 283.4 39.9 643.2 Investments.................................... 0.0 12.4 12.4 Property, plant and equipment.................. 624.7 370.2 160.0(c) 1,130.1 (22.8)(d) (2.0)(e) Excess of cost over net assets acquired, net... 365.4 263.7 501.4(f) 1,130.5 Beneficial lease rights........................ 49.2 0.0 -- 49.2 Deferred debt issuance costs, net.............. 23.0 25.5 88.4(g) 94.1 (42.8)(h) Deferred income taxes.......................... 112.5 0.0 (112.5)(i) 0.0 Other assets................................... 15.2 29.4 (12.9)(d) 36.7 5.0(j) -------- ------- ------- -------- Total assets.......................... $1,509.9 $ 984.6 $ 601.7 $3,096.2 ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt......... $ 84.0 $ 25.9 $ (83.1)(k) $ 26.8 Short-term debt.............................. 51.5 0.0 (51.5)(l) 0.0 Accounts payable............................. 176.6 165.0 -- 341.6 Accrued expenses............................. 99.8 108.8 (14.8)(m) 200.3 4.7(d) 1.8(n) Current portion of self-insurance reserves... 27.5 28.6 -- 56.1 -------- ------- ------- -------- Total current liabilities............. 439.4 328.3 (142.9) 624.8 Long-term debt................................. 883.0 590.0 725.3(o) 2,198.3 Self-insurance reserves........................ 44.9 50.7 -- 95.6 Deferred income taxes.......................... 0.0 14.7 -- 14.7 Lease valuation reserve........................ 29.0 0.0 -- 29.0 Other non-current liabilities.................. 86.4 5.0 (27.8)(p) 77.6 11.0(q) 3.0(e) -------- ------- ------- -------- Total liabilities..................... 1,482.7 988.7 568.6 3,040.0 -------- ------- ------- -------- Stockholders' equity: Series A Preferred Stock, liquidation preference $166.8 million.................. -- -- 104.0(r) 161.8 57.8(s) Series B Preferred Stock, liquidation preference $31.0 million................... -- -- 31.0(r) 31.0 Common Stock................................. 0.3 0.0 (0.3)(t) 0.0 Additional paid-in capital................... 175.2 105.5 10.0(p) 59.9 (175.2)(t) (57.8)(s) 2.2(u) Notes receivable from shareholders........... 0.0 (0.7) -- (0.7) Retained deficit............................. (148.3) (108.9) (22.6)(v) (193.6) 148.3(t) (40.4)(d) (1.8)(n) (19.9)(w) Treasury stock............................... -- -- (2.2)(u) (2.2) -------- ------- ------- -------- Total stockholders' equity(x)......... 27.2 (4.1) 33.1 56.2 -------- ------- ------- -------- Total liabilities and stockholders' equity.............................. $1,509.9 $ 984.6 $ 601.7 $3,096.2 ======== ======= ======= ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 36 46 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) Reflects gross proceeds received from (i) the New Term Loans, (ii) the New Revolving Facility, (iii) the New Equity Investment, (iv) the Public Offerings and (v) the New Discount Debenture Placement used to retire certain debt and liabilities and to pay financing costs and other related fees as set forth in the following table: New Term Loans............................................................................ $ 750.0 New Revolving Facility.................................................................... 50.8 New F4L Senior Notes...................................................................... 295.0 New RGC Notes............................................................................. 200.0 New Equity Investment..................................................................... 140.0 New Discount Debentures................................................................... 59.0 Purchase Discount Notes................................................................... (83.9) Purchase RSI Common Stock................................................................. (375.9) Repay Ralphs 1992 Credit Agreement........................................................ (297.4) Repay F4L Credit Agreement................................................................ (174.4) Purchase Old RGC Notes.................................................................... (226.8) Pay EAR liability......................................................................... (17.8) Loan to affiliate......................................................................... (5.0) Repay other Ralphs debt................................................................... (188.9) Accrued Interest.......................................................................... (14.8) Fees and Expenses......................................................................... (109.9) ------- Pro forma adjustment.............................................................. $ 0.0 =======
(b) Reflects the elimination of Ralphs historical LIFO reserve ($17.4 million) and the write-up of merchandise inventory ($22.5 million); both to reflect current estimated selling prices less costs of disposal and a reasonable profit allowance for the selling effort of the acquiring company. (c) Reflects the estimated write-up to fair value of Ralphs property, plant and equipment as of the date of the Merger. (d) Reflects estimated restructuring charge associated with closing 29 Food 4 Less conventional supermarkets or warehouse stores and converting 5 Food 4 Less conventional supermarkets to warehouse stores. Pursuant to the settlement agreement with the State of California, 24 Food 4 Less stores (as well as 3 Ralphs stores) must be closed by December 31, 1995. See "Business -- California Settlement Agreement." Although not required by such settlement agreement, an additional 5 under-performing stores selected by the Company also are scheduled to be closed by December 31, 1995. The restructuring charge consists of write-downs of property, plant and equipment ($22.8 million), write-off of the Alpha Beta trademark ($8.6 million), write-off of other assets ($4.3 million), lease termination expenses ($3.1 million) and miscellaneous expense accruals ($1.6 million). The expected cash payments to be made in connection with the restructuring charge total $7.1 million. It is expected that such cash payments will be made by December 31, 1995. The estimated restructuring charge will be recorded as an expense once the Merger is completed. No additional expenses are expected to be incurred in future periods in connection with these closings. Food 4 Less has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. (e) Reflects the anticipated closing of 3 Ralphs stores. (f) Reflects the excess of costs over the fair value of the net assets of Ralphs acquired in connection with the Merger ($866.8 million) and the elimination of Ralphs historical excess of costs over the fair value of the net assets acquired ($365.4 million). The purchase price and preliminary calculation of the excess of cost over the net book value of assets acquired is as follows: Purchase price: Purchase of outstanding common equity.................................................. $ 525.9 Fees and expenses...................................................................... 55.8 -------- Total purchase price................................................................... $ 581.7 -------- Purchase price is financed by: Seller Debentures...................................................................... $ 131.5 New Discount Debentures................................................................ 18.5 New Equity Investment.................................................................. 140.0 New borrowings......................................................................... 291.7 -------- $ 581.7 ========
Preliminary calculation of purchase price allocated to assets and liabilities based on management's estimate of fair values as of January 29, 1995: Cash................................................................................... $ 35.1 Receivables............................................................................ 43.6 Inventories............................................................................ 261.3 Other current assets................................................................... 19.8 Property, fixtures and equipment....................................................... 782.7 Beneficial lease rights................................................................ 49.2 Goodwill............................................................................... 866.8 Other assets........................................................................... 18.0 Current liabilities.................................................................... (424.8) Obligations under capital leases....................................................... (89.1) Long-term debt......................................................................... (806.6) Other non-current liabilities.......................................................... (174.3) -------- $ 581.7 ========
37 47
Pro forma book value of historical assets acquired: Historical net book value at January 29, 1995...................................... $ 27.2 Less book value of historical assets with no value at the acquisition date: Historical deferred tax asset............................................. 112.5 Historical goodwill....................................................... 365.4 Historical deferred debt costs............................................ 20.2 (498.1) ----- -------- Negative pro forma book value of net assets acquired............................. 470.9 Purchase price..................................................................... 581.7 -------- Excess of purchase price to be allocated........................................... $1,052.6 ======== Excess allocated to: Inventories........................................................................ $ 39.9 Property, fixtures and equipment................................................... 160.0 Goodwill........................................................................... 866.8 Other non-current liabilities...................................................... (14.1) -------- $1,052.6 ========
(g) Reflects the debt issuance costs associated with the New Credit Facility, ($33.4 million), the RGC Offers ($2.2 million), the F4L Exchange Offers ($2.6 million), the Senior Note Public Offering ($8.9 million) and the Subordinated Note Public Offering ($6.0 million), the cash exchange payments associated with the RGC Offers ($4.5 million) and the F4L Exchange Offers ($3.0 million) and other financing costs ($27.8 million). These amounts have been capitalized as deferred financing costs. (h) Reflects the elimination of deferred debt issuance costs associated with the Ralphs 1992 Credit Agreement (as defined) ($6.3 million), the F4L Credit Agreement (as defined) ($9.2 million), the Old RGC Notes ($10.4 million) and the Old F4L Notes ($13.4 million) and other indebtedness of RGC and Food 4 Less ($3.5 million) to be repaid in connection with the Merger. (i) Reflects the elimination of Ralphs deferred tax asset associated with changes in the financial reporting basis of assets. The combined Company may be required to record a valuation allowance on all or some deferred tax assets in compliance with Financial Accounting Standard No. 109 "Accounting for Income Taxes." This determination may be based, in part, on historical or expected earnings. For purposes of these pro forma financial statements it has been assumed that all deferred net tax assets have been fully reserved. (j) Represents a loan to a corporation owned by Yucaipa affiliates. The corporation will invest the loan proceeds in a partnership that will purchase New Discount Debentures. All proceeds received by the Company from the repayment of the loan will be paid to former holders of Ralphs EARs in satisfaction of the deferred EAR liability. See "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." (k) Reflects the repayment and cancellation of the current maturities of Ralphs 1992 Credit Agreement ($65.0 million), the F4L Credit Agreement ($19.8 million), certain other Ralphs debt ($2.1 million) and the recording of the current maturities of the New Credit Facility ($3.8 million). (l) Reflects the repayment of Ralphs' old revolving credit facility. (m) Reflects the payment of accrued interest on the Ralphs 1992 Credit Agreement ($1.5 million), the F4L Credit Agreement ($1.7 million), the Old RGC Notes ($5.5 million), the Old F4L Notes ($4.5 million) and other indebtedness of RGC and Food 4 Less ($1.6 million) to be repaid in connection with the Merger. (n) Represents the liability to an executive under his employment contract due to a change of control provision. (o) Reflects the repayment and cancellation of the Ralphs 1992 Credit Agreement and the F4L Credit Agreement and the repayment of certain other Ralphs debt, and records borrowings under the New Credit Facility and issuance of the New Discount Debentures and the Seller Debentures as set forth in the table below: New Term Loans............................................................................ $ 746.2 New Revolving Facility.................................................................... 50.8 New F4L Senior Notes...................................................................... 295.0 New RGC Notes............................................................................. 200.0 New Discount Debentures................................................................... 100.0 Seller Debentures......................................................................... 131.5 Purchase Discount Notes (book value)...................................................... (64.5) Repay Ralphs 1992 Credit Agreement........................................................ (180.0) Repay F4L Credit Agreement................................................................ (154.6) Purchase Old RGC Notes.................................................................... (224.5) Repay other Ralphs debt................................................................... (174.6) ------- Net pro forma adjustment.......................................................... $ 725.3 =======
(p) Reflects payments with respect to a portion of the Ralphs EAR liability ($17.8 million) and the issuance of New Holdings stock options in consideration of the cancellation of the remaining Ralphs EAR liability ($10.0 million). See "Executive Compensation -- Equity Appreciation Rights Plan." No future compensation expense will be recorded as the cancellation of certain EAR liabilities ($10.0 million) in consideration for the issuance of New Holdings stock options is deemed to reflect fair value. (q) Reflects a reserve for Ralphs unfunded defined benefit pension plan, determined as the difference between the projected benefit obligation of the plan as compared to the fair value of plan assets, less amounts previously accrued. (r) Reflects the issuance of the Series A and Series B Preferred Stock for cash, net of (in the case of the Series A Preferred Stock) $5.0 million in related commitment fees. The proceeds will be used to acquire RSI stock, to repurchase Discount Notes and to repay indebtedness of the Company. (s) Represents the cancellation of 5,783,244 shares of common stock (after giving effect to a 2.082-for-one stock split) in connection with the issuance of Preferred Stock in the New Equity Investment. (t) Reflects the elimination of Ralphs historical equity. (u) Represents the reclassification of treasury stock held by Holdings. (v) Represents the write-off of the historical deferred debt issuance costs of Holdings related to its refinanced debt. (w) Represents the premium over the book value of the Discount Notes as of January 7, 1995 and related fees. (x) The unaudited pro forma combined balance sheet as of January 7, 1995 does not include certain one-time non-recurring costs related to (i) severance payments under certain employment contracts with Food 4 Less management totaling $1.4 million that are subject to change of control provisions and the achievement of earnings and sales targets, (ii) costs related to the integration of the Company's operations which are estimated to be $50.0 million (includes an estimated $12.0 million related to termination and severance costs) over a three-year period, (iii) other costs related to warehouse closures, which costs are not presently determinable or (iv) any contingent liability to reimburse Yucaipa in the event it incurs a loss on the resale of $10 million of the Seller Debentures. 38 48 SELECTED HISTORICAL FINANCIAL DATA OF RALPHS The following table presents selected historical financial data of RGC (as the predecessor of RSI) as of and for the 53 weeks ended February 3, 1991, and the 52 weeks ended February 2, 1992, and summary historical financial data of RSI for the 52 weeks ended January 31, 1993, January 30, 1994 and January 29, 1995, which have been derived from the financial statements of RSI and RGC audited by KPMG Peat Marwick LLP, independent certified public accountants. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of RSI and RGC and related notes thereto included elsewhere in this Offer to Purchase and Solicitation Statement.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, 1991 1992 1993 1994 1995 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS) OPERATING DATA: Sales................................................ $2,799.1 $2,889.2 $ 2,843.8 $ 2,730.2 $2,724.6 Cost of sales........................................ 2,225.4 2,275.2 2,217.2 2,093.7 2,101.0 -------- -------- --------- --------- -------- Gross profit......................................... 573.7 614.0 626.6 636.5 623.6 Selling, general and administrative expenses(a)...... 438.0 459.2 470.0 471.0 467.0 Provision for equity appreciation rights............. 15.3 18.3 -- -- -- Amortization of excess of cost over net assets acquired........................................... 11.0 11.0 11.0 11.0 11.0 Provisions for restructuring and tax indemnification payments(b)........................................ -- 10.0 7.1 2.4 -- -------- -------- --------- --------- -------- Operating income..................................... 109.4 115.5 138.5 152.1 145.6 Interest expense(c)................................ 128.5 130.2 125.6 108.8 112.7 Loss on disposal of assets and provisions for legal settlement and earthquake losses(d).............. 6.4 13.0 10.1 12.9 0.8 Income tax expense (benefit)......................... 12.8 13.5 8.3 (108.0)(e) -- Cumulative effect of change in accounting for postretirement benefits other than pensions........ (13.1) -- -- -- -- Extraordinary item-debt refinancing, net of tax benefits........................................... -- -- (70.6) -- -- -------- -------- --------- --------- -------- Net earnings (loss).................................. $ (51.4) $ (41.2) $ (76.1) $ 138.4 $ 32.1 ======== ======== ========= ========= ========= Ratio of earnings to fixed charges(f)................ --(f) --(f) 1.02x 1.24x 1.24x BALANCE SHEET DATA (end of period): Working capital surplus (deficit).................... $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (119.5) Total assets......................................... 1,406.4 1,357.6 1,388.5 1,483.7 1,509.9 Total debt(g)........................................ 986.1 941.9 1,029.8 998.9 1,018.5 Redeemable stock..................................... 3.0 3.0 -- -- -- Stockholders' equity (deficit)....................... (16.0) (57.2) (133.3) 5.1 27.2 OTHER DATA: Depreciation and amortization(h)..................... $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 76.0 Capital expenditures................................. 87.6 50.4 102.7 62.2 64.0 Stores open at end of period......................... 150 158 159 165 173 EBITDA (as defined)(i)............................... $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 230.2 EBITDA margin(j)..................................... 7.4% 7.8% 8.0% 8.4% 8.4%
- --------------- (a) Includes provision for post retirement benefits other than pensions of $2.2 million, $2.6 million, $3.3 million, $3.4 million and $2.6 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. (b) Provisions for restructuring are charges for expenses relating to closing of Ralphs central bakery operation. The charge reflected the complete write-down of the bakery building, machinery and equipment, leaseholds, related inventory and supplies, and providing severance pay to terminated employees. These charges were $7.1 million and $2.4 million for the 52 weeks ended January 31, 1993 and the 52 weeks ended January 30, 1994, respectively. Provision for tax indemnification payments to Federated were $10.0 million for the 52 weeks ended February 2, 1992. (c) Net earnings (loss) includes non-cash charges related to the amortization of deferred debt issuance costs of $4.1 million for the 53 weeks ended February 3, 1991, $5.0 million for the 52 weeks ended February 2, 1992, $5.5 million for the 52 weeks ended January 31, 1993, $6.5 million for the 52 weeks ended January 30, 1994 and $6.1 million for the 52 weeks ended January 29, 1995, respectively. (d) Loss on disposal of assets was $6.4 million, $13.0 million, $2.6 million, $1.9 million and $0.8 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. The 52 weeks ended February 2, 1992 includes approximately $12.2 million representing a reserve against losses related to the closing of three stores. Provision for legal settlement was $7.5 million for the 52 weeks ended January 31, 1993. Provision for earthquake losses was $11.0 million for the 52 weeks ended January 30, 1994. This represents reserve for losses, net of anticipated insurance recoveries, resulting from the January 17, 1994 Southern California earthquake. 39 49 (e) Includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993 (see Note 11 of Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc.). (f) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary items and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992 by $25.5 million and $27.7 million, respectively. (g) Total debt includes long-term debt, current maturities of long-term debt, short-term debt and capital lease obligations. (h) For the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, depreciation and amortization includes amortization of the excess of cost over net assets acquired of $11.0 million, $11.0 million, $11.0 million, $11.0 million and $11.0 million, respectively. (i) "EBITDA," as defined and presented historically by RGC, represents earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provisions for Equity Appreciation Rights, provision for tax indemnification payments to Federated, provision for postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Ralphs' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (j) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 40 50 SELECTED HISTORICAL FINANCIAL DATA OF HOLDINGS The following table presents selected historical financial data of Holdings and its predecessor, Food 4 Less. Because Holdings acquired the capital stock of Food 4 Less in a reorganization, which occurred December 31, 1992, the financial data presented below for periods ending prior to such date represent data of Food 4 Less. Operating data of Holdings for the 52 weeks ended June 26, 1993 reflects the operating results of Food 4 Less only until December 31, 1992 and reflects the consolidated operating results of Holdings for the remainder of the period. The historical financial data of Food 4 Less presented below as of and for the 52 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991 and the 52 weeks ended June 27, 1992, and the historical financial data of Holdings presented below as of and for the 52 weeks ended June 26, 1993 and the 52 weeks ended June 25, 1994 have been derived from the financial statements of Holdings and Food 4 Less audited by Arthur Andersen LLP, independent public accountants. The summary historical financial data of Holdings presented below as of and for the 28 weeks ended January 8, 1994 and January 7, 1995 have been derived from unaudited interim financial statements of Holdings which, in the opinion of management, reflect all material adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. The following information should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Holdings and related notes thereto included elsewhere in this Offer to Purchase and Solicitation Statement.
FOOD 4 LESS HOLDINGS -------------------------------- ---------------------------------------------- 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 28 WEEKS 28 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1990 1991(A) 1992 1993 1994(B) 1994 1995 -------- -------- -------- -------- -------- ---------- ---------- (DOLLARS IN MILLIONS) (UNAUDITED) OPERATING DATA: Sales....................................... $1,318.2 $1,606.6 $2,913.5 $2,742.0 $2,585.2 $ 1,416.2 $1,404.7 Cost of sales............................... 1,113.4 1,340.9 2,392.7 2,257.8 2,115.9 1,154.0 1,167.2 -------- -------- -------- -------- -------- --------- -------- Gross profit................................ 204.8 265.7 520.8 484.2 469.3 262.2 237.5 Selling, general, administrative and other expenses.................................. 157.8 213.1 469.7 434.9 388.8 221.5 199.2 Amortization of excess cost over net assets acquired.................................. 5.3 5.3 7.8 7.6 7.7 4.1 4.2 Restructuring charge........................ -- -- -- -- -- -- 5.1(d) -------- -------- -------- -------- -------- --------- -------- Operating income............................ 41.7 47.3 43.3 41.7 72.8 36.6 29.0 Interest expense(c)......................... 50.8 50.1 70.2 73.6 77.0 41.5 43.2 Loss (gain) on disposal of assets........... -- 0.6 (1.3) (2.1 ) -- 0.1 (0.4) Provision for earthquake losses............. -- -- -- -- 4.5 -- -- Provision for income taxes.................. 1.0 2.5 3.4 1.4 2.7 0.7 0.5 Extraordinary charge........................ -- 3.7(e) 4.8(f) -- -- -- -- -------- -------- -------- -------- -------- --------- -------- Net loss.................................... $ (10.1) $ (9.6) $ (33.8) $ (31.2) $ (11.5) $ (5.7) $ (14.3) ======== ======== ======== ======== ======== ========= ======== Ratio of earnings to fixed charges(g)....... --(g) --(g) --(g) -- (g) --(g) --(g) --(g) BALANCE SHEET DATA (end of period)(h): Working capital surplus (deficit)........... $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (14.9) $ (44.8) Total assets................................ 574.7 980.0 998.5 957.8 980.1 969.6 984.6 Total debt(i)............................... 360.7 558.9 525.3 588.3 576.9 576.2 615.9 Redeemable stock............................ 5.1 -- -- -- -- -- -- Stockholder's equity (deficit).............. 20.6 84.6 50.8 22.6 10.0 16.2 (4.1) OTHER DATA: Depreciation and amortization(j)............ $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8 Capital expenditures........................ 36.4 34.7 60.3 53.5 57.5 20.4 39.0 Stores open at end of period................ 115 259 249 248 258 249 266 EBITDA (as defined)(k)...................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4 EBITDA margin(l)............................ 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
- --------------- (a) Operating data for the 52 weeks ended June 29, 1991 include the results of Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha Beta's sales for the two weeks ended June 29, 1991 were $59.2 million. (b) Operating data for the 52 weeks ended June 25, 1994 include the results of the Food Barn stores, which were not material, from March 29, 1994, the date of the acquisition of the Food Barn stores. (c) Interest expense includes non-cash charges related to the amortization of deferred financing costs of $4.1 million for the 53 weeks ended June 30, 1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June 26, 1993, 41 51 $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks ended January 7, 1995. (d) Represents the recording of a restructuring charge for the write-off of property and equipment in connection with the conversion of 11 conventional format supermarkets to warehouse format stores. (e) Represents an extraordinary charge of $3.7 million (net of related income tax benefit of $2.5 million) relating to the refinancing of certain indebtedness in connection with the Alpha Beta acquisition and the write-off of related debt issuance costs. (f) Represents an extraordinary net charge of $4.8 million reflecting the write-off of $6.7 million (net of related income tax benefit of $2.5 million) of deferred debt issuance costs as a result of the early redemption of a portion of Food 4 Less' term loan facility under the F4L Credit Agreement, partially offset by a $1.9 million extraordinary gain (net of a related income tax expense of $0.7 million) on the replacement of partially depreciated assets following the civil unrest in Los Angeles. (g) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of loss before provision for income taxes and extraordinary charges, plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 and January 7, 1995 by approximately $9.1 million, $3.4 million, $25.6 million, $29.8 million, $8.8 million, $5.0 million and $13.8 million, respectively. However, such earnings included non-cash charges of $29.9 million for the 53 weeks ended June 30, 1990, $37.0 million for the 52 weeks ended June 29, 1991, $61.2 million for the 52 weeks ended June 27, 1992 and $66.4 million for the 52 weeks ended June 26, 1993, $71.3 million for the 52 weeks ended June 25, 1994, $38.0 million for the 28 weeks ended January 8, 1994 and $44.6 million for the 28 weeks ended January 7, 1995, primarily consisting of depreciation, amortization and accretion of interest. (h) Balance sheet data as of June 30, 1990 include the effect of the BHC Acquisition, as well as the acquisitions of Bell Markets, Inc. and certain assets of ABC Market Corp. Balance sheet data as of June 29, 1991, June 27, 1992, June 26, 1993 and January 8, 1994 reflect the Alpha Beta acquisition and the financings and refinancings associated therewith. Balance sheet data as of June 25, 1994 and January 7, 1995 reflect the acquisition of the Food Barn stores. (i) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. (j) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994, and the 28 weeks ended January 8, 1994 and January 7, 1995, depreciation and amortization includes amortization of excess of cost over net assets acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and $4.2 million, respectively. (k) "EBITDA," as defined and presented historically by Holdings, represents income before interest expense, depreciation and amortization expense, the LIFO provision, provision for incomes taxes, provision for earthquake losses and the one-time adjustment to the Teamsters Union sick pay accrual. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Holdings' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (l) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 42 52 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Prior to consummation of the Merger, FFL will merge with and into Holdings pursuant to the FFL Merger. FFL is a holding company and the assets of FFL consist solely of its investment in the capital stock of Holdings. FFL does not conduct any operations of its own. Holdings owns 100% of the stock of Food 4 Less and does not conduct any business operations of its own. Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into a newly-formed, wholly-owned subsidiary, New Holdings, incorporated in Delaware, pursuant to the Reincorporation Merger. The following discussion addresses an overview of the combination of Ralphs and Food 4 Less, the historical results of operations of Ralphs and Holdings and the liquidity and capital resources of Ralphs and Holdings on both a historical and a pro forma combined basis. OVERVIEW The combination of Ralphs and Food 4 Less will create the largest supermarket operator in Southern California with an estimated 264 conventional format Ralphs stores and an estimated 68 price-impact Food 4 Less warehouse format stores. The Company will operate an additional 63 stores in Northern California and certain areas of the Midwest. Management believes that the Company's dual format strategy will appeal to a broad range of Southern California consumers and enable the Company to significantly enhance its overall competitive position. In addition, the Company expects to achieve cost savings and incremental profitability through the integration of advertising, administration, purchasing, distribution, manufacturing and other operations. Due to its increased size, dual format strategy and integration related costs, the Company believes that its future operating results may not be directly comparable to the historical operating results of either Ralphs or Holdings. Certain factors which are expected to affect the future operating results of the Company (or their comparability to prior periods) are discussed below. Regional Economic Conditions. In recent periods Ralphs and Food 4 Less have each been affected by the adverse economic conditions that have existed in Southern California since approximately 1991. These conditions were exacerbated by the substantial layoffs in the defense and aerospace industries and by the civil unrest in Los Angeles in April, 1992. In addition, management estimates that approximately eight million square feet of supermarket selling space has been added in Southern California over the past five years. As a result of these factors and general deflationary pressures in certain food product categories, Ralphs and Food 4 Less have each experienced declining comparable store sales in recent periods. Over the last three fiscal years, Food 4 Less' and Ralphs' total sales declined by 11.3% and 4.2%, respectively. However, both Food 4 Less' and Ralphs' comparable store sales declines have begun to moderate in recent months. Despite these sales trends, however, each company has improved its profitability over the same period as discussed in greater detail below. Although data indicate a mild recovery in the Southern California economy and management believes that overall sales trends in Southern California should improve along with the economy, there can be no assurance that such improvements will occur. Management believes that its dual format strategy and anticipated cost savings will leave it well positioned to take advantage of improvements in the regional economy and growing population and to compete effectively in the Southern California marketplace. See "Risk Factors -- Regional Economic Conditions." Integration Costs and Restructuring Charges. The two principal components of the Company's integration strategy will be (i) the conversion of up to 122 of Food 4 Less' conventional stores (primarily Alpha Beta stores) to the Ralphs name and format and the conversion of 16 other (Boys and Viva) Food 4 Less conventional stores (11 of which were recently completed) and 23 Ralphs stores to the Food 4 Less price impact warehouse format; and (ii) the achievement of substantial cost savings through the consolidation of warehousing, manufacturing and distribution operations and the elimination of certain other duplicative overhead costs. Management has estimated that approximately $90 million of net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) are achievable by the end of the fourth year of combined operations. Although a portion of the anticipated cost savings is premised upon the completion of certain capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. See "Business -- The Merger" and 43 53 "Risk Factors -- Ability to Achieve Anticipated Cost Savings." Management believes that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over this four-year period. Management expects that the non-recurring integration costs will effectively offset any cost savings in the first year following the Merger. See "-- Liquidity and Capital Resources." In addition, management anticipates that certain non-recurring costs associated with the integration of operations will be recorded as a restructuring charge. The charge will cover costs associated with the writedown of property and equipment and related reserves associated with the conversion of certain Food 4 Less conventional supermarkets to warehouse stores and the closure of certain Food 4 Less conventional stores as well as the write-off of the Alpha Beta trademark. This restructuring charge has been estimated, for purposes of the pro forma financial information included elsewhere herein, at approximately $45.5 million. On December 14, 1994, Food 4 Less and Ralphs entered into a Settlement Agreement (the "Settlement Agreement") with the State of California. See "Business -- California Settlement Agreement." Under the Settlement Agreement, the Company must divest a total of 27 stores (24 Food 4 Less conventional supermarkets or warehouse stores and 3 Ralphs stores). In addition, although not required pursuant to the Settlement Agreement, an additional 5 under-performing stores selected by the Company are scheduled to be closed following the Merger. It is anticipated that such closures and store conversions will be substantially completed by December 31, 1995. The estimated restructuring charge aggregating $45.5 million for the 24 Food 4 Less stores to be divested under the Settlement Agreement, the planned closures (5 Food 4 Less stores) and the conversion of 16 Food 4 Less conventional stores to warehouse format stores reflects (i) the writedown of property, plant and equipment ($27.9 million), (ii) the write-off of the Alpha Beta trademark ($8.6 million), (iii) the write-off of other assets ($4.3 million), (iv) lease termination expense ($3.1 million) and (v) miscellaneous expense accruals ($1.6 million). The expected cash payments to be made in connection with the restructuring charge will total $7.1 million. It is expected that such cash payments will be made by December 31, 1995. As a result of the completion of 11 of the 16 planned Food 4 Less conventional store conversions during the second quarter of the current fiscal year, Food 4 Less has recorded a restructuring charge of $5.1 million in its results of operations for the 28 weeks ended January 7, 1995. Food 4 Less has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. The remaining estimated restructuring charge will be recorded as an expense once the Merger is completed. The divestiture of the 3 Ralphs stores pursuant to the Settlement Agreement will be reflected in the allocation of the purchase price and therefore will not give rise to any restructuring charge. Store Mix. Approximately 28% of the Company's total anticipated number of stores following the Merger are expected to be warehouse format stores. Because these stores offer prices that are generally 5-12% below those in Food 4 Less' conventional stores, they produce lower gross profit margins than an average conventional supermarket. As a result, the Holdings' consolidated gross margin following the Merger is expected to decline from the levels historically reported by Ralphs. In addition, if the percentage of warehouse stores in the overall store mix increases following the Merger, as expected, the Holdings' consolidated gross margins should also be expected to decline slightly over time. Because of the reduced SG&A (as defined) costs associated with the warehouse format stores, management believes that overall profitability of the warehouse stores is comparable to that of conventional stores. Purchase Accounting. The Merger will be accounted for as a purchase of Ralphs by Holdings. As a result, the assets and liabilities of Ralphs will be recorded at their estimated fair market values on the date the Merger is consummated. The purchase price in excess of the fair market value of Ralphs' assets will be recorded as goodwill and amortized over a forty-year period. The purchase price allocation reflected in the pro forma statements is based on management's preliminary estimates. The actual purchase accounting adjustments will be determined following the Merger and may vary from the amounts reflected in the Unaudited Pro Forma Financial Data included elsewhere herein. Fiscal Year and Restatement of Holdings Financial Statements. Food 4 Less and Holdings each have filed a Form 8-K with the Commission to announce that they will adopt Ralphs' fiscal year end for financial reporting purposes. Ralphs' fiscal year ends on the Sunday closest to January 31. In connection with the preparation of this Offer to Purchase and Solicitation Statement, Holdings elected to restate its historical financial statements to conform to Ralphs' classification of certain expenses. The changes primarily involved 44 54 the reclassification of certain labor, occupancy and utility costs associated with product deliveries as cost of goods sold, which were previously classified as selling, general, administrative and other expense, net. In addition, depreciation expense, which had been reported separately by Holdings with the amortization of goodwill, was classified as cost of goods sold or selling, general, administrative and other expense, net, as appropriate. The amounts aggregated $236.2 million, $224.5 million, $219.5 million and $114.3 million (unaudited) for the fiscal years ended June 27, 1992, June 26, 1993, June 25, 1994 and the 28 weeks ended January 8, 1994. Holdings has also classified a portion of its self-insurance costs as interest expense that was previously recorded in selling, general, administrative and other expense, net. These self-insurance amounts were reclassified to more completely segregate the interest component of self-insurance costs arising from discounting long-term obligations. The amounts reclassified aggregated $5.0 million, $5.9 million, $5.8 million and $3.3 million (unaudited) for the fiscal years ended June 27, 1992, June 26, 1993, June 25, 1994 and the 28 weeks ended January 8, 1994. All historical financial information for Holdings and Food 4 Less included in this Offer to Purchase and Solicitation Statement reflects these reclassifications. See Note 13 of Notes to Holdings Consolidated Financial Statements. RESULTS OF OPERATIONS OF RALPHS The following table sets forth the historical operating results of Ralphs for the 52 weeks ended January 31, 1993 ("Fiscal 1992"), January 30, 1994 ("Fiscal 1993") and January 29, 1995 ("Fiscal 1994"):
52 WEEKS ENDED -------------------------------------------------------- JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ---------------- ---------------- ---------------- (IN MILLIONS) Sales............................................... $2,843.8 100.0% $2,730.2 100.0% $2,724.6 100.0% Cost of sales....................................... 2,217.2 78.0 2,093.7 76.7 2,101.0 77.1 Selling, general and administrative expenses........ 470.0 16.5 471.0 17.2 467.0 17.2 Operating income(a)................................. 138.5 4.9 152.1 5.6 145.6 5.3 Net interest expense................................ 125.6 4.4 108.8 4.0 112.7 4.1 Provision for earthquake losses(b).................. -- -- 11.0 0.4 -- -- Income tax expense (benefit)........................ 8.3 0.3 (108.0) (4.0) -- -- Extraordinary item.................................. 70.6 2.5 -- -- -- -- Net earnings (loss)................................. (76.1) (2.7) 138.4 5.1 32.1 1.2
- --------------- (a) Operating income reflects charges of $7.1 million in Fiscal 1992 and $2.4 million in Fiscal 1993, for expenses relating to closing of central bakery operation. The charges reflected the complete write-down of the bakery building, machinery and equipment, leaseholds, related inventory and supplies, and providing severance pay to terminated employees. (b) Represents reserve for losses, net of expected insurance recoveries, resulting from the January 17, 1994 Southern California earthquake. COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 29, 1995 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1994. Sales For the fifty-two weeks ended January 29, 1995 ("Fiscal 1994"), sales were $2,724.6 million, a decrease of $5.6 million or 0.2% from the fifty-two weeks ended January 30, 1994 ("Fiscal 1993"). During Fiscal 1994, Ralphs opened ten new stores (four in Los Angeles County, three in Orange County, one in San Diego County and two in Riverside County), closed two stores (in conjunction with new stores opening in the same areas), and completed five store remodels. Comparable store sales decreased 3.7%, which included an increase of 0.3% for replacement store sales, from $2,707.9 million in Fiscal 1993 to $2,606.4 million in Fiscal 1994. Ralphs sales continued to be adversely affected by the continuing softness of the economy in Southern California, continuing competitive new store and remodeling activity and recent pricing and promotional changes by competitors. Ralphs continued to take steps to mitigate the impact of the weak retailing environment in its markets, which included continuing its own new store and remodeling program and initiating the Ralphs Savings Plan in February 1994, a new marketing campaign specifically designed to enhance customer value. See "Business -- Advertising and Promotion." 45 55 On January 17, 1994, an earthquake in Southern California caused considerable damage in Los Angeles and surrounding areas. Several Ralphs supermarkets suffered earthquake damage, with 54 stores closed on the morning of January 17th. Thirty-four stores reopened within one day and an additional 17 stores reopened within three days. Three stores in the San Fernando Valley area of Los Angeles suffered major structural damage. All three stores have since reopened for business, with the last reopening on April 15, 1994. Management believes that there was some negative impact on sales resulting from the temporary disruption of business resulting from the earthquake. Ralphs is partially insured for earthquake losses. The pre-tax financial impact, net of expected insurance recoveries, is expected to be approximately $11.0 million and Ralphs reserved for this loss in Fiscal 1993. The gross earthquake loss is approximately $25.3 million and the expected insurance recovery is approximately $14.3 million. Cost of Sales Cost of sales increased $7.3 million or 0.3% from $2,093.7 million in Fiscal 1993 to $2,101.0 million in Fiscal 1994. As a percentage of sales, cost of sales increased to 77.1% in Fiscal 1994 from 76.7% in Fiscal 1993. The increase in cost of sales as a percentage of sales included a one-time charge for Teamsters Union sick pay benefits pursuant to a new contract ratified in August 1994 with the Teamsters. The total charge was $2.5 million, of which $2.1 million was included in cost of sales and $0.4 million in selling, general and administrative expense. Increases in cost of sales were partially offset by savings in warehousing and distribution costs, reductions in self-insurance costs, pass-throughs of increased operating costs and increases in relative margins where allowed by competitive conditions. Warehousing and distribution cost savings were primarily attributable to Ralphs' ASRS and PSC facilities. The ASRS facility can hold substantially more inventory and requires fewer employees to operate than does a conventional warehouse of equal size. This facility has reduced Ralphs' warehousing costs of non-perishable items markedly, enabling it to take advantage of advance buying opportunities and minimize "out-of-stocks." Ralphs engages in forward-buy purchases to take advantage of special prices or to delay the impact of upcoming price increases by purchasing and warehousing larger quantities of merchandise than immediately required. The PSC facility has consolidated the operations of three existing facilities and holds more inventory than the facilities it replaced, thereby reducing Ralphs' warehouse distribution costs. Over the last several years, Ralphs has been implementing modifications in its workers compensation and general liability insurance programs. Ralphs believes that these modifications have resulted in a significant reduction in self-insurance costs for Fiscal 1994. Based on a review of the results of these modifications by Ralphs and its actuaries, adjustments to the accruals for self-insurance costs were made during Fiscal 1994 resulting in a reduction of approximately $18.9 million. Of the total $18.9 million reduction in self-insurance costs, $7.5 million is included in cost of sales and $11.4 million is included in selling, general and administrative expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") decreased $4.0 million or 0.8% from $471.0 million in Fiscal 1993 to $467.0 million in Fiscal 1994. As a percentage of sales, SG&A was 17.2% in Fiscal 1993 and 17.2% in Fiscal 1994. The decrease in SG&A was primarily due to a reduction in contributions to the United Food and Commercial Workers Union ("UFCW") health care benefit plans, due to an excess reserve in these plans, a reduction in self-insurance costs, as discussed above, and the results of cost savings programs instituted by Ralphs. Ralphs is continuing its expense reduction program. The decrease in SG&A was partially offset by several factors including increases in union wage rates, a one-time charge for Teamsters Union sick pay benefits, as discussed above, transition expense relating to the Merger ($1.4 million) and increased rent expense resulting from new stores, including fixture and equipment financing. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. In both Fiscal 1992 and Fiscal 1993 the multi-employer pension plan was deemed to be overfunded based upon the collective bargaining agreement then currently in force. During Fiscal 1993 the 46 56 agreement called for pension benefits which resulted in additional required expense. The UFCW health and welfare benefit plans were overfunded and those employers who contributed to these plans received a pro rata share of excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs' share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder, $12.7 million, was recognized in Fiscal 1994. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. Operating Income Operating income in Fiscal 1994 decreased 4.3% to $145.6 million from $152.1 million in Fiscal 1993. Operating margin, defined as operating income as a percentage of sales, was 5.3% in Fiscal 1994 compared to 5.6% in Fiscal 1993. EBITDA, defined as net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provision for post-retirement benefits, provision for LIFO expense, gain or loss on disposal of assets, transition expense and a one-time charge for Teamsters Union sick pay benefits, was 8.4% of sales or $230.2 million in Fiscal 1994 and 8.4% of sales or $230.2 million in Fiscal 1993. Net Interest Expense Net interest expense for Fiscal 1994 was $112.7 million versus $108.8 million for Fiscal 1993. Net interest expense increased primarily as a result of increases in interest rates. Included as interest expense during Fiscal 1994 was $97.4 million, representing interest expense on existing debt obligations, capitalized leases and a swap agreement. Comparable interest expense for Fiscal 1993 was $92.8 million. Also included in net interest expense for Fiscal 1994 was $15.3 million representing certain other charges related to amortization of debt issuance costs, self-insurance discounts, lease valuation reserves and other miscellaneous charges (categorized by Ralphs as non-cash interest expense) as compared to $16.0 million for Fiscal 1993. Investment income, which is immaterial, has been offset against interest expense. The continuation of higher interest rates subsequent to the end of Fiscal 1994 has continued to increase interest expense and adversely affect Ralphs' net income. Net Earnings For Fiscal 1994, Ralphs reported net earnings of $32.1 million compared to net earnings of $138.4 million for Fiscal 1993. The decrease in net earnings is primarily the result of decreased operating income, higher interest expense due to increased interest rates, the recognition of $109.1 million of deferred income tax benefit in Fiscal 1993 and $11.0 million recorded for earthquake losses in Fiscal 1993. Other In February 1994, the Board of Directors of Ralphs authorized a dividend of $10.0 million to be paid to RSI, and the Board of Directors of RSI authorized distribution of this dividend to its shareholders subject to certain restrictive covenants in the instruments governing certain of Ralphs' indebtedness that impose limitations on the declaration or payment of dividends. Ralphs' credit agreement, entered into in 1992 (the "1992 Credit Agreement"), was amended to allow for the payment of the dividend to RSI for distribution to RSI's shareholders. The fee for the amendment was approximately $500,000, which was included in interest expense for the period. The dividend was distributed to the shareholders of RSI in the second quarter of Fiscal 1994. COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1994 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 31, 1993. Sales Sales in Fiscal 1993 were $2,730.2 million, a decrease of $113.6 million or 4.0% compared to Fiscal 1992. During Fiscal 1993, Ralphs opened eight new stores, four in Los Angeles County, two in Orange County and 47 57 two in Riverside County, and remodeled six stores. Two of the eight new stores replaced the two stores closed during the fiscal year. Comparable store sales decreased 5.8%, which included an increase of 0.6% for the replacement stores, from $2,823.4 million to $2,659.3 million in Fiscal 1993. Ralphs' sales continued to be adversely affected by the significant recession in Southern California, continuing competitive new store and remodelling activity and pricing and promotional changes by competitors. Cost of Sales Cost of sales decreased $123.5 million or 5.6% from $2,217.2 million in Fiscal 1992 to $2,093.7 million in Fiscal 1993. As a percentage of sales, cost of sales declined to 76.7% in Fiscal 1993 from 78.0% in Fiscal 1992. The decrease in cost of sales as a percentage of sales was the result of savings in warehousing and distribution costs, the pass-through of increased operating costs and increases in relative margins where allowed by competitive conditions. Selling, General and Administrative Expenses SG&A increased $1.0 million or 0.2% from $470.0 million in Fiscal 1992 to $471.0 million in Fiscal 1993. As a percentage of sales, SG&A increased from 16.5% in Fiscal 1992 to 17.2% in Fiscal 1993. The increase in SG&A as a percentage of sales was the result of several factors including the soft sales environment. Increases in expense were partially offset by cost savings programs instituted by Ralphs. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. In both Fiscal 1992 and Fiscal 1993 the UFCW multi-employer pension plan was deemed to be overfunded based upon the collective bargaining agreement then currently in force. During Fiscal 1993 the agreement called for pension benefits which resulted in additional required expense. The UFCW health and welfare benefit plans were overfunded and those employers who contributed to these plans are to receive a pro rata share of the excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs' share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder will be recognized in the fiscal year ending January 29, 1995. The change in health and welfare plan expenses resulted from the $11.8 million credit associated with the collective bargaining agreement as well as a reduction in the current year plan expense due to the overfunded status of the plan. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. Partially offsetting the reductions of health and welfare maintenance payments was a $6.0 million contract ratification bonus paid by Ralphs at the conclusion of contract negotiations with the UFCW in Fiscal 1993. The $6.0 million contract ratification payment was an item separate from either of these plans. Operating Income Operating income in Fiscal 1993 increased to $152.1 million from $138.5 million in Fiscal 1992, a 9.8% increase. Operating margin increased in Fiscal 1993 to 5.6% from 4.9% in Fiscal 1992. This increase was primarily the result of the aforementioned improvements in Ralphs' cost of sales percentage. EBITDA, defined as net earnings before interest expense, income tax expense (benefit), depreciation and amortization expenses, post-retirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses and loss on disposal of assets, improved to $230.2 million or 8.4% of sales in Fiscal 1993 from $227.3 million or 8.0% of sales in Fiscal 1992. Net Interest Expense Net interest expense for Fiscal 1993 was $108.8 million, compared to $125.6 million for Fiscal 1992. The reduction in net interest expense was attributable to the refinancing and defeasance of Ralphs 14% Senior Subordinated Debentures due 2000 (the "14% Debentures") with the proceeds from the issuance of the Old RGC 9% Notes as the final step in a recapitalization plan initiated on July 30, 1992. Cash interest expense 48 58 during Fiscal 1993 was $92.8 million compared to $105.5 million in Fiscal 1992. Also included in interest expense for Fiscal 1993 was $16.0 million representing certain other charges relating to amortization of debt issuance costs, self-insurance discount, lease valuation reserves and other miscellaneous charges (categorized by Ralphs as non-cash interest expense) as compared to $20.1 million for Fiscal 1992. Investment income, which is immaterial, has been offset against interest expense. Earthquake Losses Several Ralphs stores suffered earthquake damage from the January 17, 1994 earthquake in Southern California and 54 stores were completely shutdown on the morning of January 17th. Management believes that there was some negative impact on sales resulting from the temporary disruption of business resulting from the earthquake. Ralphs is partially insured for earthquake losses. The pre-tax financial impact, net of expected insurance recoveries, is expected to be approximately $11.0 million and Ralphs reserved for this loss in Fiscal 1993. The gross earthquake loss is approximately $25.3 million and the expected insurance recovery is approximately $14.3 million. Income Taxes In Fiscal 1993, Ralphs recorded the incremental impact of The Omnibus Budget Reconciliation Act of 1993 on net deductible temporary differences and Ralphs increased its deferred income tax assets by a net amount of $109.1 million. Income tax expense (benefit) for Fiscal 1993 includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993. See Note 11 of Notes to Ralphs Consolidated Financial Statements. Net Earnings In Fiscal 1993, Ralphs reported net earnings of $138.4 million compared to a net loss of $76.1 million for Fiscal 1992. This increase in net earnings was primarily the result of Ralphs' recognition of $109.1 million of deferred income tax benefit for Fiscal 1993 and the following items recorded in Fiscal 1992: (1) an extraordinary charge, net of tax benefit, of $70.6 million relating to Ralphs' recapitalization plan, (2) a provision of $7.1 million made for expenses related to the closure of the central bakery operation (an additional charge of $2.4 million was recorded in Fiscal 1993) and (3) a provision of $7.5 million made for the maximum loss under a judgment rendered against Ralphs. 49 59 RESULTS OF OPERATIONS OF HOLDINGS The following table sets forth the historical operating results of Holdings for the 52 weeks ended June 27, 1992 ("Fiscal 1992"), June 26, 1993 ("Fiscal 1993") and June 25, 1994 ("Fiscal 1994"), and for the 28 weeks ended January 8, 1994 and January 7, 1995:
52 WEEKS ENDED 28 WEEKS ENDED ---------------------------------------------------------- ----------------------------------------- JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ---------------- ---------------- ---------------- ------------------ ------------------ (IN MILLIONS) (UNAUDITED) Sales.................. $2,913.5 100.0% $2,742.0 100.0% $2,585.2 100.0% $1,416.2 100.0% $1,404.7 100.0% Gross profit........... 520.8 17.9 484.2 17.7 469.3 18.1 262.2 18.5 237.5 16.9 Selling, general, administrative and other, net........... 469.7 16.1 434.9 15.9 388.8 15.0 221.5 15.6 199.2 14.2 Amortization of excess costs over net assets acquired............. 7.8 0.3 7.6 0.3 7.7 0.3 4.1 0.3 4.2 0.3 Restructuring charge... -- -- -- -- -- -- -- -- 5.1 0.4 Operating income....... 43.3 1.5 41.7 1.5 72.8 2.8 36.6 2.6 29.0 2.0 Interest expense....... 70.2 2.4 73.6 2.6 77.0 2.9 41.5 2.9 43.2 3.0 Loss (gain) on disposal of assets............ (1.3) -- (2.1) (0.1) -- -- 0.1 -- (0.4) -- Provision for earthquake losses.... -- -- -- -- 4.5 0.2 -- -- -- -- Provision for income taxes................ 3.4 0.1 1.4 0.1 2.7 0.1 0.7 0.1 0.5 -- Loss before extraordinary charge............... (29.0) (1.0) (31.2) (1.1) (11.5) (0.4) (5.7) (0.4) (14.3) (1.0) Extraordinary charges.............. 4.8 0.2 -- -- -- -- -- -- -- -- Net loss............... (33.8) (1.2) (31.2) (1.1) (11.5) (0.4) (5.7) (0.4) (14.3) (1.0)
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 28 WEEKS ENDED JANUARY 7, 1995 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 28 WEEKS ENDED JANUARY 8, 1994 Sales Sales decreased $11.5 million, or 0.8%, from $1,416.2 million in the 28 weeks ended January 8, 1994, to $1,404.7 million in the 28 weeks ended January 7, 1995, primarily as a result of a 4.5% decline in comparable store sales, partially offset by sales from new and acquired stores opened since January 8, 1994. Management believes that the decline in comparable store sales is attributable to the weak economy in Southern California and, to a lesser extent, in Food 4 Less' other operating areas, and competitive store openings and remodels in Southern California. Gross Profit Gross profit decreased as a percentage of sales from 18.5% in the 28 weeks ended January 8, 1994, to 16.9% in the 28 weeks ended January 7, 1995. The decrease in gross profit margin resulted primarily from pricing and promotional activities related to Food 4 Less' "Total Value Pricing" program and an increase in the number of warehouse format stores (which have lower gross margins resulting from prices that are generally 5-12% below the prices in Food 4 Less' conventional stores) from 48 at January 8, 1994, to 87 at January 7, 1995. The decrease in the gross profit margin was partially offset by improvements in product procurement. Selling, General, Administrative and Other, Net Selling, general, administrative and other expenses, net ("SG&A") were $221.5 million and $199.2 million for the 28 weeks ended January 8, 1994 and January 7, 1995, respectively. SG&A decreased as a percentage of sales from 15.6% to 14.2% for the same period. Food 4 Less experienced a reduction of workers' compensation and general liability self-insurance costs of $9.7 million due to continued improvement in the cost and frequency of claims. The improved experience was due primarily to cost control programs implemented by Food 4 Less, including awards for stores with the best loss experience, specific achievable 50 60 goals for each store, and increased monitoring of third-party administrators. In addition, Food 4 Less maintained tight control of administrative expenses and store level expenses, including advertising, payroll (due primarily to increased productivity), advertising and other controllable store expenses. Because Food 4 Less' warehouse stores have lower SG&A than conventional stores, the increase in the number of warehouse stores, from 48 at January 8, 1994, to 87 at January 7, 1995, also contributed to decreased SG&A. Food 4 Less participates in multi-employer health and welfare plans for its store employees who are members of the UFCW. As part of the renewal of the Southern California UFCW contract in October 1993, employers contributing to UFCW health and welfare plans are to receive a pro rata share of the excess reserves in the plans through a reduction of current employer contributions. Food 4 Less' share of the excess reserves was $24.2 million, of which Holdings recognized $8.1 million in Fiscal 1994 and $13.7 million in the 28 weeks ended January 7, 1995. The remainder of the excess reserves will be recognized as the credits are taken in the future. On August 28, 1994, the Teamsters and Food 4 Less ratified a new contract which, among other things, provided for the vesting of sick pay benefits resulting in a one-time charge of $2.1 million. Restructuring Charge Food 4 Less has converted 11 of its conventional format supermarkets to warehouse format stores. During the 28 weeks ended January 7, 1995, Food 4 Less recorded a restructuring charge for the write-off of property and equipment at the 11 stores of $5.1 million. Interest Expense Interest expense (including amortization of deferred financing costs) was $41.5 million and $43.2 million for the 28 weeks ended January 8, 1994 and January 7, 1995, respectively. The increase in interest expense was due primarily to higher interest rates on the term loan portion (the "Term Loan") of Food 4 Less' credit agreement dated as of June 17, 1991, as amended, (the "F4L Credit Agreement"), and on the revolving credit portion of the F4L Credit Agreement (the "Revolving Credit Facility"), combined with increased indebtedness under the Discount Notes and the Revolving Credit Facility. The increase was partially offset by the reduction of indebtedness under the Term Loan as a result of amortization payments. Food 4 Less increased its borrowing under the F4L Credit Agreement as a result of higher capital expenditures subsequent to the end of its first quarter. Net Loss Primarily as a result of the factors discussed above, Holdings' net loss increased from $5.7 million in the 28 weeks ended January 8, 1994, to $14.3 million in the 28 weeks ended January 7, 1995. COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 25, 1994 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 26, 1993. Sales Sales decreased $156.8 million or 5.7% from $2,742.0 million in Fiscal 1993 to $2,585.2 million in Fiscal 1994. The decrease in sales resulted primarily from a 6.9% decline in comparable store sales. The decline in comparable store sales primarily reflects (i) the continuing softness of the economy in Southern California, (ii) lower levels of price inflation in certain key food product categories, and (iii) competitive factors, including new stores, remodeling and recent pricing and promotional activity. This decrease in sales was partially offset by sales from 13 stores opened or acquired during Fiscal 1994. Gross Profit Gross profit increased as a percent of sales from 17.7% in Fiscal 1993 to 18.1% in Fiscal 1994. The increase in gross profit margin was attributable to improvements in product procurement and an increase in 51 61 vendors' participation in Food 4 Less' promotional costs. These improvements were partially offset by an increase in the number of warehouse format stores (which have lower gross margins resulting from prices that are generally 5-12% below the prices in Food 4 Less' conventional stores) from 45 at June 26, 1993 to 66 at June 25, 1994, and the effect of the fixed cost component of gross profit as compared to a lower sales base. Selling, General, Administrative and Other, Net SG&A was $434.9 million and $388.8 million in Fiscal 1993 and Fiscal 1994, respectively. SG&A decreased as a percent of sales from 15.9% to 15.0% for the same periods. Food 4 Less experienced a reduction of self-insurance costs of $18.2 million due to continued improvement in the cost and frequency of claims. The improved experience was due primarily to cost control programs implemented by Food 4 Less, including awards for stores with the best loss experience, specific achievable goals for each store, and increased monitoring of third-party administrators, and, to a lesser extent, a lower sales base which reduced Food 4 Less' exposure. In addition, Food 4 Less maintained tight control of administrative expenses and store level expenses, including payroll (due primarily to increased productivity), advertising, and other controllable store expenses. Because Food 4 Less' warehouse stores have lower SG&A than conventional stores, the increase in the number of warehouse stores, from 45 at June 26, 1993 to 66 at June 25, 1994, also contributed to decreased SG&A as a percentage of sales. The reduction in SG&A as a percentage of sales was partially offset by the effect of the fixed cost component of SG&A as compared to a lower sales base. Food 4 Less participates in multi-employer health and welfare plans for its store employees who are members of the UFCW. As part of the renewal of the Southern California UFCW contract in October 1993, employers contributing to UFCW health and welfare plans are to receive a pro rata share of the excess reserves in the plans through a reduction of current employer contributions. Food 4 Less' share of the excess reserves was $24.2 million, of which Holdings recognized $8.1 million in Fiscal 1994 and the remainder of which will be recognized as the credits are taken in the future. Offsetting the reduction in employer contributions was a $5.5 million contract ratification bonus and contractual wage increases. Interest Expense Interest expense (including amortization of deferred financing costs) increased $3.4 million from $73.6 million to $77.0 million for Fiscal 1993 and Fiscal 1994, respectively. The increase in interest expense is due to additional indebtedness related to the Discount Notes, partially offset by reduced borrowings under the F4L Credit Agreement. Provision for Earthquake Losses On January 17, 1994, Southern California was struck by a major earthquake which resulted in the temporary closing of 31 of Food 4 Less' stores. The closures were caused primarily by loss of electricity, water, inventory, or structural damage. All but one of the closed stores reopened within a week of the earthquake. The final closed store reopened on March 24, 1994. Food 4 Less is insured against earthquake losses (including business interruption), subject to certain deductibles. The pre-tax financial impact, net of expected insurance recovery, was approximately $4.5 million. Net Loss Primarily as a result of the factors discussed above, Holdings' net loss decreased from $31.2 million in Fiscal 1993 to $11.5 million in Fiscal 1994. COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 26, 1993 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JUNE 27, 1992. Sales Sales decreased $171.5 million or 5.9% from $2,913.5 million in Fiscal 1992 to $2,742.0 million in Fiscal 1993, primarily as a result of a 5.1% decline in comparable store sales and a net reduction in Food 4 Less' total 52 62 store count of one store at June 26, 1993 compared to June 27, 1992. Management believes that the decline in comparable store sales was attributable to (i) the weak economy in Southern California, and, to a lesser extent, in Food 4 Less' other operating areas, (ii) lower levels of price inflation in certain key food categories, and (iii) increased competitive store openings in Southern California. Gross Profit Gross profit decreased as a percent of sales from 17.9% in Fiscal 1992 to 17.7% in Fiscal 1993 primarily as a result of an increase in the number of Food 4 Less warehouse stores (which have lower gross margins resulting from prices that are generally 5-12% below the prices in Food 4 Less' conventional stores), from 34 stores in Fiscal 1992 to 45 stores in Fiscal 1993, and as a result of the fixed cost component of gross profit being compared to a lower sales base, partially offset by increases in relative margins allowed by competitive conditions, improvements in the procurement function, and cost savings and operating efficiencies associated with Food 4 Less' warehousing and manufacturing facilities. Selling, General, Administrative and Other, Net SG&A was $469.7 million and $434.9 million in Fiscal 1992 and Fiscal 1993, respectively. SG&A decreased as a percent of sales from 16.1% to 15.9% for the same periods as a result of tight control of direct store expenses, primarily payroll costs, the impact in Fiscal 1992 of the $12.8 million non-cash self-insurance reserve adjustment partially offset by market-wide contractual increases in union wages, current year increases in workers' compensation costs primarily associated with the new law which took effect in 1990, and the fixed cost component of SG&A being compared to a lower sales base. Interest Expense Interest expense (including amortization of deferred financing costs) increased $3.4 million from $70.2 million to $73.6 million for the 52 weeks ended June 27, 1992 and June 26, 1993, respectively. The increase to interest expense is due to additional indebtedness related to the Discount Notes, partially offset by lower interest expense due to the reduction of indebtedness as a result of amortization payments combined with decreasing interest rates on the Term Loan. Loss Before Extraordinary Charge Primarily as a result of the factors discussed above, Holdings' loss before extraordinary charge increased from $29.0 million in Fiscal 1992 to $31.2 million in Fiscal 1993. Holdings recorded a net extraordinary charge of $4.8 million in Fiscal 1992, reflecting the write-off of certain deferred financing costs which were partially offset by a gain on the replacement of partially depreciated assets following the civil unrest in Los Angeles. LIQUIDITY AND CAPITAL RESOURCES Holdings does not conduct any business operations of its own and has no income or assets other than its investment in Food 4 Less' common and preferred stock. No cash interest is payable on any Amended Discount Notes that remain outstanding following the Merger until June 15, 1998 and on the Seller Debentures and the New Discount Debentures until the fifth anniversary of their issue date. Holdings intends to service the cash interest payments on the Seller Debentures, on the New Discount Debentures and on any Amended Discount Notes that remain outstanding following the consummation of the Merger through dividends it receives from the Company following the Merger. Such dividends and other payments will be restricted under the terms of the debt agreements of the Company. See "Risk Factors -- Holding Company Structure." In order to consummate the Merger, Holdings and Food 4 Less expect to utilize total new financing proceeds in the amount of approximately $1.5 billion. Pursuant to the New Equity Investment, New Holdings (as the successor to Holdings) will issue capital stock for total cash proceeds of approximately $140 million (excluding a $5 million commitment fee of which $2.5 million will be paid in cash and $2.5 million will be satisfied through the issuance of New Discount Debentures). In addition, Food 4 Less will enter into the New 53 63 Credit Facility pursuant to which it will have available up to $750 million of New Term Loans, all of which is anticipated to be drawn at the Closing Date (assuming all Old RGC Notes are tendered into the RGC Offers), and will have available a $325 million New Revolving Facility, of which $12.7 million is anticipated to be drawn at the Closing Date. Food 4 Less will also issue up to $295 million principal amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and will issue up to $200 million principal amount of New RGC Notes pursuant to the Subordinated Note Public Offering. The proceeds from the New Credit Facility and the Public Offerings, together with the $140 million cash proceeds of the New Equity Investment, $59 million cash proceeds of the New Discount Debenture Placement, $41 million in initial accreted value of additional New Discount Debentures issued other than for cash and $131.5 million principal amount of the Seller Debentures, will provide the sources of financing required to consummate the Merger and to repay existing bank debt of approximately $161.5 million at Food 4 Less and $255.1 million at Ralphs, to repay existing mortgage debt of $174.1 million (excluding prepayment fees) at Ralphs and to pay $83.9 million in consideration for the Discount Notes (excluding related fees). Proceeds from the New Credit Facility and the Public Offerings will also be used to pay the cash portions of the RGC Offers and the F4L Exchange Offers, as well as the Change of Control Offer, if any, and accrued interest on all exchanged debt securities in the amount of $29.3 million (as of May 30, 1995), to pay $17.8 million to the holders of Ralphs Equity Appreciation Rights and to loan $5 million to an affiliate for the benefit of such holders and to pay up to $109.9 million of fees and expenses of the Merger and the Financing. The Company will also assume certain existing indebtedness of Food 4 Less and Ralphs. Pursuant to the RGC Offers, Food 4 Less will seek the exchange of at least a majority of the Old RGC Notes for New RGC Notes and pursuant to the F4L Exchange Offers, Food 4 Less will seek the exchange of at least 80% of the Old F4L Notes for New F4L Notes. The primary purpose of the F4L Exchange Offers and the RGC Offers is to refinance Food 4 Less' and RGC's existing public debt securities with longer term public debt securities, to obtain all necessary consents to consummate the Merger and to eliminate substantially all of the restrictive covenants contained in the Old F4L Indentures and the Old RGC Indentures. After the Merger the Company's principal sources of liquidity are expected to be cash flow from operations, amounts available under the New Revolving Facility and capital and operating leases. It is anticipated that the Company's principal uses of liquidity will be to provide working capital, finance capital expenditures, including the costs associated with the integration of Food 4 Less and Ralphs, and to meet debt service requirements. The New Revolving Facility will be a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Credit Facility. The Company anticipates that letters of credit for approximately $92.6 million will be drawn under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. The New Revolving Facility will be non-amortizing and will have a six-year term. The Company will be required to reduce loans outstanding under the New Revolving Facility to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period. Assuming that the Merger closes on May 30, 1995, giving effect to currently anticipated borrowings and letter of credit issuances, the Company's remaining borrowing availability under the New Revolving Facility would have been approximately $219.7 million. Pursuant to the New Credit Facility, the New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of $375 million, will have a six-year term; (ii) Tranche B, in the amount of $125 million, will have a seven-year term; (iii) Tranche C, in the amount of $125 million, will have an eight-year term; and, (iv) Tranche D, in the amount of $125 million, will have a nine-year term. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. The New Term Loans will require quarterly amortization payments aggregating $3.8 million in the first year, $48.8 million in the second year and increasing thereafter. The New Credit Facility will be guaranteed by New Holdings and each of the Company's subsidiaries and secured by liens on substantially all of the unencumbered assets of the Company and its subsidiaries and by a pledge of New Holdings' stock in the Company. The New Credit Facility will 54 64 contain financial covenants which are expected to require, among other things, the maintenance of specified levels of cash flow and stockholder's equity. See "Description of the New Credit Facility." Standard & Poor's has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline under the Old RGC Indentures. The consummation of the Merger (which is conditioned on, among other things, successful consummation of the Offer to Purchase, the Other Debt Financing Transactions, the New Equity Investment and the Bank Financing) and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline, would constitute a Change of Control Triggering Event under the Old RGC Indentures. Although Food 4 Less does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the RGC Offers, upon such a Change of Control Triggering Event the Company would be obligated to make the Change of Control Offer following the consummation of the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. The portion of the Tranche A Loan not fully funded at the Closing Date will be available to fund the purchase of Old RGC Notes tendered pursuant to the Change of Control Offer. Management anticipates that significant capital expenditures will be required following the Merger in connection with the integration of Ralphs and Food 4 Less. In order to implement the Company's store format strategy, up to 122 conventional stores currently operated by Food 4 Less will be converted to the Ralphs format and 16 conventional stores (primarily Boys and Viva) have been or will be converted and 23 Ralphs stores will be converted to the Food 4 Less warehouse format. An additional 18 Ralphs and Food 4 Less warehouse stores are scheduled to be opened during calendar 1995. It is estimated that the gross capital expenditures to be made by the Company in the first fiscal year following the closing will be approximately $153 million (or $106 million net of expected capital leases), of which approximately $98 million relate to ongoing expenditures for new stores, equipment and maintenance and approximately $55 million relate to store conversions and other Merger-related and non-recurring items. An additional $33 million of Merger-related and non-recurring capital expenditure items (or $22 million net of expected capital leases) are anticipated to be incurred in the second year following the consummation of the Merger. Management expects that these expenditures will be financed primarily through cash flow from operations and capital leases. Ralphs cash flow from operating activities was $55.4 million for the 52 weeks ended January 29, 1995 and $104.0 million for Fiscal 1993. Holdings generated approximately $87.8 million of cash from operating activities during the 52-week period ended June 25, 1994 and used approximately $18.0 million of cash for its operating activities during the 28 weeks ended January 7, 1995 (as compared to generating $30.5 million of cash during the 28 weeks ended January 8, 1994). The decrease in cash from operating activities is due primarily to changes in operating assets and liabilities. Holdings anticipates that one of the principal uses of cash in its operating activities will be inventory purchases. However, supermarket operators typically require small amounts of working capital since inventory is generally sold prior to the time that payments to suppliers are due. This reduces the need for short-term borrowings and allows cash from operations to be used for non-current purposes such as financing capital expenditures and other investing activities. Consistent with this pattern, Ralphs and Holdings had working capital deficits of $119.5 million and $44.8 million at January 29, 1995 and January 7, 1995, respectively. Ralphs cash used in investing activities was $45.5 million during Fiscal 1993 and $50.8 million during the 52 weeks ended January 29, 1995. These amounts reflected increased capital expenditures related to store remodels and new store openings (including store acquisitions) and, to a lesser extent, expansion of other warehousing, distribution and manufacturing facilities and equipment, including data processing and computer systems. For the 52 weeks ended June 25, 1994, Holdings' cash used in investing activities was $55.8 million. Investing activities consisted primarily of capital expenditures by Food 4 Less of $57.5 million, partially offset by $9.3 million of sale/leaseback transactions, and $11.1 million of costs in connection with the acquisition of ten former "Food Barn" stores. For the 28 weeks ended January 7, 1995, Holdings' cash used in investing activities was $32.8 million. Investing activities consisted primarily of capital expenditures by Food 4 Less of $39.0 million, partially offset by $6.5 million of sale/leaseback transactions. The capital expenditures, net of the proceeds from sale/leaseback transactions, were financed primarily with cash provided by financing 55 65 activities. The capital expenditures included the costs associated with the conversion of 11 conventional format stores to the Food 4 Less warehouse format. See "Business -- The Merger -- Two Leading Complementary Formats." In January 1995, Food 4 Less entered into an amendment to the F4L Credit Agreement to, among other things, allow for the accelerating of the capital expenditures and other costs associated with the conversion of stores to the warehouse format. Ralphs cash used in financing activities was approximately $24.6 million for the 52 weeks ended January 29, 1995. Reduction of capital lease obligations of $12.2 million and the payment of a $10.0 million dividend reduced cash flow. Food 4 Less' cash provided by financing activities was $33.6 million for the 28 weeks ended January 7, 1995, which consisted primarily of $48.7 million of borrowings outstanding on its revolving credit facility at January 7, 1995 partially offset by a $11.3 million repayment of its term loan. At January 7, 1995, $48.6 million of standby letters of credit had been issued under Food 4 Less' existing letter of credit facility. Ralphs and FFL have significant net operating loss carryforwards for regular federal income tax purposes. As a result of the Merger and the New Equity Investment, New Holdings' ability to utilize such loss carryforwards in future periods will be limited to approximately $15.6 million per year with respect to FFL net operating loss carryforwards and approximately $15.0 million per year with respect to Ralphs' net operating loss carryforwards. Holdings does not expect the Merger to materially adversely affect any other tax assets of the Company or New Holdings. New Holdings will be a party to a tax sharing agreement with the Company and its subsidiaries. Pursuant to the tax sharing agreement, the Company will make payments to New Holdings in the amount it would be required to pay if its consolidated liability was calculated on a separate company basis. Conversely, if the Company generates losses or credits which reduce the consolidated tax liability of New Holdings, New Holdings will credit to the Company the amount of such reduction in the consolidated tax liability. See "Certain Relationships and Related Transactions." The Company will continue to be a party to an indemnification agreement with Federated and certain other parties. See Note 1 of Notes to Consolidated Financial Statements of Ralphs Supermarkets, Inc. Pursuant to the terms of such agreement, Ralphs will make annual tax payments of $1.0 million in 1995 and 1996 and a final tax payment of $5.0 million in 1997. Following the Merger, the Company will be a wholly-owned subsidiary of New Holdings. In addition, following the Merger, New Holdings will have $100 million initial accreted value of the New Discount Debentures and $131.5 million principal amount of the Seller Debentures outstanding. New Holdings is a holding company which will have no assets other than the capital stock of the Company. New Holdings will be required to commence semi-annual cash payments of interest on (i) the New Discount Debentures and the Seller Debentures commencing five years from their date of issuance in the amount of $61.0 million per annum and (ii) any Amended Discount Notes that remain outstanding following the Merger commencing June 15, 1998. Subject to the limitations contained in its debt instruments, the Company intends to make dividend payments to New Holdings in amounts which are sufficient to permit New Holdings to service its cash interest requirements. The Company may pay other dividends to New Holdings in connection with certain employee stock repurchases and for routine administrative expenses. See "Risk Factors -- Holding Company Structure." Following the consummation of the Merger and the Financing, New Holdings will be highly leveraged. Based upon current levels of operations and anticipated cost savings and future growth, Holdings believes that its cash flow from operations, together with available borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, integration costs and interest payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that future costs savings and growth can be achieved. See "Risk Factors -- Leverage and Debt Service." Interest Rate Protection Agreements Ralphs and Food 4 Less currently are parties to certain interest rate protection agreements required under the terms of their existing bank indebtedness. In connection with the New Credit Facility, these interest rate protection agreements will be replaced by a new agreement which will be finalized prior to the closing of the 56 66 Merger. The Company will be exposed to credit loss in the event of nonperformance by the counterparty to the interest rate protection agreement. However, the Company does not anticipate nonperformance by such counterparty. The following details the impact of Ralphs' hedging activity on its weighted average interest rate for each of the last three fiscal years of Ralphs:
WITH WITHOUT HEDGE HEDGE -------- -------- 1992............................................ 10.52% 10.22% 1993............................................ 8.96% 8.96% 1994............................................ 9.37% 9.18%
Due to increasing interest rates under its existing credit facility, Ralphs' interest expense has increased during recent periods and may continue to increase, reducing Ralphs' net income during such periods. The following details the impact of Food 4 Less' hedging activity on its weighted average interest rate for each of the last three fiscal years of Food 4 Less:
WITH WITHOUT HEDGE HEDGE -------- -------- 1992............................................ 10.28% 10.25% 1993............................................ 10.07% 10.03% 1994............................................ 10.10% 10.09%
Effects of Inflation The Company's primary costs, inventory and labor, are affected by a number of factors that are beyond its control, including inflation, availability and price of merchandise, the competitive climate and general and regional economic conditions. As is typical of the supermarket industry, Ralphs and Food 4 Less have generally been able to maintain margins by adjusting their retail prices, but competitive conditions may from time to time render the Company unable to do so while maintaining its market share. 57 67 BUSINESS THE MERGER The combination of Ralphs Grocery Company and Food 4 Less Supermarkets, Inc. will create the largest food retailer in Southern California. Pro forma for the Merger, the Company will operate approximately 332 Southern California stores with an estimated 26% market share among the area's supermarkets. The Company will operate the second largest conventional supermarket chain in the region under the "Ralphs" name and the largest warehouse supermarket chain in the region under the "Food 4 Less" name. In addition, the Company will operate approximately 24 conventional format stores and 39 warehouse format stores in Northern California and the Midwest. On a pro forma basis giving effect to the Merger, Holdings would have had sales of approximately $5.1 billion and $2.8 billion, operating income of approximately $183 million and $90 million and EBITDA (as defined) of approximately $343 million and $189 million for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, respectively. TWO LEADING COMPLEMENTARY FORMATS In Southern California the Company plans to convert up to 122 conventional stores currently operated by Food 4 Less to the "Ralphs" name and format and 39 Ralphs and Food 4 Less conventional stores to the "Food 4 Less" name and warehouse format. As a result, and pro forma for the Merger, Ralphs will be the region's second largest conventional format supermarket chain, with 264 stores and Food 4 Less will be the region's largest warehouse format supermarket chain with 68 stores. The Ralphs stores will continue to emphasize a broad selection of merchandise, high quality fresh produce, meat and seafood and service departments, including bakery and delicatessen departments in most stores. The Company's conventional stores will also benefit from Ralphs' strong private label program and its strengths in merchandising, store operations and systems. Passing on format-related efficiencies, the Company's price impact warehouse format stores will continue to offer consumers the lowest overall prices while still providing product selections comparable to conventional supermarkets. Management believes the Food 4 Less warehouse format has demonstrated its appeal to a wide range of demographic groups in Southern California and offers a significant opportunity for future growth. The Company plans to open nine new Food 4 Less warehouse stores and 21 new Ralphs stores over the next two years. Management believes the consolidation of its formats will improve the Company's ability to adapt its stores' merchandising strategy to the local markets in which they operate while achieving cost savings and other efficiencies. These conversions will be effected in three phases which the Company believes will be completed within the first 18 months of combined operation. Phase 1. Food 4 Less has converted 11 of its conventional format stores operated under the names "Viva" and "Boys" into Food 4 Less warehouse format supermarkets. Such conversions took up to eight weeks to complete and generally required the store to be closed for up to two weeks. These Phase 1 conversions, which were planned independently, were completed prior to the end of Food 4 Less' second quarter at a cost of approximately $1 million per store. Phase 2. Following the Merger, the Company plans to begin converting up to 122 conventional format stores currently operated by Food 4 Less under the names "Viva," "Alpha Beta" and "Boys" into Ralphs conventional format stores. It is anticipated that these conversions will be completed at the rate of approximately 10 stores per week. Management expects that the Company will be able to substantially complete each conversion without closing the store. Management believes that these Phase 2 conversions will be completed within the first 12-16 weeks of the Company's combined operation at a cost of approximately $75,000 per store. Phase 3. Following the Merger, the Company also plans to convert 23 conventional Ralphs format stores and five Food 4 Less conventional format stores into Food 4 Less warehouse format stores. Management expects that each such conversion will take up to eight weeks and may require the store to be closed for up to two to eight weeks during such period. Management believes that these Phase 3 conversions will be completed within the first 18 months of the Company's combined operation at a cost of approximately $1 million per store. 58 68 The following table summarizes the store formats to be operated by the Company in Southern California both before and after giving effect to the conversion program:
PRO FORMA NUMBER OF ACTUAL STORES(1) ---------- ------------------------- OCTOBER 1, PRIOR TO FOLLOWING STORE FORMATS 1994 CONVERSION CONVERSION ------------- ---------- ---------- ---------- Ralphs Conventional............................... 168 165 264 Food 4 Less Warehouse............................. 30 29 68 Alpha Beta Conventional........................... 129 105 0 Viva Conventional................................. 15 13 0 Boys Conventional................................. 24 20 0 --- --- --- Total........................................... 366 332 332
- --------------- (1) Pro forma store numbers give effect to the anticipated Merger-related divestiture or closing of 32 stores open at October 1, 1994 and the closure of two additional Food 4 Less conventional stores. Ralphs Conventional Format. Following completion of the store conversions described above, and pro forma for the Merger, the Company will operate 264 Ralphs stores in Southern California. Management believes these conversions will enhance Ralphs' market position and competitive advantages. Converted stores will benefit from Ralphs strengths in merchandising, store operations, systems and technology. Although all Ralphs stores use the Ralphs name and are operated under a single format, each store is merchandised to appeal to the local community it serves. Ralphs' substantial supermarket product selection is a significant aspect of its marketing efforts: Ralphs stocks between 20,000 and 30,000 merchandise items in its stores, including approximately 2,800 private label products, representing 17.3% of sales (excluding meat, service delicatessen and produce items) during Fiscal 1993. Ralphs stores offer name-brand grocery products; quality and freshness in its produce, meat, seafood, delicatessen and bakery products; and broad selection in all departments. Most existing Ralphs stores offer service delicatessen departments, on-premises bakery facilities and seafood departments. Ralphs emphasizes store ambiance and cleanliness, fast and friendly service, the convenience of debit and credit card payment (including in-store branch banks) and 24-hour operations in most stores. Food 4 Less' 168 conventional supermarkets, currently operated under the names "Alpha Beta," "Boys" and "Viva," are located throughout densely populated areas of Los Angeles and surrounding counties, including both suburban and urban neighborhoods. Food 4 Less' merchandising strategy for conventional stores has been tailored to the community each store services, but has emphasized customer service, quality of merchandise, and a large variety of product offerings in modern store environments. Of Food 4 Less' 168 conventional supermarkets, up to 122 are intended to be converted to the "Ralphs" name and format, 16 will be converted to the "Food 4 Less" warehouse format and the remainder are expected to be closed or sold. Food 4 Less Warehouse Format. Following completion of the store conversions described above, and pro forma for the Merger, the Company will operate 68 Food 4 Less warehouse stores in Southern California. The conversions will substantially accelerate the growth of the Food 4 Less format and will enhance the Company's position as the largest operator of warehouse supermarkets in Southern California. In addition to the conversions, the Company plans to continue its rapid growth of the Food 4 Less format by opening nine new warehouse format stores over the next two years, including five stores in San Diego, a new market for Food 4 Less. Management believes the expansion of warehouse format stores will create efficiencies in warehousing, distribution, and administrative functions. Food 4 Less' warehouse format stores target the price-conscious segment of the market, encompassing a wide range of demographic groups in both urban and suburban areas. Food 4 Less attempts to offer the lowest overall prices in its marketing areas by passing savings on to the consumer while providing the product selection associated with a conventional format. Savings are achieved through labor efficiencies and lower overhead and advertising costs associated with the warehouse format. In-store operations are designed to allow customers to perform certain labor-intensive services usually offered in conventional supermarkets. For example, merchandise is presented on warehouse style racks in full cartons, reducing labor intensive 59 69 unpacking, and customers bag their own groceries. Labor costs are also reduced since the stores generally do not have service departments such as delicatessens, bakeries and fresh seafood departments, although they do offer a complete line of fresh meat, fish, produce and baked goods. Additionally, labor rates are generally lower than in conventional supermarkets. The Food 4 Less format generally consists of large facilities constructed with high ceilings to accommodate warehouse racking with overhead pallet storage. Wide aisles accommodate forklifts and, compared to conventional supermarkets, a higher percentage of total store space is devoted to retail selling because the top of the warehouse-style grocery racks on sales floors are used to store inventory. This reduces the need for large backroom storage. The Food 4 Less warehouse format supermarkets have brightly painted walls and inexpensive signage in lieu of more expensive graphics. In addition, a "Wall of Values" located at the entrance of each store presents the customer with a selection of specially priced merchandise. SUBSTANTIAL COST SAVINGS OPPORTUNITIES Management believes that approximately $90 million of net annual cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) will be achieved by the end of the fourth full year of combined operations. It is also anticipated that approximately $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the same period. Although a portion of the anticipated cost savings is premised upon the completion of such capital expenditures, management believes that over 70% of the cost savings could be achieved without making any Merger-related capital expenditures. The following anticipated savings are based on estimates and assumptions made by the Company that are inherently uncertain, though considered reasonable by the Company, and are subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of management. There can be no assurance that such savings will be achieved. The sum of the components of the estimated cost savings exceeds $90 million; however, management's estimate of $90 million in net annual cost savings gives effect to an offsetting adjustment to reflect its expectation that a portion of the savings will be reinvested in the Company's operations. See "Risk Factors -- Ability to Achieve Anticipated Cost Savings." Reduced Advertising Expenses. As a result of the consolidation of conventional format stores in Southern California under the "Ralphs" name, the Company will eliminate most of the separate advertising associated with Food 4 Less' existing Alpha Beta, Boys and Viva formats. Because Ralphs' current advertising program now covers the Southern California region, the Company will be able to expand the number of Ralphs stores without significantly increasing advertising costs. Management estimates that there will be annual advertising cost savings of approximately $28 million as compared to such costs for the pro forma combined fiscal year ended June 25, 1994. Because of reductions in certain advertising and promotional expenses on its conventional format stores that Food 4 Less has already begun to implement and certain refinements in the post-Merger advertising plan, actual cost savings related to advertising expenses are presently expected to be $19 million in the first full year of combined operations following the Merger as compared to the current annualized costs. Reduced Store Operations Expense. Management expects to reduce store operations costs as a result of both reduced labor and benefit costs and reduced non-labor expenses. Projected labor and benefit cost savings are based primarily on Ralphs' labor scheduling system, which has reduced Ralphs' labor costs relative to those of Food 4 Less. Other labor savings will result from the reduction of certain high-cost labor as a result of changed manufacturing, warehouse and distribution practices, and productivity enhancements resulting from the installation of Ralphs store level systems. Non-labor expense reductions are based primarily on the installation of Ralphs' computerized energy management equipment in Food 4 Less stores which will require significant capital expenditures. The expense savings associated with the use of this equipment is based on Ralphs' historical experience. Other significant non-labor expense reductions are projected to come from improved safety programs, increased cardboard baling revenues, changes to guard and shoplift agent programs and a reduction in supply and packaging costs. 60 70 Total labor and non-labor operational savings estimated at approximately $21 million annually are anticipated to be achieved by the fourth full year of combined operation. Increased Volume Purchasing Efficiencies. Management has identified approximately $19 million of cost savings it believes can be achieved as a result of purchasing efficiencies. These efficiencies consist primarily of (i) savings from increased discounts and allowances as a result of the combined volume of the two companies; (ii) an improvement in the terms of vendor contracts for products carried in the Company's stores on an exclusive or promoted basis; and (iii) savings from the conversion of some less-than-truckload shipping quantities to full truckload quantities. These savings are anticipated to be achieved by the second full year of combined operation. Warehousing and Distribution Efficiencies. The consolidation of the Company's warehousing and distribution facilities into Ralphs' two primary facilities located in Compton, California and in the Atwater district of Los Angeles and Food 4 Less' primary facility located in La Habra, California will result in lower outside storage, transportation and labor costs. The Company plans facility additions at one Ralphs facility to accommodate the additional volume as a result of such consolidation. Management anticipates improvements in the areas of automation, inventory management and handling, delivering, scheduling and route optimization and worker safety. In addition, the Company plans to close three existing facilities, which will result in lower occupancy expenses. Management believes that annual savings of approximately $16 million associated with warehousing and distribution will be achieved, before giving effect to capital expenditures in connection with facilities expansions and facility closing costs. Such savings are expected to be achieved by the third full year of combined operations. Consolidated Manufacturing. Ralphs and Food 4 Less operate manufacturing facilities that produce similar products or have excess capacity. Through the consolidation of meat, bakery, dairy and other manufacturing and processing operations, and the discontinuance of external purchases of certain goods that can be manufactured internally, management believes that annual cost savings of approximately $10 million can be achieved. In each instance, management has identified the facilities best suited to the needs of the combined company and has estimated the expense savings associated with each consolidation. The combined company will utilize a 316,000 square foot bakery and a 25,722 square foot milk processing plant, located at Food 4 Less' La Habra facility, and a 28,000 square foot milk processing plant, a 9,000 square foot ice cream processing plant, and a 23,000 square foot delicatessen kitchen located at Ralphs' Compton facility. Previously, Ralphs purchased bakery products externally and Food 4 Less purchased ice cream and delicatessen items externally. Management also plans to utilize Ralphs' third party meat processors, which have historically provided Ralphs with a full line of prefabricated and retail cuts of beef, to produce meat for Food 4 Less stores. Management anticipates that manufacturing expense savings will be achieved by the second full year of combined operation. Consolidated Administrative Functions. The Company expects to achieve savings from the elimination of redundant administrative staff, the consolidation of management information systems and a decreased reliance on certain outside services and consultants. To reduce headcount, the Company plans to target several functions for consolidation, including accounting, marketing, management information systems, administration and human resources. The Company plans to eliminate a data processing center, which is anticipated to result in savings in the areas of equipment, software, headcount and outside programmer fees. The Company also plans to eliminate the use of third party administrators to handle workers compensation and general liability claims. Management estimates that annual savings of approximately $15 million associated with consolidating administrative functions will be achieved by the second full year of combined operation. EXPERIENCED MANAGEMENT TEAM The executive officers of the Company have extensive experience in the supermarket industry. The strength of Ralphs management expertise is evidenced by Ralphs' reputation for quality and service, its technologically advanced systems, strong store operations and high historical EBITDA margins. The Food 4 Less management team will provide valuable experience in operating warehouse supermarkets and in effectively integrating companies into a combined operation. Following the acquisition of Alpha Beta in 1991, 61 71 Food 4 Less management successfully integrated Alpha Beta with its existing Southern California operations and (within three years) achieved annual cost savings in excess of $40 million (compared to a pre-acquisition estimate of approximately $33 million). See "Management." WAREHOUSING AND DISTRIBUTION The combined Company will utilize Ralphs' technologically advanced warehousing and distribution systems, which include a 17 million cubic foot high-rise automated storage and retrieval system warehouse (the "ASRS") for non-perishable items and a 5.4 million cubic foot perishable service center (the "PSC") designed for processing, storing and distributing all perishable items. These facilities and the Food 4 Less La Habra warehouse will provide the Company with substantial operating benefits, including: (i) enhanced turnover to further improve the freshness and quality of in-store products, (ii) additional opportunities in forward buying programs and (iii) an increase in the percentage of inventory supplied by the Company's own warehousing and distribution system. Management believes the consolidation of these operations will enable the Company to meet the combined inventory requirements of all stores with fewer employees and lower operating and occupancy-related expenses. In November 1987, Ralphs opened the 17 million cubic foot highrise ASRS warehouse for non-perishable items in the Atwater district of Los Angeles, at a cost of approximately $50 million. This facility significantly increased capacity and improved the efficiency of Ralphs' warehouse operations. The automated warehouse has a ground floor area of 170,000 square feet and capacity of approximately 50,000 pallets. Guided by computer software, ten-story high cranes move pallets from the receiving dock to programmed locations in the ASRS warehouse while recording the location and time of storage. Goods are retrieved and delivered by the cranes to conveyors leading to an adjacent "picking" warehouse where individual store orders are filled and shipped. The Company plans to utilize existing unused capacity to accommodate additional volume resulting from the consolidation. The ASRS facility can hold substantially more inventory and requires fewer employees to operate than a conventional warehouse of equal size. This facility has reduced Ralphs' warehousing costs of non-perishable items markedly, enabling it to take advantage of advance buying opportunities and minimize "out-of-stocks." The Company plans to close two existing Ralphs warehouse facilities in Los Angeles and Carson, California and one Food 4 Less facility in Los Angeles, California. In mid-1992, Ralphs opened the 5.4 million cubic foot PSC facility in Compton, California, designed to process and store all perishable products. This facility cost approximately $35 million and has provided Ralphs with the ability to deliver perishable products to its stores on a daily basis, thereby improving the freshness and quality of these products. The facility contains an energy efficient refrigeration system and a computer system designed to document the location and anticipated delivery time of all inventory. The PSC has consolidated the operations of three existing facilities and holds more inventory than the facilities it replaced, thereby reducing Ralphs' warehouse distribution costs. The Company also plans to expand the PSC facility to accommodate additional volume resulting from the consolidation. Most Ralphs stores and Food 4 Less Southern California stores are located within approximately a one-hour drive from Ralphs' distribution and warehousing facilities. This geographical concentration, combined with Ralphs' efficient order system, shortens the lead time between the placement of a merchandise order and its receipt. Food 4 Less currently operates a centralized manufacturing, warehouse and office facility in La Habra, California which it leases from Alpha Beta's former parent corporation. The La Habra facility measures 1,378,083 total square feet over 75 acres and, in addition to serving warehousing, distribution and office functions, houses manufacturing operations which include a bakery and a creamery. The La Habra facility is operated pursuant to a long-term lease which expires in 2001. The La Habra facility is expected to be used as an additional distribution and warehouse facility. Food 4 Less is party to a joint venture with a subsidiary of Certified Grocers of California, Ltd. which operates a general merchandise warehouse in Fresno, California. Management is evaluating the role of such warehouse in the operation of the combined Company. 62 72 MANUFACTURING Ralphs' manufacturing operations produce a variety of dairy and other products, including fluid milk, ice cream, yogurt and bottled waters and juices as well as packaged ice, cheese and salad preparations. Ralphs contracts with meat processors to provide a full line of prefabricated and retail cuts of beef. Ralphs ceased its bakery operations during the second quarter of Fiscal 1993 at its 102,000 square foot facility in Los Angeles. Food 4 Less' La Habra facility includes a full-line bakery as well as a creamery and certain other manufacturing operations. The following table sets forth information concerning the principal manufacturing and processing facilities expected to be owned and operated by the Company:
FACILITY SQUARE FEET LOCATION ----------------------------------------------- ----------- ---------- Milk processing................................ 28,000 Compton Ice cream processing........................... 9,000 Compton Delicatessen kitchen........................... 23,000 Compton Bakery......................................... 316,000 La Habra Milk processing................................ 25,722 La Habra
Management believes that Ralphs' manufacturing facilities and the La Habra bakery can accommodate the volume requirements of the Company, after planned expenditures of approximately $3.0 million over the next year. PRIVATE LABEL PROGRAM Through its private label program, Ralphs offers approximately 2,800 items under the "Ralphs," "Private Selection," "Perfect Choice" and "Plain Wrap" brand names. These products provide quality comparable to that of national brands at prices 20-30% lower. Gross margins on private label goods are generally higher than on national brands. Management believes its private label program is one of the most successful programs in the supermarket industry, representing 17.3% of sales (excluding meats, service delicatessen and produce items) during the twelve months ended July 17, 1994. This figure has grown in the past few years, and management intends to continue the growth of its private label program in the future. Food 4 Less has entered into several private label licensing arrangements which allow it to exclusively utilize recognized brand names in connection with certain goods it manufactures or purchases from others, including "Carnation" and "Sunnyside Farms" (dairy products) and "Van de Kamps" (baked goods). In addition, Food 4 Less has entered into an agreement to distribute private label dry grocery and frozen products under the "Sunny Select" and "Grocers Pride" labels and has established its own private label, "Equality," for health and beauty aid products. Food 4 Less actively promoted its private label products during fiscal 1994, and management believes that the additional variety, superior quality and promotional program resulted in an overall increase in private label sales and corresponding gross margins. It is expected that the Company will continue the Carnation, Van de Kamps and certain of its other licensing agreements following the Merger. EXPANSION AND DEVELOPMENT As a result of Ralphs' 122-year history and Alpha Beta's 91-year history in Southern California, the Company will have valuable and well established store locations, many of which are in densely populated metropolitan areas. Additionally, the Company will have a technologically advanced store base. During the five years ended June 25, 1994, on a combined basis, Ralphs and Food 4 Less opened 74 new stores and remodeled 211 stores. Approximately 84% of the Company's stores have been opened or remodeled in the last five years. The Company plans to expand the Southern California Division by acquiring existing stores and constructing new ones. The Company intends to continue to focus its new store construction and store conversion efforts during calendar 1995 and future years primarily within existing marketing areas. Such efforts will encompass both of the Company's store formats, namely Food 4 Less and Ralphs. To this end, the Company plans to continue its store expansion program in Southern California by opening 17 new stores 63 73 during calendar 1995 (including three Food 4 Less stores which will be located in San Diego, a new market for Food 4 Less), and additional stores in subsequent years. During the second quarter of its current fiscal year, Food 4 Less converted 11 of its conventional format stores to warehouse format stores and, following the Merger, the Company plans to convert approximately five additional conventional stores currently managed by Food 4 Less and approximately 23 stores currently managed by RGC to the "Food 4 Less" name and warehouse format, as Food 4 Less stores have proven to have a strong appeal to value-conscious consumers across a wide range of demographic groups. See "-- The Merger -- Two Leading Complementary Formats." Remodeling activity in Southern California will be focused on the conventional format stores, including 13 planned major remodels of such stores during calendar 1995. The Company's expansion, remodel and conversion efforts have required, and will continue to require, the funding of significant capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." During the last five fiscal years, Ralphs has opened 46 new stores and remodeled 54 stores at a cost of approximately $277.2 million. A majority of these new and remodeled stores offer expanded produce and European-style seafood departments, service delicatessens, fresh bakeries and a broad selection of general merchandise. With enhanced decor reflecting contemporary interior design, these stores are designed to provide a quality shopping experience. At the end of Fiscal 1994, 100 of Ralphs' 173 total stores were newly built or remodeled within the past five fiscal years. While Ralphs has sold or closed 15 stores during the last five fiscal years, the number of Ralphs' stores has increased from 142 stores at January 28, 1990 to 173 stores at January 29, 1995. During the last five fiscal years, in Southern California Food 4 Less has acquired or opened 172 stores (which includes 142 stores acquired in connection with the acquisition of Alpha Beta) and remodeled 113 stores. Since its acquisition of Alpha Beta in 1991, Food 4 Less has undertaken an extensive program of store remodels, conversions and additions, which have resulted in a substantially improved store base. During Fiscal 1994, Food 4 Less spent approximately $50.7 million on capital improvements in Southern California. Additionally, since the Alpha Beta acquisition, Food 4 Less has converted 22 Southern California stores from conventional formats to the warehouse format. As Food 4 Less has remodeled existing stores, opened new larger stores and closed smaller, marginally performing stores, there has been a net reduction in store count, from 209 stores to 196 stores from the year ended June 29, 1991 ("Fiscal 1991") to the end of Fiscal 1994, but an increase in average store size. The average square feet per store has increased from 28,700 at the end of Fiscal 1991 to 30,500 at the end of Fiscal 1994. During the last five fiscal years, 29 stores have been closed or sold (including five stores which closed as a result of the April 1992 civil unrest in Los Angeles). The Company will select most new store sites from developers' proposals after such proposals have been researched and analyzed by the Company's personnel. Each site will be monitored for population shifts, zoning changes, traffic patterns, and nearby new construction and competitors' stores in an effort to determine sales potential. The Company will actively participate with developers in order to attain the Company's objectives for the site, including adequate parking and complementary co-tenant mix. Remodeling involves enhancing a store's decor through fixture replacement, upgrading of service departments and improvements to lighting systems. In order to minimize the disruptive effect on sales, most stores will be kept open during the remodeling period. The primary objectives of remodeling will be to improve the attractiveness of stores, increase sales of higher margin product categories and to increase selling area where feasible. Remodelings and openings, among other things, are subject to the availability of developers' financing, agreements with developers and landlords, local zoning regulations, construction schedules and other factors, including costs, often beyond the Company's control. Accordingly, there can be no assurance that the schedule will be met. Further, the Company expects increasing competition for new store sites, and it is possible that this competition might adversely affect the timing of its new store opening program. ADVERTISING AND PROMOTION Ralphs' marketing strategy is to provide a combination of wide product selection, quality and freshness of perishable products, competitive prices and double coupons supporting Ralphs' advertising theme "Everything 64 74 You Need. Every Time You Shop." In February 1994, Ralphs launched the Ralphs Savings Plan, a new marketing campaign designed to enhance customer value. The Ralphs Savings Plan is comprised of six major components: Guaranteed Low Prices ("GLPs"), Price Breakers, Big Buys, Multi-Buys, Ralphs Brand Products and Double Coupons. GLPs guarantee low prices on certain high volume items that are surveyed and updated every four weeks. Price Breakers are weekly advertised items that offer significant savings. Big Buys are club size items at prices competitive to club store prices and Multi-Buys offer Ralphs shoppers the opportunity to purchase club store quantities of regular sized items at prices competitive to club store prices. In conjunction with this new campaign Ralphs' private label offering of approximately 2,800 products provides value to the customer. In the second quarter of 1994, Ralphs began more aggressively promoting perishables through weekly ad features and lower prices. In addition, Ralphs increased the number of storewide GLPs. Further, a mailer program was intensified to highlight the perishable pricing and increased GLPs. Ralphs stores promote sales through the use of product coupons, consisting of manufacturers' coupons and Ralphs' own promotional coupons. Ralphs offers a double coupon program in all stores with Ralphs matching the price reduction offered by the manufacturer. Ralphs also generates store traffic through weekly advertised specials, special sales promotions such as discounts on recreational activities, seasonal and holiday promotions, increased private label selection, club pack items and exclusive product offerings. Current advertising by Ralphs has substantially the same market coverage as Food 4 Less and it is expected that following the Merger duplicative advertising can be eliminated. The Food 4 Less warehouse stores utilize print and radio advertising which emphasizes Food 4 Less' low-price leadership, rather than promoting special prices on individual items. The Food 4 Less warehouse stores also utilize weekly advertising circulars, customized to local communities, which highlight the merchandise offered in each store. INFORMATION SYSTEMS AND TECHNOLOGY Ralphs' management utilizes technology and industrial engineering methods to enhance operating efficiency. Every checkout lane in every Ralphs store has a point of sale terminal. Information from these terminals is utilized to allocate shelf space, select merchandise based on the buying patterns of each store, reduce out-of-stocks and increase efficiency at the checkstand and in the warehouses. Industrial engineering methods are used to schedule labor thereby improving productivity at the store level and in warehousing and distribution operations. Ralphs was the first supermarket chain in the western United States to adopt scanning in all of its stores and has upgraded this equipment through the purchase of IBM 4680 point-of-sale computers. All Ralphs stores use laser scanning equipment, operating through an integrated computer system, to scan the Universal Product Code, which provides prices and descriptions for most products. Ralphs has a Uniform Communications Standard purchase order system that electronically links Ralphs to major suppliers via computer. This system has enabled the automated processing of purchase orders which management believes reduces the lead time required for product purchases. In Fiscal 1993, Ralphs completed installation of an industry standard, direct store delivery receiving system for goods delivered directly by vendors. This system allows the receipt of each order to be recorded electronically, thereby confirming product retail price and purchase authorization. This system has reduced the incidence of billing errors and unauthorized deliveries. Industrial engineering standards have been established for all major work functions in Ralphs stores, ranging from stocking to checkout. Performance of each major department in each store is measured weekly against these standards. Similar measurements are made in Ralphs' distribution, warehouse and manufacturing operations. Ralphs believes that its application of qualitative methods to the operation of the business has given it a competitive advantage and has better enabled management to run its business efficiently and to control costs. The Company plans to convert the Food 4 Less management information systems to the Ralphs management information systems. Ralphs stores that will be converted to the Food 4 Less format will continue to use the Ralphs programs. 65 75 NORTHERN CALIFORNIA AND MIDWESTERN DIVISIONS The Northern California Division of Food 4 Less operates 19 conventional supermarkets in the greater San Francisco Bay Area under the names "Cala" and "Bell," and six warehouse format stores under the "Foods Co." name. Management believes that the Northern California Division has excellent store locations in the city of San Francisco that are very difficult to replicate. The Midwestern Division of Food 4 Less operates 38 stores, of which 33, including ten former "Food Barn" stores which Food 4 Less acquired in March 1994, are warehouse format stores operated under the "Food 4 Less" name, and five of which are conventional supermarkets operated under the "Falley's" name. Of these 38 stores, 34 are located in Kansas and four are located in Missouri. Management believes the Food 4 Less warehouse format stores are the low-price leaders in each of the markets in which they compete. The Northern California Division's conventional store strategy is to attract customers through its convenient locations, broad product line and emphasis on quality and service and its advertising and promotion strategy highlights the reduced price specials offered in its stores. In contrast, the Company's warehouse format stores, operated under the Food 4 Less name in the Midwestern Division and the Foods Co. name in the Northern California Division, emphasize lowest overall prices rather than promoting special prices on individual items. The Northern California Division's conventional stores range in size from approximately 8,900 square feet to 32,800 square feet, and average approximately 19,400 square feet. The Northern California Division's warehouse stores range in size from approximately 30,000 square feet to 59,600 square feet, and average approximately 37,900 square feet. The Midwestern Division's warehouse format stores range in size from approximately 8,800 square feet to 60,200 square feet and average approximately 37,300 square feet. The Northern California Division purchases merchandise from a number of suppliers; however, approximately 40% of its purchases are made through Certified Grocers of California, Ltd. ("Certified"), a food distribution cooperative, pursuant to supply contracts. The Northern California Division does not operate its own warehouse facilities, relying instead on direct delivery to its stores by Certified and other vendors. Food 4 Less' Southern California warehouse facilities supply a portion of the merchandise sold in the Northern California Division stores, and it is expected that, following completion of the Merger, the Company's Southern California warehouses will continue to do so. The Midwestern Division's primary supplier is Associated Wholesale Grocers ("AWG"), a member-owned wholesale grocery cooperative based in Kansas City. The Midwestern Division does not operate a central warehouse, but purchases approximately 73% of the merchandise sold in its stores from AWG. Management believes that, as AWG's largest single customer, the Midwestern Division has significant buying power, allowing it to provide a broader product line more economically than it could if it maintained its own full-line warehouse. The Midwestern Division produces approximately 50% of all case-ready fresh meat items sold in its stores at its central meat plant located in Topeka, Kansas. In fiscal 1990, the Northern California Division initiated a remodeling program to upgrade its stores and to increase profitability. Food 4 Less remodeled 15 stores during the past five fiscal years, and opened five new stores during the past four fiscal years. During fiscal 1994, Food 4 Less opened one new warehouse store, converted three existing stores to the warehouse format and remodeled one conventional format store. The Company has closed 4 stores during the past five fiscal years and increased its number of stores from 22 at the end of the fiscal year ended June 30, 1990 to 24 at the end of the fiscal year ended June 25, 1994. The average square feet per store has increased from 20,000 at the end of fiscal 1990 to 23,300 at the end of fiscal 1994. The Company plans to open one additional warehouse format store and remodel two conventional format stores during fiscal 1995. Management plans to further expand the Northern California Division in the future by acquiring existing stores and constructing new stores, including warehouse stores. The Northern California Division Food 4 Less warehouse stores were renamed "Foods Co." in fiscal 1994 following the sale by Food 4 Less of exclusive rights to use the "Food 4 Less" name in Northern California to Fleming Companies, Inc. See "-- Licensing Operations." The Company intends to focus its Midwestern Division expansion primarily on its Food 4 Less operations. While Food 4 Less expects to construct new stores, it may also expand operations by purchasing existing Food 4 Less stores from unaffiliated licensees, or by acquiring existing supermarkets and converting 66 76 them to the Food 4 Less warehouse format. The acquisition in March 1994 of ten warehouse stores formerly operated as "Food Barn" stores increased the Midwestern Division's Food 4 Less warehouse store count from 23 at June 26, 1993 to 33 at June 25, 1994. During the last five fiscal years, the Midwestern Division has opened 3 new stores, acquired 13 stores, closed one store and remodeled 10 stores. COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors in each of its operating divisions include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse club stores, deep discount drug stores and "super centers." Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use these resources to take steps which could adversely affect the Company's competitive position. The Southern California stores compete with several large national and regional chains, principally Albertsons, Hughes, Lucky, Smith's, Stater Bros., and Vons, and with smaller independent supermarkets and grocery stores as well as warehouse clubs and other "alternative format" food stores. The Northern California Division competes with large national and regional chains, principally Lucky and Safeway, and with independent supermarket and grocery store operators and other retailers, including "alternative format" stores. The Midwestern Division's supermarkets compete with several national and regional supermarket chains, principally Albertsons and Dillons, as well as independent and "alternative format" stores such as Hypermarket USA. Food 4 Less positions its Food 4 Less warehouse format supermarkets as the overall low-price leader in each marketing area in which they operate. In addition, management believes that Ralphs is a leading competitor in many of its marketing areas, based on its strong customer franchise, desirable store locations, technology and efficient distribution systems. EMPLOYEES RALPHS At January 29, 1995, Ralphs had 6,213 full-time and 8,940 part-time employees as follows:
EMPLOYEE TYPE UNION NON-UNION TOTAL --------------------------------------------- ------ --------- ------ Hourly....................................... 13,854 245 14,099 Salaried..................................... -- 1,054 1,054 ------ ----- ------ Total employees.................... 13,854 1,299 15,153
Of Ralphs' 15,153 total employees at January 29, 1995, 13,854 were covered by union contracts principally with the UFCW. The table below sets forth information regarding Ralphs' union contracts which cover more than 100 employees.
UNION NUMBER OF EMPLOYEES COVERED DATE OF EXPIRATION - ---------------------------------- -------------------------------- ------------------- UFCW 10,723 clerks and meatcutters October 6, 1996 International Brotherhood of 1,675 drivers and warehousemen September 13, 1998 Teamsters Hotel Employees and Restaurant Employees 977 September 10, 1995 Hospital and Service Employees 328 Los Angeles January 19, 1997 67 San Diego April 20, 1997
67 77 FOOD 4 LESS At June 25, 1994, Food 4 Less had a total of 5,728 full-time and 8,959 part-time employees as follows:
EMPLOYEE TYPE UNION NON-UNION TOTAL ----------------------------------------------- ------ --------- ------ Hourly......................................... 11,882 1,907 13,789 Salaried....................................... -- 898 898 ------ ----- ------ Total employees...................... 11,882 2,805 14,687
Of Food 4 Less' 14,687 total employees at June 25, 1994, 11,882 were covered by union contracts, principally with UFCW. The table below sets forth information regarding Food 4 Less' union contracts which cover more than 100 employees.
NUMBER OF DATE OF UNION EMPLOYEES COVERED EXPIRATION - ---------------------------------------------- -------------------------- --------------------- UFCW.......................................... 7,908 Southern California October 6, 1996 clerks and meatcutters Hospital and Service Employees................ 299 Southern California January 19, 1997 store porters International Brotherhood of Teamsters........ 886 Southern California September 13, 1998 produce drivers and warehousemen UFCW.......................................... 971 Northern California February 28, 1995(a) clerks and meatcutters UFCW.......................................... 1,532 Southern California February 25, 1996 clerks and meatcutters Bakery and Confectionery Workers.............. 192 Southern California July 8, 1995 bakers
- --------------- (a) Certain of such employees are covered by a contract expiring on June 2, 1996. The contract which expired on February 28, 1995 and an additional contract which expired on March 4, 1995 have been provisionally extended for a five-month period and currently are being renegotiated. Pursuant to their collective bargaining agreements, both Ralphs and Food 4 Less contribute to various union-sponsored, multi-employer pension plans. The terms of most collective bargaining agreements that cover employees of conventional stores operated by Food 4 Less are substantially identical to the terms of the corresponding collective bargaining agreements of Ralphs. The terms of each company's collective bargaining agreements generally will remain in effect following the Merger, although it is expected that, as a result of current negotiations, Ralphs' collective bargaining agreements will apply to all Company stores converted to the Ralphs name and format, and the collective bargaining agreements that cover employees of Food 4 Less warehouse format stores will apply to all Company stores converted to the Food 4 Less name and warehouse format. Management believes that both Ralphs and Food 4 Less have good relations with their employees. LICENSING OPERATIONS Food 4 Less owns the "Food 4 Less" trademark and service mark and licenses the "Food 4 Less" name for use by others. In Fiscal 1994, earnings from licensing operations were approximately $270,000. An exclusive license with the right to sublicense the "Food 4 Less" name in all areas of the United States except Arkansas, Iowa, Illinois, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin, the upper peninsula of Michigan, certain portions of Kansas, Missouri, and Tennessee has been granted to Fleming Companies, Inc. ("Fleming"), a major food wholesaler and retailer. In August of 1993, Food 4 Less amended (the "Amendment") its licensing agreement with Fleming to give Fleming exclusive use of the Food 4 Less name in Northern California and Food 4 Less exclusive use in Southern California. Fleming paid Food 4 Less a fee of $1.9 million for the Amendment. With the exception of Northern California, and subject to the Amendment and certain proximity restrictions, Food 4 Less retains the right to open and operate its own 68 78 "Food 4 Less" warehouse supermarkets throughout the United States. As of June 25, 1994, there were 158 Food 4 Less warehouse supermarkets in 20 states, including the 61 stores owned or leased and operated by Food 4 Less. Of the remaining 97 stores, Fleming operates three under license, 67 are operated under sublicenses from Fleming and 27 are operated by other licensees. PROPERTIES At October 1, 1994, Ralphs and Food 4 Less operated a total of 429 stores, as set forth in the table below:
NUMBER OF SUPERMARKETS TOTAL SELLING -------------- SQUARE FEET SQUARE FEET OWNED LEASED ----------- ----------- ----- ------ (IN THOUSANDS) Southern California..................... 49 317(a) 12,929 9,174 Northern California..................... -- 25 610 424 Midwestern.............................. 2(b) 36 1,357 1,025 -- --- ------ ------ Total......................... 51 378(c) 14,896 10,623 == === ====== ======
- --------------- (a) Includes 17 stores located on real property subject to a ground lease. (b) Includes one store that is partially owned and partially leased. (c) The average remaining term (including renewal options) of Ralphs' and Food 4 Less' supermarket leases is 27 years. The number of Ralphs and Food 4 Less stores by size classification as of October 1, 1994 is as follows:
AVERAGE GROSS SQUARE FEET AVERAGE SELLING SQUARE FEET NUMBER OF STORES TOTAL SQUARE --------------------------- --------------------------- ------------------------------------- FEET RALPHS FOOD 4 LESS RALPHS FOOD 4 LESS RALPHS FOOD 4 LESS TOTAL - ---------------- ----------- ----------- ----------- ----------- --------- ----------- ------- 8,800 - 15,599 -- 13,175 -- 9,478 -- 8 8 15,600 - 25,000 21,867 21,740 16,709 14,880 3 92 95 25,001 - 30,000 27,926 26,966 19,725 18,633 15 37 52 30,001 - 35,000 32,993 32,574 24,204 23,247 31 51 82 35,001 - 40,000 37,254 36,804 27,053 26,272 32 27 59 40,001 - 45,000 43,264 42,329 31,422 30,038 59 12 71 45,001 - 50,000 46,356 48,037 33,185 34,572 15 11 26 50,001 - 84,280 68,400 55,056 48,466 37,814 13 23 36
At October 1, 1994, the Company also operated 20 distribution, warehouse and administrative facilities and five manufacturing and processing facilities, 14 of which are owned and 11 of which are leased. Certain of the facilities are expected to be sold, closed or subleased following completion of the Merger. See "-- Warehousing and Distribution." Ralphs' distribution and warehouse facilities include the 17 million cubic foot ASRS warehouse for nonperishable items that Ralphs opened in November 1987 and the 5.4 million cubic foot PSC facility for the processing and storage of perishable products opened in mid-1992. Food 4 Less operates two warehouse facilities: The largest of such facilities is Food 4 Less' central office, manufacturing and warehouse complex in La Habra, California, which occupies approximately 1.4 million total square feet over 75 acres. Food 4 Less has entered into a lease of the La Habra property which expires in 2001 (and which may be extended for up to 15 years at the election of Food 4 Less), with American Food and Drug, Inc. ("AFDI"), a subsidiary of American Stores Company, and has an option to purchase such property. Rent on the La Habra property was $6.3 million in Fiscal 1994. Four of Food 4 Less' supermarkets are also leased from AFDI. In addition to the La Habra facility, Food 4 Less leases a 321,000 square foot warehouse in Los Angeles. This warehouse, which was formerly owned by Food 4 Less, was the subject of a sale leaseback arrangement entered into by Food 4 Less in August 1990. For information regarding the Company's plan to consolidate its warehouse facilities following completion of the Merger, see "-- The Merger -- Substantial Cost Savings Opportunities -- Warehousing and Distribution Efficiencies." LEGAL PROCEEDINGS In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against RGC and Food 4 Less and other major supermarket chains located in Southern 69 79 California, alleging that they conspired to refrain from competing in the retail market for fluid milk and to fix the retail price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14, and December 23, 1992, respectively. The Court has yet to certify any of these classes. A demurrer to the complaints was denied. Notwithstanding that it believes there is no merit to these cases, RGC had reached an agreement in principle to settle them. However, no settlement agreement has been signed. Food 4 Less is continuing to actively defend these suits and Ralphs has elected to defer any further settlement discussions until after the consummation of the Merger. The Company does not believe that the resolution of these cases will have a material adverse effect on its future financial condition. Any settlement would be subject to court approval. On March 25, 1991, George A. Koteen Associates, Inc. ("Koteen Associates") commenced an action in San Diego Superior Court alleging that RGC breached an alleged utility rate consulting agreement. In December 1992, a jury returned a verdict of approximately $4.9 million in favor of Koteen Associates and in March 1993, attorney's fees and certain other costs were awarded to the plaintiff. RGC has appealed the judgment and fully reserved in Fiscal 1992 against an adverse ruling by the appellate courts. In April 1994, RGC was served with a complaint filed by over 240 former employees at Ralphs' bakery in the Atwater district of Los Angeles (the "Bakery Plaintiffs"). The action was commenced in the United States District Court for the Central District of California, and, among other claims, the Bakery Plaintiffs alleged that RGC breached its collective bargaining agreement and violated the Workers Adjustment Retraining Notification Act (the "WARN Act") when it downsized and subsequently closed the bakery. In their complaint, the Bakery Plaintiffs are seeking damages for lost wages and benefits as well as punitive damages. The Bakery Plaintiffs also named RGC and two of its management employees in fraud, conspiracy and emotional distress causes of action. In addition, the Bakery Plaintiffs sued their union local for breach of its duty of fair representation and other alleged misconduct, including fraud and conspiracy. The defendants have answered the complaint and discovery is ongoing. Trial is set for February, 1996, and RGC is vigorously defending this suit. Management believes, based on its assessment of the facts, that the resolution of this case will not have a material effect on the Company's financial position or results of operations. In addition, Food 4 Less and Ralphs are defendants in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on Food 4 Less' or Ralphs' financial position or results of operations. CALIFORNIA SETTLEMENT AGREEMENT On December 14, 1994, Food 4 Less and Ralphs entered into a Settlement Agreement (the "Settlement Agreement") with the State of California to settle potential antitrust and unfair competition claims the State of California asserted against Ralphs and Food 4 Less relating to the effects of the Merger on supermarket competition in Southern California (the "State Claims"). Without admitting any liability in connection with the State Claims, Food 4 Less and Ralphs agreed in the Settlement Agreement to divest 27 specific stores in Southern California. Under the Settlement Agreement, the Company must divest 14 stores by June 30, 1995, and the balance of 13 stores by December 31, 1995. The Company also agreed not to acquire new stores from third parties in the six Southern California areas specified in the Settlement Agreement for five years following the date of the Settlement Agreement. If the Company fails to divest the required stores by the two dates set forth in the Settlement Agreement, the Company has agreed not to object to the appointment of a trustee to effect the required sales. The Settlement Agreement also requires the Company to pay the reasonable fees and costs of the attorneys and experts of the State of California associated with its review. GOVERNMENT REGULATION Ralphs and Food 4 Less are subject to regulation by a variety of governmental agencies, including, but not limited to, the California Department of Alcoholic Beverage Control, the California Department of Agriculture, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments. In addition, the Merger is subject to the review of the Federal Trade Commission and the 70 80 requirements and waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The waiting period under the HSR Act has expired and on February 2, 1995, the Federal Trade Commission advised Food 4 Less and Ralphs that it had closed its investigation of the Merger. ENVIRONMENTAL MATTERS In January 1991, the California Regional Water Quality Control Board for the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a subsurface characterization of Ralphs' Atwater property. This request was part of an ongoing effort by the Regional Board, in connection with the U.S. Environmental Protection Agency (the "EPA"), to identify contributors to groundwater contamination in the San Fernando Valley. Significant parts of the San Fernando Valley, including the area where Ralphs' Atwater property is located, have been designated federal Superfund sites requiring response actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, because of regional groundwater contamination. On June 18, 1991, the EPA made its own request for information concerning the Atwater property. Since that time, the Regional Board has requested further investigations by Ralphs. Ralphs has conducted the requested investigations and has reported the results to the Regional Board. Approximately 25 companies have entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate and design a remediation system for contaminated groundwater beneath an area which includes the Atwater property. Ralphs is not a party to that Consent Order, but is cooperating with requests of the subject companies to allow installation of monitoring or recovery wells on Ralphs' property. Based upon available information, management does not believe this matter will have a material adverse effect on the Company's financial condition or results of operations. Ralphs has removed underground storage tanks and remediated soil contamination at the Atwater property. In some instances the removals and the contamination were associated with grocery business operations; in others they were associated with prior property users. Although the possibility of other contamination from prior operations or adjacent properties exists at the Atwater property, management does not believe that the costs of remediating such contamination will be material to the Company. Apart from the Atwater property, Ralphs and Food 4 Less have recently had environmental assessments performed on a significant portion of Ralphs' facilities and Food 4 Less' facilities, including warehouse and distribution facilities. Management believes that any responsive actions required at the examined properties as a result of such assessments will not have a material adverse effect on its financial condition or results of operations. Ralphs has incurred approximately $4.5 million in non-recurring capital expenditures for conversion of refrigerants during 1994. Food 4 Less may incur some additional capital expenditures for such conversion. Other than these expenditures, neither Ralphs nor Food 4 Less has incurred material capital expenditures for environmental controls during the previous three years, nor does management anticipate incurring such expenditures during the current fiscal year or the succeeding fiscal year. At the time that Food 4 Less acquired Alpha Beta in 1991, it learned that certain underground storage tanks located on the site of the La Habra facility may have released hydrocarbons. In connection with the acquisition of Alpha Beta the seller (who is also the lessor of the La Habra facility) agreed to retain responsibility, subject to certain limitations, for remediation of the release. Ralphs and Food 4 Less are subject to a variety of environmental laws, rules, regulations and investigative or enforcement activities, as are other companies in the same or similar business. The Company believes it is in substantial compliance with such laws, rules and regulations. These laws, rules, regulations and agency activities change from time to time, and such changes may affect the ongoing business and operations of the Company. 71 81 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the persons who are expected to serve as the executive officers and directors of the Company and New Holdings, as successor to Holdings, following the consummation of the Merger, the FFL Merger and the Reincorporation Merger.
YEARS OF SUPERMARKET INDUSTRY SERVICE ---------------------------- NAME AGE POSITION MANAGERIAL POSITIONS TOTAL - ------------------------- --- ----------------------------------- -------------------- ----- Ronald W. Burkle 42 Director and Chairman of the Board 19 24 of New Holdings and the Company Byron E. Allumbaugh 63 Director and Chief Executive 36 36 Officer of New Holdings and the Company George G. Golleher 46 Director and Vice Chairman of New 21 21 Holdings and the Company Alfred A. Marasca 53 Director of the Company and 30 38 President and Chief Operating Officer of New Holdings and the Company Joe S. Burkle 71 Director and Executive Vice 44 48 President of New Holdings and the Company Greg Mays 48 Executive Vice President of New 21 21 Holdings and the Company Terry Peets 50 Executive Vice President of New 18 18 Holdings and the Company Jan Charles Gray 47 Senior Vice President, General 20 31 Counsel and Secretary of New Holdings and the Company Alan J. Reed 48 Senior Vice President and Chief 22 22 Financial Officer of New Holdings and the Company Patrick L. Graham 45 Director of New Holdings and the -- -- Company Mark A. Resnik 47 Director of New Holdings and the -- -- Company
Ronald W. Burkle has been a Director and the Chairman of the Board and Chief Executive Officer of Food 4 Less since its inception in 1989. Mr. Burkle co-founded Yucaipa in 1986 and has served as Director, Chairman of the Board, President and Chief Executive Officer of FFL since 1987 and of Holdings since 1992. From 1986 to 1988, Mr. Burkle was Chairman and Chief Executive Officer of Jurgensen's, a Southern California gourmet food retailer. Before joining Jurgensen's, Mr. Burkle was a private investor in Southern California. Mr. Burkle is the son of Joe S. Burkle. Byron E. Allumbaugh has been Chairman of the Board and Chief Executive Officer of Ralphs since 1976 and a Director since 1988. He also is a Director of the H.F. Ahmanson Company, El Paso Natural Gas Company and Ultramar, Inc. George G. Golleher has been a Director of Food 4 Less since its inception in 1989 and has been the President and Chief Operating Officer of Food 4 Less since January 1990. From 1986 through 1989 Mr. Golleher served as Senior Vice President, Finance and Administration, of The Boys Markets, Inc. Prior to joining The Boys Markets, Inc. in 1984, Mr. Golleher served as Vice President and Chief Financial Officer of Mayfair Markets, Inc. from 1983 to 1984. Alfred A. Marasca has been President, Chief Operating Officer and a Director of Ralphs since February 1994 and he was President from February 1993 to February 1994, Executive Vice President, Retail from 1991 until 1993 and Executive Vice President, Marketing from 1985 to 1991. 72 82 Joe S. Burkle has been a Director and Executive Vice President of Food 4 Less since its inception in 1989 and has been Chief Executive Officer of Falley's, Inc. since 1987. Mr. Burkle began his career in the supermarket industry in 1946, and served as President and Chief Executive Officer of Stater Bros. Markets, a Southern California supermarket chain. Prior to 1987, Mr. Burkle was a private investor in Southern California. Mr. Burkle is the father of Ronald W. Burkle. Greg Mays has been Executive Vice President -- Finance and Administration, and Chief Financial Officer of Food 4 Less and of Holdings since December 1992. From 1989 until 1991, Mr. Mays was Chief Financial Officer of Almac's, Inc. and, from 1991 to December 1992, President and Chief Financial Officer of Almac's. From April 1988 to June 1989, Mr. Mays was Chief Financial Officer of Food 4 Less of Modesto, Inc. and Cala Foods, Inc. Terry Peets has been Executive Vice President of Ralphs since February 1994. He was Senior Vice President, Marketing from 1991 to February 1994, Senior Vice President, Merchandising from 1990 to 1991, Group Vice President, Merchandising from 1988 to 1990 and Group Vice President, Store Operations from 1987 to 1988. Jan Charles Gray has been Senior Vice President, General Counsel and Secretary of Ralphs since 1988. He was Senior Vice President and General Counsel from 1985 to 1988 and Vice President and General Counsel from 1978 to 1985. Alan J. Reed has been Senior Vice President and Chief Financial Officer of Ralphs since 1988. He was Senior Vice President, Finance from 1985 to 1988 and Vice President, Finance from 1983 to 1985. Patrick L. Graham joined Yucaipa as a general partner in January 1993. Prior to that time he was a Managing Director in the corporate finance department of Libra Investments, Inc. from 1992 to 1993 and PaineWebber Inc. from 1990 to 1992. From 1982 to 1990, he was a Managing Director of the corporate finance department of Drexel Burnham Lambert Incorporated and an Associate Director in the corporate finance department of Bear Stearns & Co., Inc. Mark A. Resnik has been a Director and the Vice President and Secretary of Food 4 Less since its inception in 1989, co-founded Yucaipa in 1986 and has been a Director, Vice President and Secretary of FFL since 1987. From 1986 until 1988, Mr. Resnik served as a Director, Vice President and Secretary for Jurgensen's. From 1983 through 1986, Mr. Resnik served as a Director, Vice President and General Counsel of Stater Bros. Markets. In addition to the directors named above, two members will be nominated to the Board of Directors of each of the Company and New Holdings by Apollo, and one member will be nominated to the Board of Directors of each of the Company and New Holdings by the other New Equity Investors, pursuant to the terms of the 1995 Stockholders Agreement. See "Description of Capital Stock -- 1995 Stockholders Agreement." All directors of the Company and New Holdings will hold office until the election and qualification of their successors. Executive officers of each of the Company and New Holdings will be chosen by its Board of Directors and will serve at its discretion. It is anticipated that neither the Company nor New Holdings will pay any fees or remuneration to its directors for service on the board or any board committee, but that the Company and New Holdings will reimburse directors for their ordinary out-of-pocket expenses incurred in connection with attending meetings of the Board of Directors. 73 83 EXECUTIVE COMPENSATION EMPLOYMENT AGREEMENTS Concurrently with the consummation of the Merger, the Company will enter into employment agreements with certain of the current executive officers of Ralphs and Food 4 Less. It is expected that Byron E. Allumbaugh, George G. Golleher, Alfred A. Marasca, as well as other executive officers of the Company, including Messrs. Mays, Peets, Gray and Reed, will enter into three-year employment contracts with the Company and that the existing employment contracts, if any, of such officers will be cancelled. New Allumbaugh Agreement. The employment agreement between the Company and Byron Allumbaugh, 63, is expected to provide for a salary of $1 million for the first year and $1.25 million for the second year. If Mr. Allumbaugh continues as the Chief Executive Officer during the third year following the Merger, he would be entitled to a salary of $2 million and if he is employed in another capacity then he would be entitled to a salary of $1.25 million for the third year. Mr. Allumbaugh will be entitled to a bonus equal to his salary in each year if certain prescribed earnings targets (the "Earnings Targets") for the year are reached. If the Company completes an initial public offering of capital stock during the first two years of Mr. Allumbaugh's employment, Mr. Allumbaugh will remain Chief Executive Officer for one year after the public offering. If the public offering is anticipated to occur during the third year of Mr. Allumbaugh's employment agreement, Mr. Allumbaugh will resign as Chief Executive Officer six months prior to the intended date of the public offering but will continue to be employed at the lesser compensation level provided in his employment agreement until its termination. New Golleher Agreement. Food 4 Less is currently a party to a five-year employment agreement with George G. Golleher providing for annual base compensation of $350,000, plus employee benefits and an incentive bonus calculated in accordance with a formula based on Food 4 Less' earnings. Under the employment agreement, Mr. Golleher may terminate his employment agreement in the event of a change of control of Food 4 Less, in which case he is entitled to receive all of the salary and benefits provided under the agreement for the remaining term thereof, notwithstanding the termination of his employment. In connection with the consummation of the Merger, the Food 4 Less board of directors has authorized the payment of a special bonus to George Golleher in a lump sum amount equal to the base salary due him under the remaining term of his employment agreement. As a condition of the payment of such bonus, Mr. Golleher's existing employment agreement will be cancelled, and he will enter into a new agreement containing terms to be mutually agreed upon between Food 4 Less and Mr. Golleher. The new employment agreement is expected to provide for an annual salary of $500,000 plus a bonus equal to his salary in each year if the Earnings Targets are reached. The new employment agreement will continue in effect certain existing contractual rights of Mr. Golleher to be elected to the Company's board of directors and to require the Company to repurchase certain of his shares of New Holdings stock upon his death, disability or termination without cause. New Marasca Agreement. The employment agreement between the Company and Alfred Marasca is expected to provide for a salary of $500,000 per annum and an annual bonus equal to his salary if the Earnings Targets for the year are reached. General Provisions of the New Employment Agreements. The new employment agreements are expected to provide generally that the Company may terminate the agreement for cause or upon the failure of the employee to render services to the Company for a continuous period to be agreed upon by the Company and the employee because of the employee's disability. In addition, the employee's services may be suspended upon notice by the Company and in such event the employee will continue to be compensated by the Company during the remainder of the term of the agreement subject to certain offsets if the employee becomes engaged in another business. Existing Food 4 Less Employment Agreements. Food 4 Less entered into employment agreements with 24 officers providing for their employment for a one-year term commencing on the date of a change of control of Food 4 Less. These agreements provide for the payment of an incentive bonus calculated in accordance with Food 4 Less policies, and certain of the agreements provide for the payment of a special bonus payable upon a change of control (provided certain financial performance targets have been met). These agreements 74 84 will become effective upon the consummation of the Merger. Greg Mays, who will be an Executive Vice President of the Company, will be entitled to receive a base salary of not less than $250,000 and a special bonus of $150,000 (provided certain financial performance targets have been met). It is anticipated that some, but not all, of these employment agreements will be replaced by new employment agreements with the Company. Joe Burkle Consulting Agreement. Food 4 Less has a consulting agreement with Joe S. Burkle providing for compensation of $3,000 per week, pursuant to which Mr. Burkle provides the management and consulting services of an executive vice president. The agreement has a five-year term, which is automatically renewed on January 1 of each year for a five-year term unless sixty days' notice is given by either party; provided that if Food 4 Less terminates Mr. Burkle's services for reasons other than for good cause, the payments due under the agreement continue for the balance of the term. It is expected that the Company will assume Mr. Burkle's consulting agreement upon the consummation of the Merger. EQUITY APPRECIATION RIGHTS PLAN RGC has 1,500,000 EARs outstanding that were granted under the RGC 1988 Equity Appreciation Rights Plan, as amended (the "EAR Plan"). The outstanding EARs are held by 36 officers and former officers of Ralphs, including Byron Allumbaugh, Alfred Marasca, Alan Reed, Terry Peets and Jan Charles Gray. All outstanding EARs are vested in full and not subject to forfeiture by the holders, except in the event a holder's employment is terminated for cause within the meaning of the EAR Plan. The outstanding EARs represent the right to receive, in the aggregate, 15% of the increase of the appraised value of RGC's equity at the time of exercise over a base value of $120 million. Concurrently with the consummation of the Merger, the outstanding EARs will be redeemed for $17.8 million in cash and a deferred payment of up to $5.0 million. An additional $10 million of EAR payments that would otherwise be payable upon consummation of the Merger will be cancelled in exchange for the issuance of the Reinvestment Options (as defined). No future compensation expense will be recorded as the cancellation of certain EAR liabilities ($10.0 million) in consideration for the Reinvestment Options is deemed by management to reflect fair and equal value. See "-- New Management Stock Option Plan and Management Investment," "Description of Capital Stock -- New Equity Investment" and "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." The price to redeem the EARs is based on a $517 million valuation (the maximum valuation possible under the EAR Plan) of RGC's equity. NEW MANAGEMENT STOCK OPTION PLAN AND MANAGEMENT INVESTMENT Upon the consummation of the Merger, certain members of Ralphs' management and Food 4 Less' management will be entitled to receive options to purchase common stock of New Holdings (the "New Options"). The New Options will have a term of ten years and the exercise price with respect to each New Option will be $10 per share, which is equal to the price paid by the New Equity Investors for the New Equity Investment. The New Options will represent 7.5% of the total equity of New Holdings, and will be allocated as follows: New Options representing 1.5%, 0.5% and 0.5% of the total equity of New Holdings will be granted to Byron Allumbaugh, George Golleher and Alfred Marasca, respectively (the "Tier One Options"). The Tier One Options will be fully vested upon issuance and will be immediately exercisable. New Options for an additional 2.5% of the total equity of New Holdings will be granted to certain other management employees of the Company (the "Tier Two Options"). Fifty percent (50%) of the Tier Two Options granted to each holder will vest immediately upon issuance and 10% will vest each year thereafter. In addition, New Options representing an aggregate of 2.5% of the total equity of New Holdings will be issued to holders of EARs in exchange for the cancellation of $10 million of the EAR payments which would otherwise be payable upon consummation of the Merger (the "Reinvestment Options"). The value of the EAR payments cancelled will be credited against the exercise price for each Reinvestment Option. The Reinvestment Options will be fully vested upon issuance and will be immediately exercisable. Certain of Ralphs' officers, including Messrs. Allumbaugh, Marasca, Reed, Peets and Gray, currently hold options to purchase common stock of RSI. These options will be cancelled for cash payments aggregating $880,000 in connection with the Merger. 75 85 Each holder of New Options (collectively, the "Management Shareholders") will also execute a management shareholder agreement with New Holdings (collectively, the "Management Shareholder Agreements"). The Management Shareholder Agreements generally will provide New Holdings with a right of first refusal in the event of proposed sales of New Holdings stock acquired by the Management Shareholders upon the exercise of New Options and an option, exercisable following any termination for cause of a Management Shareholder's employment, or if the Management Shareholder commences employment with a competitor, to repurchase at Fair Market Value (as defined in the Management Shareholder Agreements) any New Holdings stock acquired by such Management Shareholder upon the exercise of New Options. Each Management Shareholder Agreement will contain certain rights of the Management Shareholders to participate in sales by Yucaipa of New Holdings stock and certain obligations of the Management Shareholders to sell their New Holdings stock in the case of a sale for cash of all of the outstanding New Holdings stock. Finally, the Management Shareholders will be required to vote their New Holdings stock to elect to the New Holdings Board of Directors the directors nominated by Yucaipa, Apollo and the other New Equity Investors under New Holdings' 1995 Stockholders Agreement. See "Description of Capital Stock -- 1995 Stockholders Agreement." The Management Shareholders Agreements, and all rights and obligations of the Management Shareholders thereunder described above, will terminate upon an initial public offering of New Holdings common stock meeting certain criteria. SUMMARY COMPENSATION TABLE -- RALPHS The following Summary Compensation Table sets forth information concerning the compensation of the Chief Executive Officer and the other four most highly compensated executive officers of Ralphs who are expected to serve as executive officers of the Company, whose total annual salary and bonus exceeded $100,000 for the year ended January 29, 1995.
LONG TERM COMPENSATION AWARDS ------------------- ANNUAL COMPENSATION SECURITIES NAME AND PRINCIPAL ----------------------- UNDERLYING ALL OTHER POSITION YEAR SALARY($) BONUS($)(1) OPTIONS/SARS(#) COMPENSATION($)(2) - ------------------------ ----- -------- ----------- ------------------- ------------------ Byron E. Allumbaugh, 1994 650,000 0 N/A 44,080 Chairman and 1993 645,000 387,000 N/A 38,575 Chief Executive 1992 620,000 372,000 587,753 31,886 Officer Alfred A. Marasca, 1994 400,000 0 N/A 17,180 President and 1993 340,000 204,000 N/A 18,177 Chief Operating 1992 296,260 148,125 308,812 11,485 Officer Alan J. Reed, 1994 225,000 0 N/A 10,273 Senior Vice President, 1993 222,500 111,250 N/A 12,904 Finance and 1992 211,250 105,625 154,406 9,569 Chief Financial Officer Terry Peets, 1994 215,000 0 N/A 13,022 Executive Vice 1993 192,500 96,250 N/A 10,337 President 1992 182,500 91,250 154,406 10,237 Jan Charles Gray, 1994 213,750 0 N/A 13,547 Senior Vice President, 1993 207,500 103,750 N/A 13,584 General Counsel and 1992 196,250 98,125 154,406 13,593 Secretary
- --------------- (1) Bonuses for services performed in Fiscal Year 1994 were paid in Fiscal Year 1995. Bonus amounts for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray were $390,000, $240,000, $112,500, $107,500 and $106,875 respectively. (2) Represents (i) insurance premiums and the dollar value of the remainder of premiums paid under the Senior Executive Supplemental Benefit Plan, and (ii) Ralphs' contributions under the Ralphs Thrift Incentive Plan. The respective amount paid for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray are as follows: (A) Insurance premiums: $23,732, $9,302, $4,025, $5,460 and $7,199; (B) dollar value of the remainder of premiums: $18,500, $6,600, $4,025, $5,460 and $4,500; (C) incentive plan contributions: $1,848, $1,278, $2,223, $2,102 and $1,848. 76 86 AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION/SAR VALUES -- RALPHS
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($) ACQUIRED --------------------- -------------------- ON EXERCISE VALUE EXERCISABLE/ EXERCISABLE/ NAME (#)(1) REALIZED($) UNEXERCISABLE(2) UNEXERCISABLE(3)(4) - ------------------------------- ----------- ----------- --------------------- -------------------- Byron E. Allumbaugh............ 70,000 1,961,646 352,652/ 0/ 375,101 3,923,290 Alfred A. Marasca.............. 13,500 378,317 108,084/ 0/ 259,228 1,639,375 Alan J. Reed................... 10,500 294,247 54,042/ 0/ 145,864 1,275,069 Terry Peets.................... 7,500 210,176 54,042/ 0/ 132,864 910,764 Jan Charles Gray............... 0 0 54,042/ 0/ 132,864 1,120,940
- --------------- (1) Represents EARs exercised under the EAR Plan. (2) Each number represents the aggregate number of options and EARs outstanding, as currently exercisable/unexercisable. Options and EARs were granted under different plans, not in tandem. All EARs are free standing. (3) Represents value of EARs, based on a value of $28.0235 per EAR at the time of exercise. Outstanding options are not currently in-the-money, based on current estimates of the fair market value of the Common Stock. (4) A portion of the EARs will be redeemed in connection with the Merger and the remaining EARs will be cancelled in exchange for the issuance of the Reinvestment Options by New Holdings, based upon their maximum possible valuation of $39.70 per EAR (or $517 for the total equity of RGC). For purposes of such redemptions and cancellations, the value of outstanding EARs held by Messrs. Allumbaugh, Marasca, Reed, Peets and Gray is expected to equal approximately $8.0 million, $2.7 million, $2.1 million, $1.5 million and $1.7 million, respectively. RALPHS' RETIREMENT PLANS Retirement Plan. The Ralphs Grocery Company Retirement Plan (the "Retirement Plan") is a defined benefit pension plan for salaried and hourly nonunion employees with at least one year of credited service (1,000 hours). Ralphs makes annual contributions to the Retirement Plan in such amounts as are actuarially required to fund the benefits payable to participants in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Supplemental Executive Retirement Plan. To allow Ralphs' retirement program to provide benefits based upon a participant's total compensation and without regard to other ERISA or tax code pension plan limitations, eligible executive employees of Ralphs participate in the Ralphs Grocery Company Supplemental Executive Retirement Plan and, after December 31, 1993, the Ralphs Grocery Company Retirement Supplement Plan (collectively, the "Supplemental Plan"). The Supplemental Plan also modifies the benefit formula under the Retirement Plan in other respects. Benefits provided under the Supplemental Plan were improved effective April 9, 1994. The following table sets forth the combined estimated annual benefits payable in the form of a (single) life annuity under both the Retirement Plan and the Supplemental Plan (unreduced by the cash surrender value of any life insurance policies) to a participant in both plans who is retiring at a normal retirement date of January 1, 1995 for the specified final average salaries and years of credited service.
YEARS OF CREDITED SERVICE ------------------------------------------------------------ FINAL AVERAGE SALARY 15 20 25 30 35 - -------------------- -------- -------- -------- -------- -------- $ 100,000 $ 19,484 $ 25,978 $ 32,473 $ 38,967 $ 45,462 200,000 41,984 55,978 69,973 83,967 97,962 300,000 90,000 120,000 150,000 180,000 180,000 400,000 120,000 160,000 200,000 240,000 240,000 600,000 180,000 240,000 300,000 360,000 360,000 800,000 240,000 320,000 400,000 480,000 480,000 1,000,000 300,000 400,000 500,000 600,000 600,000 1,200,000 360,000 480,000 600,000 720,000 720,000
77 87 Messrs. Allumbaugh, Marasca, Reed, Peets and Gray have completed 36, 38, 22, 18 and 31 years of credited service, respectively. Compensation covered by the Supplemental Plan includes both salary and bonus. The calculation of retirement benefits generally is based on average compensation for the highest three years of the ten years preceding retirement. The benefits earned by a participant under the Supplemental Plan are reduced by any benefits which the participant has earned under the Retirement Plan and may be offset under certain circumstances by the cash surrender value of life insurance policies maintained by Ralphs pursuant to the split dollar life insurance agreements entered into by Ralphs and the executive. Benefits are not subject to any deduction for social security offset. It is currently anticipated, although there can be no assurance, that Ralphs and Food 4 Less salaried employees will participate in the Retirement Plan and other existing Ralphs benefit plans following the Merger. These plans are currently being evaluated to determine the feasibility of such participation. SUMMARY COMPENSATION TABLE -- FOOD 4 LESS Holdings has no operations of its own and Holdings' executive officers do not receive any additional remuneration for serving as executive officers of Holdings. The following Summary Compensation Table sets forth information concerning the compensation of the Chief Executive Officer and the other three most highly compensated executive officers of Food 4 Less who are expected to serve as executive officers of the Company, whose total annual salary and bonus exceeded $100,000 for services rendered in all capacities to Food 4 Less and its subsidiaries for Fiscal 1994.
ANNUAL COMPENSATION ---------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(4)($) - -------------------------------------------- ---- --------- -------- ------------------ Ronald W. Burkle, Chairman and.............. 1994 -- -- -- Chief Executive Officer(1) 1993 -- -- -- 1992 -- -- -- George G. Golleher,......................... 1994 500,000 500,000 3,937 President 1993 500,000 500,000 -- 1992 500,000 235,000 5,300 Greg Mays, Executive Vice-President......... 1994 250,000 150,000 -- Finance/Administration and 1993 108,000 75,000 -- Chief Financial Officer(2) 1992 -- -- -- Joe Burkle,................................. 1994 196,000 50,000 -- Executive Vice President(3) 1993 156,000 -- -- 1992 156,000 -- --
- --------------- (1) Ronald W. Burkle and Mark A. Resnik, Vice President and Secretary of Food 4 Less, provide services to Food 4 Less pursuant to a management agreement between Yucaipa and Food 4 Less. See "Certain Relationships and Related Transactions." Pursuant to this management agreement, Food 4 Less paid Yucaipa and an affiliate of Yucaipa $2.4 million in the fiscal year ended June 25, 1994 for the services of Messrs. Ronald Burkle and Resnik and other Yucaipa personnel. Such payments to Yucaipa and its affiliate are not reflected in the table set forth above. (2) During Fiscal 1993, Greg Mays became Executive Vice President- Finance/Administration and Chief Financial Officer. (3) Mr. Joe Burkle provides services to Food 4 Less pursuant to a consulting agreement. See " -- Employment Agreements." (4) The amounts shown in this column represent annual payments by Food 4 Less to the Employee Profit Sharing and Retirement Program of Food 4 Less for the benefit of Mr. Golleher. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION -- FOOD 4 LESS Food 4 Less does not have a board committee performing the functions of a compensation committee. Ronald W. Burkle, Chief Executive Officer of Food 4 Less, and George G. Golleher, President of Food 4 Less, made decisions with regard to Food 4 Less' executive officer compensation for Fiscal 1994. FOOD 4 LESS STOCK PLAN As of June 25, 1994, certain employees of Food 4 Less (the "Management Stockholders") collectively owned approximately 4.5% of Holdings' outstanding common stock which they acquired under the management stock plan of Food 4 Less. Pursuant to this plan, the Board of Directors of Holdings from time to time has offered common stock of Holdings for sale to selected employees at a price and for consideration (which may include a promissory note) determined at the discretion of the Board. Management Stockholders who have purchased shares are party to a Management Stockholders Agreement (the "Stockholders Agreement") 78 88 with Holdings, a Stockholder Voting Agreement and Proxy (the "Voting Agreement"), and such other documents as Holdings may require. The Stockholders Agreement prohibits the transfer of any of the Management Stockholder's common stock for a period of four years from the date of its original issuance (although such date may, in the case of certain Management Stockholders who were shareholders of BHC, relate back to the date that shares were issued to them by BHC) other than transfers to certain family members and heirs or pursuant to a registration statement. The Management Stockholder's shares may be purchased by Holdings if, (a) prior to the fourth anniversary of their issuance, the Management Stockholder's employment terminates for any reason, or (b) after such fourth anniversary, the Management Stockholder wishes to sell his/her common stock to a third party. In the event of the death or permanent disability of the Management Stockholder, each Management Stockholder has an irrevocable option for one year to require Holdings to purchase all (or a portion) of his common stock in the manner and on the terms set forth in the Stockholders Agreement; provided, however, that the Management Stockholder may exercise such option in the event of death or disability only to the extent that Holdings or Food 4 Less has insurance, under which Holdings or Food 4 Less is the named beneficiary, with respect to such event. Additionally, if shareholders holding at least fifty percent (50%) of the issued and outstanding common stock of Holdings agree to sell to a third party more than eighty percent (80%) of the shares of common stock then held by them, then upon the demand of such selling stockholders, each Management Stockholder must sell to such third party the same percentage of his common stock as is proposed to be sold by the selling stockholders. The Stockholders Agreement terminates on the tenth anniversary of the Merger. Under the Voting Agreement, Ronald W. Burkle, George G. Golleher and Yucaipa Capital Advisors, Inc. have sole voting control over the shares of common stock owned by the other Management Stockholders until the tenth anniversary of the Merger (unless extended by such Management Stockholders). As of January 7, 1995, there was outstanding $0.7 million principal amount of notes receivable from certain Management Stockholders, representing loans for the purchase of Holdings' common stock. The notes are due over various periods, bear interest at the bank "prime" lending rate, and are secured by such common stock. Pursuant to the Reincorporation Merger, New Holdings will succeed to the rights and obligations of Holdings under the Food 4 Less stock plan. It is expected that following the Merger, equity issuances to management will cease to be made under the Food 4 Less stock plan and instead will be made under the New Holdings option plan. See "-- New Management Stock Option Plan and Management Investment." 79 89 PRINCIPAL STOCKHOLDERS The information in the following table gives effect to (i) the Merger and the Financing and (ii) the FFL Merger and the Reincorporation Merger. The information in the following table assumes that the outstanding stock options of RSI have been cancelled, that certain new stock options of New Holdings have been granted to management and that certain warrants to purchase New Holdings Common Stock have been issued to institutional investors who currently hold warrants to purchase Common Stock of Holdings. Based on such assumption and giving effect to the foregoing events, the following table sets forth the ownership of common stock and Series A Preferred Stock and Series B Preferred Stock of New Holdings by each person who to the knowledge of Food 4 Less will own 5% or more of New Holdings' outstanding voting stock, by each person who will be a director or named executive officer of the Company, and by all executive officers and directors of the Company as a group. Share amounts and percentage ownership information set forth for the Series A Preferred Stock and Series B Preferred Stock are subject to change pending finalization of the Financing.
SERIES A SERIES B COMMON PREFERRED PREFERRED STOCK(1)(2) STOCK(1) STOCK(1) ------------------ ----------------- ----------------- PERCENTAGE PERCENTAGE NUMBER NUMBER NUMBER OF TOTAL OF ALL OF OF OF VOTING OUTSTANDING BENEFICIAL OWNER(3) SHARES % SHARES % SHARES % POWER STOCK - --------------------------- ---------- ----- ---------- ---- --------- ---- ---------- ----------- Yucaipa and affiliates: The Yucaipa Companies(4)(5)........ 17,567,622 62.3% -- -- -- -- 39.1% 36.6% Ronald W. Burkle(4)(6)... 2,046,392 10.1% -- -- -- -- 5.5% 5.1% George G. Golleher(2)(6)......... 462,525 2.3% -- -- -- -- 1.3% 1.2% 10000 Santa Monica Boulevard, Los Angeles, California 90067 ---------- ----- --- --- Total................ 20,076,539 71.2% -- -- -- -- 44.7% 41.8% Byron E. Allumbaugh(2)..... 600,000 3.0% -- -- -- -- 1.6% 1.5% Alfred A. Marasca(2)....... 200,000 1.0% -- -- -- -- 0.5% 0.5% Greg Mays(7)............... -- -- -- -- -- -- -- -- Alan J. Reed(8)............ -- -- -- -- -- -- -- -- Terry Peets(8)............. -- -- -- -- -- -- -- -- Jan Charles Gray(8)........ -- -- -- -- -- -- -- -- Apollo Advisors, L.P.(9) 2 Manhattanville Road Purchase, NY 10577....... 1,285,165 6.4% 12,283,244 73.6% -- -- 36.8% 33.9% BT Investment Partners, Inc.(10) 130 Liberty Street New York, NY 10006....... 509,812 2.5% 900,000 5.4% 3,100,000 100% 3.8% 11.3% Other New Equity Investors as a group(11)........... 3,500,000 21.0% -- -- 9.5% 8.8% All directors and executive officers as a group (15 persons)(2)(4)(5)(6)..... 20,876,539 74.0% -- -- -- -- 46.5% 43.5%
- --------------- (1) Gives effect to (i) a stock split to be effected with respect to the outstanding common stock of Holdings prior to the Merger, (ii) the conversion (in connection with the FFL Merger) of the outstanding common stock of FFL into newly-issued common stock of Holdings in an amount which will preserve the proportionate ownership interests of FFL's stockholders, and of the equity holders of Holdings, in the combined Company, (iii) the conversion (in connection with the Reincorporation Merger) of the outstanding common stock, and warrants to acquire common stock, of Holdings into New Holdings common stock and warrants, (iv) the issuance by New Holdings of 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock in connection with the New Equity Investment and the concurrent exchange of outstanding shares of common stock acquired by the New Equity Investors from an existing stockholder, and (v) the assumed exercise of the outstanding warrants to acquire New Holdings common stock issued to the former Holdings warrantholders in connection with the Reincorporation Merger. (2) Gives effect to the exercise of Tier One Options to be issued to Byron E. Allumbaugh, George G. Golleher and Alfred A. Marasca under a new management stock option plan to be adopted prior to completion of the Merger, covering 600,000, 200,000 and 200,000 shares, respectively. Does not give effect to the exercise of (a) Tier Two Options to purchase up to 1,000,000 shares of New Holdings common stock to be issued at the discretion of the Board of Directors to certain management employees of the Company, under such stock option plan, concurrently with or following completion of the Merger or (b) Reinvestment Options to purchase up to 1,000,000 shares of New Holdings common stock to be issued to holders of EARs in exchange for the cancellation of $10 million 80 90 of the EAR payments which would otherwise be payable upon consummation of the Merger. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." (3) Except as otherwise indicated, each beneficial owner has the sole power to vote, as applicable, and to dispose of all shares of Common Stock or Series A Preferred Stock or Series B Preferred Stock owned by such beneficial owner. (4) Represents shares owned by The Yucaipa Companies, F4L Equity Partners, L.P., FFL Partners, Yucaipa Capital Fund and Yucaipa/F4L Partners. These entities are affiliated partnerships which are controlled, directly or indirectly, by Ronald W. Burkle. Following completion of the Merger, the foregoing entities will be parties to a stockholders agreement with other New Holdings investors which will give to Yucaipa the right to elect a majority of the directors of New Holdings. See "Description of Capital Stock -- 1995 Stockholders Agreement." (5) Share amount and percentages shown for Yucaipa include a warrant to purchase 8,000,000 shares of New Holdings Common Stock to be issued to Yucaipa concurrently with the completion of the Merger and the Financing. Such warrant will become exercisable only upon the occurrence of an initial public offering or certain sale transactions involving New Holdings. See "Description of Capital Stock -- Yucaipa Warrant." (6) Certain management stockholders who own in the aggregate 852,326 shares of Common Stock (pro forma for the events and assumptions described above) have entered into a Stockholder Voting Agreement and Proxy pursuant to which Ronald W. Burkle, George G. Golleher and Yucaipa Capital Advisors, Inc. have sole voting control over the shares currently owned by such management stockholders until December 31, 2002 (unless extended by such stockholders). See "Executive Compensation -- Food 4 Less Stock Plan." The 852,326 shares have been included, solely for purposes of the above table, in the share amounts shown for Mr. Burkle but not for Mr. Golleher. Neither Messrs. Burkle and Golleher nor Yucaipa Capital Advisors, Inc. have the power to dispose of, or any other form of investment power with respect to, such shares. Messrs. Burkle and Golleher have sole voting and investment power with respect to 1,194,066 and 462,525 shares of Common Stock they respectively own (including, in the case of Mr. Golleher, 200,000 shares issuable upon the exercise of Tier One Options). (7) Mr. Mays owns 8,890 of the 852,326 shares of Common Stock which are subject to the Stockholder Voting Agreement and Proxy described in note (6) above. (8) Does not include Reinvestment Options to purchase 60,000 shares, 60,000 shares and 174,940 shares of New Holdings Common Stock to be issued to Messrs. Reed, Peets and Gray, respectively, in exchange for the cancellation of the EAR payments which would otherwise be payable upon consummation of the Merger. (9) Represents shares owned by one or more entities managed by or affiliated with Apollo Advisors, L.P., together with certain affiliates or designees of Apollo. (10) Represents shares owned by BT Investment Partners, Inc. ("BTIP"), Bankers Trust New York Corporation and BT Securities Corporation. Bankers Trust New York Corporation and BT Securities Corporation are affiliated with BTIP. BTIP expressly disclaims beneficial ownership of all shares owned by Bankers Trust New York Corporation and BT Securities Corporation. (11) Includes certain institutional investors, other than Apollo and BTIP, which will purchase Series A Preferred Stock of New Holdings in connection with the Financing. Pursuant to the 1995 Stockholders Agreement, certain corporate actions by New Holdings and its subsidiaries will require the consent of the directors whom the New Equity Investors, including Apollo and BTIP, are entitled to elect to the New Holdings Board of Directors. See "Description of Capital Stock -- 1995 Stockholders Agreement." Such investors do not affirm the existence of a "group" within the meaning of Rule 13d-5 under the Exchange Act, and expressly disclaim beneficial ownership of all New Holdings shares except for those shares held of record by each such investor or its nominees. DESCRIPTION OF CAPITAL STOCK Following is a description of the capital stock of the Company and New Holdings to be authorized and outstanding upon completion of the Merger, the FFL Merger and the Reincorporation Merger, including the terms of the New Equity Investment to be made in New Holdings in connection with the closing of the Merger. THE COMPANY Upon completion of the Merger, the authorized capital stock of the Company will consist of 1,600,000 shares of common stock, $.01 par value per share, of which 1,513,938 shares will be outstanding. All of such outstanding shares will be owned by New Holdings. There will be no public trading market for the common stock of the Company. The indentures that will govern outstanding debt securities of the Company will contain certain restrictions on the payment of cash dividends with respect to the Company's common stock. In addition, it is expected that the New Credit Facility will also restrict such payments. Subject to the limitations contained in the New Credit Facility and such indentures, holders of common stock of the Company will be entitled to dividends when and as declared by the Board of Directors from funds legally available therefor, and upon liquidation, will be entitled to share ratably in any distribution to holders of common stock. All holders of common stock will be entitled to one vote per share on any matter coming before the stockholders for a vote. 81 91 NEW HOLDINGS Following completion of the Merger, the FFL Merger, the Reincorporation Merger and the New Equity Investment, (i) the authorized capital stock of New Holdings will consist of 60,000,000 shares of common stock, $.01 par value, 25,000,000 shares of Series A Preferred Stock, $.01 par value, and 25,000,000 shares of Series B Preferred Stock, $.01 par value, (ii) 17,207,882 shares of common stock, 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock will be outstanding and held by approximately 100 holders of record, (iii) 2,008,874 shares of common stock will be reserved for issuance upon the exercise of outstanding warrants held by institutional investors, and (iv) 3,000,000 shares of common stock will be reserved for issuance upon the exercise of the New Options. See "Executive Compensation -- New Management Stock Option Plan and Management Investment." An additional 8,000,000 shares of common stock will be reserved for issuance upon the exercise of a warrant to be issued to Yucaipa upon closing of the Merger. See "Yucaipa Warrant" below. There is no public trading market for the capital stock of New Holdings, nor will any such market exist following completion of the Merger. New Holdings does not expect in the foreseeable future to pay any dividends on its capital stock. Holders of common stock of New Holdings are entitled to dividends when and as declared by the Board of Directors of New Holdings from funds legally available therefor, and upon liquidation, are entitled to share ratably in any distribution to holders of common stock. All holders of New Holdings common stock are entitled to one vote per share on any matter coming before the stockholders for a vote. The Series A Preferred Stock initially will have an aggregate liquidation preference of $166,832,440, or $10 per share, which will accrete as described below. The holders of the Series A Preferred Stock will vote (on an as-converted basis) together with the common stock as a single class on all matters submitted for stockholder vote. Each share of Series A Preferred Stock initially will be convertible at the option of the holder thereof into a number of shares of New Holdings common stock equal to the liquidation preference of such share of Series A Preferred Stock divided by $10. Upon consummation of an initial public offering of New Holdings equity securities which meets certain criteria, the shares of Series A Preferred Stock will automatically convert into shares of common stock of New Holdings at the same rate as applicable to an optional conversion. The Series B Preferred Stock initially will have an aggregate liquidation preference of $31,000,000, or $10 per share, which will accrete as described below. The holders of Series B Preferred Stock generally will not be entitled to vote on any matters, except as required by the Delaware General Corporation Law. Upon the occurrence of a change of control, each share of Series B Preferred Stock initially will be convertible at the option of the holder thereof into a number of shares of New Holdings common stock equal to the liquidation preference of such share of Series B Preferred Stock divided by $10. Upon consummation of an initial public offering of New Holdings equity securities which meets certain criteria, shares of Series B Preferred Stock will automatically convert into shares of non-voting common stock of New Holdings at the same rate as applicable to an optional conversion. The liquidation preference of the Series A Preferred Stock and the Series B Preferred Stock initially will accrete daily at the rate of 7% per annum, compounded quarterly, until the later of the fifth anniversary of the date of issuance or the date the Company first reports EBDIT (as defined) of at least $500 million for any twelve-month period. Thereafter, the liquidation preference will remain constant. The accretion rate of the liquidation preference will increase (a) by 2% per annum if the Company fails to report EBDIT of at least $400 million for the four fiscal quarters ending closest to the third anniversary of the date of issuance (or for the rolling four-quarter period ending on any of the three subsequent quarter-ends), (b) by 2% per annum if the Company fails to report EBDIT of at least $425 million for the four fiscal quarters ending closest to the fourth anniversary of the date of issuance (or for the rolling four-quarter period ending on any of the three subsequent quarter-ends) or (c) by 2% per annum if the Company fails to report EBDIT of at least $450 million for the four fiscal quarters ending closest to the fifth anniversary of the date of issuance, in each case, such increase to take effect on the first day after the last day of the fiscal quarter with respect to which such failure occurred; provided that the accretion rate of the liquidation preference will not at any time exceed 82 92 13% per annum. The accretion of the liquidation preference will result in a proportional increase in the number of shares of common stock issuable upon conversion of the Series A Preferred Stock and the Series B Preferred Stock. In addition, the initial aggregate liquidation preference of the Series A Preferred Stock and the Series B Preferred Stock may increase from the amounts set forth above depending on whether New Holdings determines to increase the number of shares it may sell pursuant to the New Equity Investment, and depending on whether certain existing equity holders of FFL and Holdings exercise preemptive rights to participate in the New Equity Investment. Upon any transfer or sale of shares of either Series A Preferred Stock or Series B Preferred Stock, such shares may be converted (subject to certain conditions) at the option of the holder into shares of the other series. The holders of Series A Preferred Stock and Series B Preferred Stock have no rights to any fixed dividends in respect thereof. Subject to certain exceptions, New Holdings will be prohibited from declaring dividends with respect to its common stock without the consent of holders of a majority of the Series A Preferred Stock and of the Series B Preferred Stock. If dividends are declared on the Series A Preferred Stock or the Series B Preferred Stock which are payable in voting securities of New Holdings, New Holdings will make available to each holder of Series A Preferred Stock and Series B Preferred Stock, at such holder's request, dividends consisting of non-voting securities of New Holdings which are otherwise identical to the voting securities and which are convertible into or exchangeable for such voting securities upon a change of control. NEW EQUITY INVESTMENT Concurrently with the closing of the Merger, certain existing stockholders of New Holdings, including affiliates of George Soros, will sell 5,783,244 outstanding shares of common stock of New Holdings to CLH, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million. New Holdings will then issue 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock in a private placement to the New Equity Investors, led by Apollo and including affiliates of BT Securities, CS First Boston and DLJ for an aggregate consideration of $140 million plus the contribution to New Holdings of the shares of common stock purchased from CLH in the secondary sale transaction. The shares of Series A Preferred Stock and Series B Preferred Stock acquired by the New Equity Investors will represent approximately 41% in the aggregate of the fully diluted common equity of New Holdings (assuming exercise of the Yucaipa warrant). See "Principal Stockholders." The $140 million cash proceeds from the issuance of Series A Preferred Stock and Series B Preferred Stock will be applied by New Holdings as set forth under "The Merger and the Financing." Food 4 Less has accepted a commitment letter (the "Equity Commitment") from Apollo pursuant to which Apollo has agreed (subject to certain conditions) to purchase up to $140 million of the Series A Preferred Stock to be offered by New Holdings as part of the New Equity Investment. In consideration of its equity commitment, upon the closing of the Merger Apollo will receive from New Holdings a fee of $5 million, of which $2.5 million will be satisfied through the issuance to Apollo of New Discount Debentures and $2.5 million will be paid to Apollo in cash. See "Certain Relationships and Related Transactions -- Food 4 Less." The Company anticipates that the remainder of the Series A Preferred Stock and Series B Preferred Stock so offered will be purchased by affiliates of lenders and other financial institutions which have provided financing to the Company, including BTIP, which is an affiliate of Bankers Trust, by affiliates of CS First Boston and DLJ and by certain other investors. The amounts of New Holdings stock expected to be held by Apollo, affiliates of Bankers Trust and all other holders of 5% or more of New Holdings' outstanding stock following completion of the Merger and the Financing are set forth above under "Principal Stockholders." 1995 STOCKHOLDERS AGREEMENT Under the terms of the 1995 Stockholders Agreement (which is expected to be entered into by New Holdings, Yucaipa and its affiliates, the New Equity Investors and other stockholders), the New Equity Investors holding Series A Preferred Stock will be entitled to nominate three directors to the Board of Directors of each of New Holdings and the Company (the "Series A Directors"), of which two directors will 83 93 be nominees of Apollo and one director will be a nominee of the other New Equity Investors holding Series A Preferred Stock. The 1995 Stockholders Agreement will give to Yucaipa the right to nominate six directors of New Holdings and seven directors of the Company, and the boards of New Holdings and the Company will consist of a total of nine and ten directors, respectively. The numbers of directors which may be nominated by the foregoing stockholders will be reduced if such stockholders cease to own certain specified percentages of their initial holdings. Unless and until New Holdings has effected an initial public offering of its equity securities meeting certain criteria, New Holdings and its subsidiaries may not take certain actions without the approval of the Series A Directors, including but not limited to certain mergers, sale transactions, transactions with affiliates, issuances of capital stock and payments of dividends on or repurchases of capital stock. In addition, the New Equity Investors will have certain "demand" and "piggyback" registration rights with respect to their Series A Preferred Stock and Series B Preferred Stock, as well as the right to participate, on a pro rata basis, in sales by Yucaipa of the New Holdings stock it holds. In certain circumstances, Yucaipa will have the right to compel the participation of the New Equity Investors and other stockholders in sales of all the outstanding shares of New Holdings stock. The Company will seek the agreement of the current stockholders of FFL and warrantholders of Holdings to become party to the 1995 Stockholders Agreement, which would grant to such holders certain rights in replacement of two existing stockholders agreements among FFL and its stockholders entered into in 1987 and 1991, respectively, and an agreement among Holdings and its warrantholders executed in 1992. YUCAIPA WARRANT Upon closing of the Merger, New Holdings has agreed to issue to Yucaipa a warrant to purchase up to 8,000,000 shares of New Holdings common stock. The initial exercise price of such warrant will be set such that the warrant will have no value unless and until the value of New Holdings' equity appreciates to $1.220 billion. Such warrant will be exercisable on a cashless basis at the election of Yucaipa in the event New Holdings completes an initial public offering of equity securities meeting certain criteria, or in connection with certain sale transactions involving New Holdings, in either case effected on or prior to the fifth anniversary of the Closing Date. The expiration date of such warrant, and the deadline for such triggering transactions, may be extended from the fifth to the seventh anniversary of the Closing Date if New Holdings meets certain financial performance goals prior to such fifth anniversary. The cashless exercise provisions of such warrant allow the holder to exercise it without the payment of cash consideration, provided that New Holdings will withhold from the shares otherwise issuable upon such exercise a number of shares having a fair market value as of the exercise date equal to the exercise price. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RALPHS In connection with the acquisition of a majority of RSI's common stock in February 1992, EJDC agreed to guarantee RGC's obligations as a self-insurer of worker's compensation liabilities in the State of California (the "EJDC Guaranty"). In consideration of the EJDC Guaranty, RGC unconditionally agreed to reimburse EJDC for any payments made under the EJDC Guaranty and for the cost of insurance up to $200,000 to cover liabilities incurred pursuant to the EJDC Guaranty. Further, RGC agreed to pay EJDC a guarantee fee of $33,500 for each month the EJDC Guaranty was in effect ($402,000 was paid in Fiscal 1994). Concurrently with the completion of the Merger, the EJDC Guaranty will be terminated, and RGC will cease to pay any guarantee fee to EJDC or to reimburse it for the cost of insurance. However, RGC will continue to be obligated to reimburse EJDC for any payments which EJDC could in the future be required to make under the EJDC Guaranty in respect of prior claims. Moreover, FFL has undertaken for the benefit of EJDC to maintain, until the fifth anniversary of the closing of the Merger, bank letters of credit, insurance or other security for the workers' compensation claims for which EJDC could have liability under the EJDC Guaranty. In connection with the bankruptcy reorganization of Federated and its affiliates, Federated agreed to pay certain potential tax liabilities relating to RGC as a member of the affiliated group of companies comprising Federated and its subsidiaries. In consideration thereof, RSI and RGC agreed to pay Federated a total of 84 94 $10 million, payable $1 million on each of February 3, 1992, 1993, 1994, 1995 and 1996 and $5 million on February 3, 1997. The five $1 million installments are to be paid by RGC and the $5 million payment is the joint obligation of RSI and RGC. In the event Federated is required to pay certain tax liabilities, RSI and RGC have agreed to reimburse Federated up to an additional $10 million, subject to certain adjustments. This additional obligation, if any, is the joint and several obligation of RSI and RGC. Pursuant to the terms of the Merger Agreement, the $5 million payment and the potential $10 million payment will be paid in cash. See Note 1 of Notes to Ralphs Consolidated Financial Statements. In addition, EJDC and the other current holders of Common Stock of RSI are parties to an agreement providing for various aspects of corporate governance (the "Ralphs Registration Rights and Governance Agreement") relating to Ralphs. Pursuant to the Ralphs Registration Rights and Governance Agreement, RGC is obligated to provide RSI, by dividend, pursuant to a services agreement or otherwise, with funds sufficient to enable RSI to perform its duties as the holding company of RGC's stock and to perform its obligations set forth in the Ralphs Registration Rights and Governance Agreement. The Ralphs Registration Rights and Governance Agreement will be cancelled concurrently with the closing of the Merger. FOOD 4 LESS AND HOLDINGS Yucaipa provides certain management and financial services to Food 4 Less and its subsidiaries pursuant to a consulting agreement. The services of Ronald Burkle, Mark Resnik and Patrick Graham, acting in their capacities as directors and officers, and the services of other Yucaipa personnel are provided to Food 4 Less pursuant to this agreement. All of such individuals are partners of Yucaipa. Yucaipa's consulting agreement provides for annual management fees currently equal to $2 million plus an additional amount based on Food 4 Less' performance. Upon completion of the Merger, the consulting agreement will be amended to provide for an annual management fee payable by the Company to Yucaipa in the amount of $4 million, with no additional amounts payable based on performance. In addition, the Company may retain Yucaipa in an advisory capacity in connection with certain acquisitions or sale transactions, in which case the Company will pay Yucaipa an advisory fee. The agreement has a five-year term, which will be automatically renewed on each anniversary of the Merger for a five-year term unless ninety days' notice is given by either party. The agreement may be terminated at any time by the Company, provided that Yucaipa will be entitled to full monthly payments under the agreement for the remaining term thereof, unless the Company terminates for cause pursuant to the terms of the agreement. Yucaipa may terminate the agreement if the Company fails to make a payment due thereunder, or if there occurs a change of control (as defined in the agreement) of the Company, and upon any such termination Yucaipa will be entitled to full payments for the remainder of the five-year period commencing on the closing of the Merger. Pursuant to the agreement, Food 4 Less paid Yucaipa a total of $2.4 million, $3.8 million and $2 million in management and advisory fees for the fiscal years ended June 25, 1994, June 26, 1993 and June 27, 1992 respectively. The Yucaipa consulting agreement also provides that upon closing of the Merger, Yucaipa will be entitled to receive an advisory fee from the Company in the amount of $19 million, plus reimbursement of expenses in connection with the Merger and the related transactions. New Holdings will issue $15 million initial accreted value of New Discount Debentures to Yucaipa in satisfaction of a portion of such fee and the Company will pay the remaining $4 million of such fee in cash. Upon closing of the Merger, Yucaipa anticipates that it in turn will pay a cash fee of approximately $3.5 million to Soros Fund Management in consideration for advisory services which Soros Fund Management has rendered since 1991. The Company has no responsibility for such payment by Yucaipa. Additionally, upon closing of the Merger, Yucaipa will receive a warrant to purchase 8,000,000 shares of New Holdings common stock exercisable upon the conditions described under "Description of Capital Stock -- The Yucaipa Warrant." In consideration for its commitment to purchase Series A Preferred Stock of New Holdings, Apollo will receive a fee of $5 million from New Holdings upon the closing of the Merger. New Holdings will issue $2.5 million initial accreted value of New Discount Debentures to Apollo in satisfaction of a portion of such fee, and New Holdings will pay the remaining $2.5 million of such fee in cash. See "Description of Capital Stock -- New Equity Investment." 85 95 In connection with the execution of the Merger Agreement, Yucaipa entered into the Put Agreement with EJDC, pursuant to which EJDC will be entitled to put up to $10 million aggregate principal amount of Seller Debentures to Yucaipa on the Closing Date. The Yucaipa consulting agreement will provide that the Company will reimburse Yucaipa for any loss and expenses incurred by Yucaipa upon the resale of such Seller Debentures to any unaffiliated third party. Yucaipa has advised the Company that it intends to resell the Seller Debentures on the Closing Date or as soon thereafter as practicable. The agreement will also require Yucaipa to contribute any profit realized upon the resale of such Seller Debentures within such period to the capital of the Company. Pursuant to the New Discount Debenture Placement, New Holdings has committed to issue $100 million initial accreted value of New Discount Debentures, which will be acquired by a partnership comprised of FFL Investors L.L.C. (an affiliate of George Soros), Yucaipa RGC L.L.C. (an affiliate of Yucaipa whose members include Ronald Burkle, Mark Resnik and Patrick Graham) ("Yucaipa LLC"), RGC Investment Co. (a corporation controlled by certain Yucaipa partners) ("RGCIC"), BTIP, an affiliate of CS First Boston, an affiliate of DLJ, Apollo, EJDC and the other selling stockholders of RSI. New Discount Debentures having an initial accreted value of $59 million will be issued directly to the partnership by New Holdings for cash consideration contributed to the partnership by (i) FFL Investors L.L.C., which will invest $40 million in cash proceeds received from Soros' affiliate as a result of the secondary sale of New Holdings common stock, (ii) BTIP, which will invest $5 million in cash, (iii) an affiliate of CS First Boston, which will invest $2.5 million in cash, (iv) an affiliate of DLJ, which will invest $2.5 million in cash, (v) EJDC, which will invest $4 million of its consulting fee payable by the Company upon closing of the Merger and (vi) RGCIC, which will invest $5 million in cash borrowed from the Company. New Holdings will issue additional New Discount Debentures having an initial accreted value of (a) $15 million to Yucaipa LLC in satisfaction of advisory fees otherwise payable to Yucaipa by the Company in connection with the Merger and the Financing, (b) $5 million to BT Securities in satisfaction of other fees payable to BT Securities by the Company in connection with the Financing, (c) $2.5 million to Apollo in satisfaction of a portion of the commitment fees otherwise payable to Apollo by New Holdings in connection with the New Equity Investment and (d) $18.5 million to RSI stockholders as Merger consideration, all of which New Discount Debentures shall be contributed to the partnership, whereupon the partnership will hold all $100 million initial accreted value of New Discount Debentures issued by New Holdings. New Holdings has granted to the partnership certain registration rights with respect to the New Discount Debentures. Pursuant to such registration rights agreement, New Holdings has committed to file with the Commission a shelf registration statement which would permit resales of the New Discount Debentures by the partnership commencing 60 days following closing of the Merger. New Holdings will be obligated to use its best efforts to cause such shelf registration statement to remain effective for up to three years. If New Holdings fails to comply with its obligations to keep such shelf registration statement effective, New Holdings will be obligated to pay certain liquidated damages. New Holdings believes that the partnership actively would seek to dispose of its entire interest in the New Discount Debentures promptly upon expiration of the 60 day holdback period following closing of the Merger. New Holdings has agreed to use its best efforts to assist the partnership in such disposition, and to pay all expenses, including underwriting discounts and brokers' or dealers' commissions and mark-ups (subject to certain limitations), incident thereto. The $5 million cash investment to be made in the partnership by RGCIC, as described above, will be borrowed from the Company by RGCIC, and such borrowings will bear interest at the applicable Federal rate (as defined under the Internal Revenue Code). RGCIC will be obligated to repay such borrowings with any distributions received from the partnership in connection with resales of the New Discount Debentures. Such repayments will be applied first to the principal balance of the borrowings and then to accrued interest. To the extent that such distributions are not sufficient to repay such borrowings, any remaining indebtedness of RGCIC (including all accrued interest) will be forgiven by the Company and the Company's obligation to pay the Ralphs deferred EAR liability will be correspondingly forgiven. Upon receipt of any principal amounts repaid under such borrowings, the Company will be obligated to pay such amounts over to former holders of RGC's EARs redeemed upon closing of the Merger. The aggregate consideration payable to redeem the EARs includes, in addition to the foregoing deferred cash payment of up to $5 million, $17.8 million in cash 86 96 payable at closing and $10 million in Reinvestment Options. See "Executive Compensation -- Equity Appreciation Rights Plan." FFL files a consolidated federal income tax return, under which the federal income tax liability of FFL and its subsidiaries (which since December 31, 1992 includes Holdings) is determined on a consolidated basis. FFL has entered into a federal income tax sharing agreement with Food 4 Less and certain of its subsidiaries (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides that in any year in which Food 4 Less is included in any consolidated tax liability of FFL and has taxable income, Food 4 Less will pay to FFL the amount of the tax liability that Food 4 Less would have had on such due date if it had been filing a separate return. Conversely, if Food 4 Less generates losses or credits which actually reduce the consolidated tax liability of FFL and its other subsidiaries, FFL will credit to Food 4 Less the amount of such reduction in the consolidated tax liability. In the event any state and local income taxes are determinable on a combined or consolidated basis, the Tax Sharing Agreement provides for a similar allocation between FFL and Food 4 Less of such state and local taxes. By operation of the FFL Merger and the Reincorporation Merger, New Holdings will succeed to the rights and obligations of FFL under the Tax Sharing Agreement. Management believes that the terms of the transactions described above are or were fair to Food 4 Less and are or were on terms at least as favorable to Food 4 Less as those which could be obtained from unaffiliated parties (assuming that such transactions could be effected with such parties). 87 97 THE OFFER TO PURCHASE AND SOLICITATION BACKGROUND AND PURPOSES OF THE OFFER TO PURCHASE AND SOLICITATION The Offer to Purchase and the Solicitation, together with the other financing and solicitation transactions described under "The Merger and the Financing," are part of the transactions required to consummate the Merger of Food 4 Less with and into RSI. Immediately following the RSI Merger, RGC, a wholly-owned subsidiary of RSI, will merge with and into RSI and RSI will change its name to Ralphs Grocery Company. As a result of the Reincorporation Merger, any Amended Discount Notes that remain outstanding following the consummation of the Offer to Purchase will become the obligation of New Holdings. In connection with the consummation of the Merger, Holdings is making the Offer to Purchase in order to retire the Discount Notes and is seeking Consents to the Proposed Amendments in the Solicitation in order to permit the consummation of the Merger and to eliminate substantially all of the restrictive covenants in the Discount Note Indenture. See "The Proposed Amendments." If adopted by the holders of not less than a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates, the Proposed Amendments will become effective immediately prior to the consummation of the Merger, upon Holdings' acceptance of properly tendered Discount Notes for purchase pursuant to the Offer to Purchase. TERMS OF THE OFFER TO PURCHASE Upon the terms and subject to the conditions set forth herein and in the accompanying Letter of Transmittal, Holdings is hereby offering to holders of the Discount Notes $785.00 in cash, plus accrued interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date for every $1,000 principal amount (at maturity) of Discount Notes (which, as of May 1, 1995 had an accreted value of $680.26 per $1,000) accepted for purchase. The offer by Holdings to purchase Discount Notes is referred to herein as the "Offer to Purchase." Holdings reserves the right to extend, delay, accept, amend or terminate the Offer to Purchase. All references herein to the Offer to Purchase shall be deemed to include the Solicitation. Noteholders who wish to tender their Discount Notes pursuant to the Offer to Purchase and consent to the Proposed Amendments must complete the Letter of Transmittal and the table therein entitled "Description of Discount Notes." Nominees or other record holders of Discount Notes that hold Discount Notes for more than one beneficial owner are entitled to make multiple elections pursuant to the Letter of Transmittal that reflect the election of each of the beneficial owners for whom they are tendering Discount Notes for purchase. In order to make such multiple elections, nominees or other record holders should properly complete the table under the box entitled "Election on Behalf of Multiple Beneficial Owners." See "-- Procedures for Tendering and Consenting." Holders of Discount Notes who desire to tender Discount Notes in the Offer to Purchase will be required to consent to the Proposed Amendments. See "-- The Consent Solicitation," "-- Conditions," "The Proposed Amendments" and "Description of the Discount Notes" set forth in Appendix A hereto. THE TENDER OF DISCOUNT NOTES BY THE HOLDER THEREOF PURSUANT TO THE OFFER TO PURCHASE WILL CONSTITUTE THE CONSENT OF SUCH TENDERING HOLDER TO THE PROPOSED AMENDMENTS WITH RESPECT TO SUCH DISCOUNT NOTES. Discount Notes may be tendered and will be accepted for purchase only in denominations of $1,000 principal amount (at maturity) and integral multiples thereof. Holders must tender all of their Discount Notes if any are tendered pursuant to the Offer to Purchase. Holdings shall be deemed to have accepted validly tendered Discount Notes in the Offer to Purchase and validly delivered Consents in the Solicitation when, as and if Holdings has given oral or written notice thereof to the Depositary. The Depositary will act as agent for the tendering holders of Discount Notes for the purposes of receiving the Cash Consideration from Holdings. In the event Holdings increases the consideration offered for the Discount Notes in the Offer to Purchase, such increased consideration will be paid with regard to all Discount Notes accepted in the Offer to Purchase, including those accepted before the announcement of such increase. The Cash Consideration will be paid in 88 98 exchange for Discount Notes accepted in the Offer to Purchase promptly after acceptance on the Expiration Date. As of May 1, 1995, there was outstanding $103.6 million aggregate principal amount (at maturity) of Discount Notes. Although it has no obligation to do so, Holdings reserves the right in the future to seek to acquire Discount Notes not tendered in the Offer to Purchase by means of open market purchases, privately negotiated acquisitions, exchange offers, subsequent tender offers, redemptions or otherwise, at prices or on terms which may be higher or lower or more or less favorable than those in the Offer to Purchase. The terms of any such purchases or offers could differ from the terms of the Offer to Purchase. Holders of Discount Notes who tender in the Offer to Purchase will not be required to pay brokerage commissions or fees or, subject to the instructions in the Consent and Letter of Transmittal, transfer taxes with respect to the tender of Discount Notes pursuant to the Offer to Purchase. Holdings will pay all charges and expenses, other than certain applicable taxes, in connection with the Offer to Purchase. See "-- Fees and Expenses." No appraisal rights are available to Discount Noteholders in connection with the Offer to Purchase. THE CONSENT SOLICITATION Concurrently with the Offer to Purchase, Holdings is soliciting Consents in the Solicitation from holders of the Discount Notes with respect to the Proposed Amendments to the Discount Note Indenture. The Offer to Purchase is subject to, among other things, the condition that the Requisite Consents (i.e., Consents of holders representing at least a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates) shall have been received and not revoked on or prior to the Expiration Date. HOLDERS OF DISCOUNT NOTES WHO DESIRE TO ACCEPT THE OFFER TO PURCHASE MUST CONSENT TO THE PROPOSED AMENDMENTS. The Proposed Amendments will only become operative upon consummation of the Offer to Purchase. The primary purpose of the Proposed Amendments is to permit the Merger and to eliminate substantially all of the restrictive covenants in the Discount Note Indenture. The Proposed Amendments to the Discount Note Indenture require the consent of holders of at least a majority in aggregate principal amount of the Discount Notes not owned by Holdings or its affiliates. In addition, in order for any of the Proposed Amendments to become effective, a Supplemental Indenture amending the Discount Note Indenture must be executed by Holdings and the Trustee. See "The Proposed Amendments" and "Description of the Discount Notes" set forth in Appendix A hereto. Upon receipt of the Requisite Consents from holders of Discount Notes, Holdings will certify in writing to the Trustee that the Requisite Consents to the adoption of the Proposed Amendments have been received with respect to the Discount Notes. Upon receipt of such certification, all Consents to the Proposed Amendments theretofore received with respect to the Discount Notes will be irrevocable. Except as set forth under "-- Guaranteed Delivery Procedure," Consents from tendering holders of Discount Notes will not be counted towards determining whether Holdings has received the Requisite Consents unless Holdings is prepared to accept the tender of Discount Notes to which such Consents relate. In addition, Consents with respect to any Discount Notes will not be counted if the tender of such holders' Discount Notes is defective, unless Holdings waives such defect. After receipt by the Trustee of, among other things, certification by Holdings that the Requisite Consents with respect to the Discount Notes, have been received, Holdings and the Trustee will execute a supplemental indenture to evidence the adoption of the Proposed Amendments relating to the Discount Note Indenture (the "Supplemental Indenture"). Upon the acceptance by Holdings of the Requisite Consents from holders of Discount Notes and the execution of the Supplemental Indenture, the Supplemental Indenture will immediately become effective. Although the Proposed Amendments relating to the Discount Notes will become effective upon certification that the Requisite Consents from holders of the Discount Notes have been received, such Proposed Amendments will not be operative until Holdings has accepted for purchase all Discount Notes validly tendered and not withdrawn. Holdings will not be obligated 89 99 to pay the Cash Consideration pursuant to the Offer to Purchase unless, among other things, the Requisite Consents to the adoption of the Proposed Amendments have been received from the Discount Noteholders. See "-- Conditions." If the Proposed Amendments become effective, (i) the Depositary, as soon as practicable, will transmit a copy of the Supplemental Indenture to all registered holders of Discount Notes which remain outstanding, and (ii) non-tendering holders will hold their Discount Notes under the Discount Note Indenture as amended by the Proposed Amendments, whether or not that holder consented to the Proposed Amendments. Consents given by holders of Discount Notes tendered but rejected by Holdings pursuant to the Offer to Purchase will not be counted for the purpose of determining whether the Requisite Consents have been obtained. Only a registered holder of Discount Notes (the "Registered Holder") can effectively deliver a Consent to the Proposed Amendments. Pursuant to the terms of the Discount Note Indenture, subsequent transfers of Discount Notes on the security register for such Discount Notes will not have the effect of revoking any Consent theretofore given by the Registered Holder of such Discount Notes, and such Consents will remain valid unless revoked by the transferee holder in accordance with the procedures described under the heading "-- Withdrawal of Tenders and Revocation of Consents." EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS The Offer to Purchase and the Solicitation will expire at 12:00 Midnight, New York City time, on May 30, 1995 (the "Expiration Date"), unless extended by Holdings. Holdings reserves the right to extend the Offer to Purchase or the Solicitation, at its discretion, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer to Purchase or the Solicitation, as the case may be, as so extended by Holdings, shall expire. Holdings shall notify the Depositary of any extension by oral or written notice and shall make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next Business Day after the previously scheduled Expiration Date. Such announcement may state that Holdings is extending the Offer to Purchase or the Solicitation, as the case may be, for a specified period or on a daily basis. Holdings also expressly reserves the right, at any time or from time to time, to extend the period of time during which the Offer to Purchase or the Solicitation, as the case may be, is open. There can be no assurance that Holdings will exercise its right to extend the Offer to Purchase or the Solicitation. During any extension of the Offer to Purchase all Discount Notes previously tendered pursuant thereto and not withdrawn will remain subject to the Offer to Purchase and may be accepted for purchase by Holdings at the expiration of the Offer to Purchase subject to the right, if any, of a tendering holder to withdraw its Discount Notes. See "-- Withdrawal of Tenders and Revocation of Consents." Each of Holdings and New Holdings also expressly reserves the right, subject to applicable law and the terms of the Offer to Purchase and to the extent not inconsistent with the terms of the Merger, the Other Debt Financing Transactions, the Bank Financing or the New Equity Investment, (i) to delay the acceptance for purchase of any Discount Notes or, regardless of whether such Discount Notes were theretofore accepted for purchase, to delay the purchase of any Discount Notes pursuant to the Offer to Purchase and to terminate the Offer to Purchase and not accept for purchase any Discount Notes not theretofore accepted for purchase, upon the failure of any of the conditions to the Offer to Purchase specified herein to be satisfied, by giving oral or written notice of such delay or termination to the Depositary and (ii) at any time, or from time to time, to amend the Offer to Purchase in any respect. Except as otherwise provided herein, withdrawal rights with respect to Discount Notes tendered pursuant to the Offer to Purchase will not be extended or reinstated as a result of an extension or amendment of the Offer to Purchase, as applicable. See "-- Withdrawal of Tenders and Revocation of Consents." The reservation by Holdings of the right to delay acceptance for purchase of Discount Notes is subject to the provisions of Rule 14e-1(c) under the Exchange Act, which requires that Holdings pay the consideration offered or return the Discount Notes deposited by or on behalf of holders thereof promptly after the termination or withdrawal of the Offer to Purchase. Any extension, delay, termination or amendment of the Offer to Purchase will be followed as promptly as practicable by a public announcement thereof. Without limiting the manner in which Holdings may choose to make a public announcement of any extension, delay, termination or amendment of the Offer to Purchase, 90 100 Holdings shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by issuing a release to the Dow Jones News Service, except in the case of an announcement of an extension of the Offer to Purchase, in which case Holdings shall have no obligation to publish, advertise or otherwise communicate such announcement other than by issuing a notice of such extension by press release or other public announcement, which notice shall be issued no later than 9:00 a.m., New York City time, on the next Business Day after the previously scheduled Expiration Date. If Holdings shall decide to decrease the amount of Discount Notes being sought in the Offer to Purchase or to increase or decrease the consideration offered to holders of Discount Notes, and if, at the time that notice of such increase or decrease is first published, sent or given to holders of Discount Notes in the manner specified above, the Offer to Purchase is scheduled to expire at any time earlier than the expiration of a period ending on the tenth Business Day from and including the date that such notice is first so published, sent or given, then the Offer to Purchase will be extended for such purposes until the expiration of such period of ten Business Days. If Holdings makes a material change in the terms of the Offer to Purchase or the information concerning the Offer to Purchase, or waives any condition to the Offer to Purchase that results in a material change to the circumstances of the Offer to Purchase, then Holdings will disseminate additional tender offer materials to the extent required under the Exchange Act and will extend the Offer to Purchase to the extent required in order to permit holders of Discount Notes adequate time to consider such materials. The minimum period during which a tender offer must remain open following material changes in the terms of the offer or information concerning the offer, other than a change in price or percentage of securities sought, will depend upon the specific facts and circumstances, including the relative materiality of the terms or information. CONDITIONS Holdings will not be required to accept any Discount Notes for purchase, and may terminate or amend the Offer to Purchase, as provided herein, before the acceptance of any Discount Notes, if the Offer to Purchase has not been consummated. In addition, notwithstanding any other provision of the Offer to Purchase or the Solicitation, Holdings shall not be required to accept any Discount Notes for purchase or any Consents, and may terminate, extend or amend the Offer to Purchase or the Solicitation and may postpone, subject to Rule 14e-1 under the Exchange Act, the acceptance of Discount Notes so tendered and Consents so delivered, whether or not any other Discount Notes or Consents have theretofore been accepted for purchase pursuant to the Offer to Purchase, if, on or prior to the Expiration Date, any of the following conditions exist: (i) the Requisite Consents shall not have been validly delivered (or shall have been revoked); (ii) all conditions precedent to the Merger shall not have been satisfied or waived, in Holdings' sole discretion; (iii) any of the Other Debt Financing Transactions (including the Public Offerings) shall not have been consummated; (iv) either the Bank Financing or the New Equity Investment shall not have been consummated; (v) the Supplemental Indenture containing the Proposed Amendments shall not have been executed; (vi) there shall have been any action taken or threatened, or any statute, rule, regulation, judgment, order, stay, decree or injunction proposed, sought, promulgated, enacted, entered, enforced or deemed applicable to the Offer to Purchase by or before any local, state, federal or foreign government or governmental regulatory or administrative agency or authority or by any court or tribunal, domestic or foreign, which (a) challenges or seeks to restrain or prohibit the making or consummation of the Offer to Purchase or the purchase of Discount Notes pursuant to the Offer to Purchase, (b) in the sole judgment of Holdings, might directly or indirectly prohibit, prevent, restrict or delay consummation of the Offer to Purchase or otherwise relates in any manner to the Offer to Purchase, (c) seeks to make illegal the acceptance of Discount Notes for purchase pursuant to the Offer to Purchase, (d) makes the Solicitation 91 101 illegal, (e) might, in the sole judgment of Holdings, adversely affect the financing of the Offer to Purchase, the Merger, the Other Debt Financing Transactions, the Bank Financing or the New Equity Investment or the transactions contemplated thereby, or (f) in the sole judgment of Holdings, could materially adversely affect the business, condition (financial or otherwise), income, operations, properties, assets, liabilities or prospects of Holdings (or New Holdings or the Company, after giving effect to the Merger and the Reincorporation Merger) and its subsidiaries, taken as a whole, or materially impair the contemplated benefits of the Offer to Purchase and the Solicitation to Holdings (or New Holdings or the Company, after giving effect to the Merger and the Reincorporation Merger); (vii) there shall have occurred or be likely to occur any event affecting the business or financial affairs of Holdings (or New Holdings or the Company, after giving effect to the Merger and the Reincorporation Merger) that, in the sole judgment of Holdings, (a) would or might prohibit, prevent, restrict or delay consummation of the Offer to Purchase, or (b) will, or is reasonably likely to, materially impair the contemplated benefits to Holdings (or New Holdings or the Company, after giving effect to the Merger and the Reincorporation Merger) of the Offer to Purchase and the Solicitation or otherwise result in the consummation of the Offer to Purchase not being in the best interests of Holdings or (c) might be material to holders of Discount Notes in deciding whether to accept the Offer to Purchase or the Solicitation; (viii) there shall have occurred: (a) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange or in the over-the-counter market (whether or not mandatory); (b) any significant adverse change in the price of the Discount Notes; (c) a material impairment in the trading market for debt securities generally; (d) a declaration of a banking moratorium or any suspension of payments in respect of banks by federal or state authorities in the United States (whether or not mandatory); (e) a declaration of a national emergency or commencement of a war, armed hostilities or other national or international crisis directly or indirectly involving the United States; (f) any limitation (whether or not mandatory) by any governmental or regulatory authority on, or any other event that in the sole judgment of Holdings might affect, the nature or extension of credit by banks or other financial institutions; (g) any significant change in United States currency exchange rates or a suspension of, or limitation on, the markets therefor (whether or not mandatory); (h) any significant adverse change in United States securities or financial markets; or (i) in the case of any of the foregoing existing at the time of the commencement of the Offer to Purchase, in the sole judgment of Holdings, a material acceleration, escalation or worsening thereof; (ix) the Trustee shall have objected in any respect to, or taken any action that could, in the sole judgment of Holdings, adversely affect the consummation of the Offer to Purchase or the Solicitation or Holdings' ability to obtain the Consents or to effect any of the Proposed Amendments, or shall have taken any action that challenges the validity or effectiveness of the procedures used by Holdings in soliciting the Consents (including the form thereof) or in the making of the Offer to Purchase or the acceptance for exchange of any of the Discount Notes; or (x) the Registration Statement has not been declared effective or a stop order has been issued in connection therewith. The foregoing conditions are for the sole benefit of Holdings and may be asserted by Holdings in its sole discretion regardless of the circumstances giving rise to any such condition (including any action or inaction by Holdings) and may be waived by Holdings, in whole or in part, at any time and from time to time in its sole discretion. If any of the foregoing events shall have occurred, Holdings may, subject to applicable law, (i) terminate the Offer to Purchase or the Solicitation and return all Discount Notes tendered pursuant to the Offer to Purchase or the Solicitation to the tendering holders, (ii) extend the Offer to Purchase or the Solicitation and retain all tendered Discount Notes until the extended Expiration Date, (iii) amend the terms of the Offer to Purchase or the Solicitation or modify the consideration to be paid by Holdings pursuant to the Offer to Purchase or the Solicitation or (iv) waive the unsatisfied condition or conditions with respect to the Offer to Purchase or the Solicitation and accept all validly tendered Discount Notes. See "-- Expiration Date; Extensions; Termination; Amendments" and "-- Procedures for Tendering and Consenting." The failure by 92 102 Holdings at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. Any determination by Holdings concerning the events described in this section shall be final and binding upon all persons. PROCEDURES FOR TENDERING AND CONSENTING The tender by a holder of Discount Notes pursuant to one of the procedures set forth below will constitute an agreement between such holder and Holdings in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Holdings is terminating the Consent Solicitation described in the Old Prospectus. Holders of Discount Notes that tendered Consents in connection with such Consent Solicitation must comply with the procedures set forth below to participate in the Offer to Purchase and Solicitation. Discount Notes may be tendered and will be accepted for purchase only in denominations of $1,000 principal amount (at maturity) and integral multiples thereof. To be tendered effectively pursuant to the Offer to Purchase, (i) the properly completed Letter of Transmittal, including a valid and unrevoked Consent (or facsimile(s) thereof), duly executed by the registered holder thereof with any required signature guarantee(s), together with the certificates for tendered Discount Notes in proper form for transfer, or any book-entry transfer into the Depositary's account at DTC, MSTC or PDTC (each as defined) of Discount Notes tendered electronically, and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth below prior to 12:00 Midnight, New York City time, on the Expiration Date, or (ii) the tendering holder must comply with the guaranteed delivery procedure set forth under the heading "-- Guaranteed Delivery Procedure." THE GREEN CONSENT AND LETTER OF TRANSMITTAL SHOULD BE USED TO TENDER ALL DISCOUNT NOTES. LETTERS OF TRANSMITTAL AND DISCOUNT NOTES SHOULD BE SENT TO THE DEPOSITARY AND NOT TO HOLDINGS OR THE DEALER MANAGERS NOR TO THE TRUSTEE UNDER THE INDENTURE RELATING TO THE DISCOUNT NOTES. A HOLDER OF DISCOUNT NOTES WHO DESIRES TO TENDER INTO THE OFFER TO PURCHASE WITH RESPECT TO ANY DISCOUNT NOTES MUST TENDER ALL OF SUCH HOLDERS' DISCOUNT NOTES. Holders of Discount Notes will not be able to validly tender in the Offer to Purchase unless they consent to the Proposed Amendments. Tendering holders who sign the Letter of Transmittal shall be deemed to have consented to the Proposed Amendments. All signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Discount Notes tendered or withdrawn, as the case may be, pursuant thereto are tendered (i) by a registered holder of Discount Notes (which term, for purposes of the Letter of Transmittal, shall include any participant in DTC, MSTC or PDTC whose name appears on a security position listing as the owner of Discount Notes) who has not completed the box entitled "Special Issuance and Payment Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If Discount Notes are registered in the name of a person other than the signer of a Letter of Transmittal or a notice of withdrawal, as the case may be, or if payment is to be made or certificates for unpurchased Discount Notes are to be issued or returned to a person other than the registered holder, then the Discount Notes must be endorsed by the registered holder, or be accompanied by a written instrument or instruments of transfer in form satisfactory to Holdings duly executed by the registered holder, with such signatures guaranteed by an Eligible Institution. In the event that signatures on a Letter of Transmittal (or other document) are required to be guaranteed, such guarantee must be by a firm that is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. (the "NASD") or by a commercial bank or trust company having an office in the United States (each of the foregoing being an "Eligible Institution"). 93 103 THE METHOD OF DELIVERY OF DISCOUNT NOTES AND OTHER DOCUMENTS TO THE DEPOSITARY IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT AS OTHERWISE PROVIDED PURSUANT TO "-- GUARANTEED DELIVERY," DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. Instead of effecting delivery by mail it is recommended that tendering Discount Noteholders use an overnight or hand delivery service. If such delivery is by mail, it is recommended that holders use registered mail, properly insured, with return receipt requested. In all cases, sufficient time should be allowed to ensure delivery to the Depositary prior to 12:00 Midnight, New York City time, on the Expiration Date. Tendering holders should indicate in the applicable box in the Letter of Transmittal the name and address to which payment of the Cash Consideration and/or certificates evidencing Discount Notes for amounts not accepted for tender, each as appropriate, are to be issued or sent, if different from the name and address of the person signing the Letter of Transmittal. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated and a substitute Form W-9 for such recipient must be completed. If no such instructions are given, such payment of the Cash Consideration or Discount Notes not accepted for tender, as the case may be, will be made or returned, as the case may be, to the registered holder of Discount Notes tendered. Holders of Discount Notes who are not registered holders of, and who seek to tender, Discount Notes should (i) obtain a properly completed Letter of Transmittal for such Discount Notes from the registered holder with signatures guaranteed by an Eligible Institution and obtain and include with such Letter of Transmittal Discount Notes properly endorsed for transfer by the registered holder thereof or accompanied by a written instrument or instruments of transfer from the registered holder with signatures on the endorsement or written instrument or instruments of transfer guaranteed by an Eligible Institution or (ii) effect a record transfer of such Discount Notes and comply with the requirements applicable to registered holders for tendering Discount Notes prior to 12:00 Midnight, New York City time, on the Expiration Date. Any Discount Notes properly tendered prior to 12:00 Midnight, New York City time, on the Expiration Date accompanied by a properly completed Letter of Transmittal for such Discount Notes will be transferred of record by the registrar either prior to or as of the Expiration Date at the discretion of Holdings. Payment of the Cash Consideration will be made only against deposit of the tendered Discount Notes. Under the federal income tax laws, the Depositary will be required to withhold and will remit to the United States Treasury 31% of the amount of the Cash Consideration paid to certain holders of Discount Notes pursuant to the Offer to Purchase and the Solicitation. In order to avoid such backup withholding, each tendering holder of Discount Notes electing to tender Discount Notes pursuant to the Offer to Purchase, and, if applicable, each other payee, must provide the Depositary with such holder's or payee's correct taxpayer identification number and certify that such holder or payee is not subject to such backup withholding by completing the Substitute Form W-9 accompanying the Letter of Transmittal. In general, if a holder or payee is an individual, the taxpayer identification number is the Social Security number of such individual. If the Depositary is not provided with the correct taxpayer identification number, the holder or payee may be subject to a $50 penalty imposed by the Internal Revenue Service. Certain holders or payees (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order to satisfy the Depositary that a foreign individual qualifies as an exempt recipient, such holder or payee must submit a statement, signed under penalty of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Depositary. For further information concerning backup withholding and instructions for completing the Substitute Form W-9 (including how to obtain a taxpayer identification number if you do not have one and how to complete the Substitute Form W-9 if Discount Notes are held in more than one name), consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. Failure to complete the Substitute Form W-9 will not, by itself, cause Discount Notes tendered pursuant to the Offer to Purchase to be deemed invalidly tendered, but may require the Depositary to withhold 31% of the amount of any payments made. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of a person subject to backup withholding will be reduced by the amount of tax 94 104 withheld. If withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is furnished to the Internal Revenue Service. All questions as to the form of all documents and the validity (including the time of receipt), eligibility, acceptance and withdrawal of tendered Discount Notes will be determined by Holdings, in its sole discretion, which determination shall be final and binding. Holdings expressly reserves the absolute right to reject any and all tenders not in proper form and to determine whether the acceptance of or payment by it for such tenders would be unlawful. Holdings also reserves the absolute right, subject to applicable law, to waive or amend any of the conditions to the Offer to Purchase or the Solicitation or to waive any defect or irregularity in the tender of any of the Discount Notes. None of Holdings, New Holdings, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. No tender of Discount Notes will be deemed to have been validly made until all defects and irregularities with respect to such Discount Notes have been cured or waived. Any Discount Notes received by the Depositary that are not properly tendered and as to which irregularities have not been cured or waived will be returned by the Depositary to the appropriate tendering holder as soon as practicable. Holdings' interpretation of the terms and conditions of the Offer to Purchase and the Solicitation (including the Letter of Transmittal and the Instructions thereto) will be final and binding on all parties. The Depositary will seek to establish accounts with respect to the Discount Notes at The Depository Trust Company ("DTC"), the Midwest Securities Transfer Company ("MSTC"), and the Philadelphia Depository Trust Company ("PDTC" and, together with DTC and MSTC, collectively referred to herein as the "Book-Entry Transfer Facilities") for the purpose of the Offer to Purchase within two New York Stock Exchange Inc. ("NYSE") trading days. Any financial institution that is a participant in any of the Book-Entry Transfer Facilities' systems may make book-entry delivery of Discount Notes by causing DTC, MSTC or PDTC to transfer such Discount Notes into the Depositary's account in accordance with such Book-Entry Transfer Facility's procedure for such transfer. However, although delivery of Discount Notes may be effected through book-entry transfer into the Depositary's account at DTC, MSTC or PDTC, the Letter of Transmittal (or facsimile thereof), together with any required signature guarantees and any other required documents, must, in any case, be transmitted to, and received or confirmed by, the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase and Solicitation Statement prior to 12:00 Midnight, New York City time, on the Expiration Date, except as otherwise provided below under the heading "Guarantee Delivery Procedure." Discount Notes will not be deemed surrendered for purchase until such documents are received by the Depositary and delivery of such documents to a Book-Entry Transfer Facility will not constitute valid delivery to the Depositary. HOLDINGS UNDERSTANDS THAT THE BOOK-ENTRY TRANSFER FACILITIES WILL MAKE ARRANGEMENTS FOR EXECUTION OF LETTERS OF TRANSMITTAL TO ACCOMMODATE BENEFICIAL OWNERS THAT DESIRE TO TENDER DISCOUNT NOTES IN THE OFFER TO PURCHASE. HOWEVER, HOLDINGS UNDERSTANDS THAT THE BOOK-ENTRY TRANSFER FACILITIES WILL NOT ARRANGE FOR THE EXECUTION OF LETTERS OF TRANSMITTAL WITH RESPECT TO THE OFFER TO PURCHASE AND THE SOLICITATION, UNLESS THE DISCOUNT NOTES ARE ALSO TENDERED IN THE OFFER TO PURCHASE. HOLDERS MAY CONTACT THE DEPOSITARY AT ANY OF THE ADDRESSES SET FORTH ON THE BACK COVER PAGE HEREOF FOR INFORMATION REGARDING WITHDRAWAL OF DISCOUNT NOTES FROM A BOOK-ENTRY TRANSFER FACILITY. GUARANTEED DELIVERY PROCEDURE If a registered holder of Discount Notes desires to tender such Discount Notes and consent to the Proposed Amendments, and the Discount Notes are not immediately available, or if time will not permit such holder's Discount Notes or any other required documents to be delivered to the Depositary prior to 12:00 Midnight, New York City time, on the Expiration Date, then such Discount Notes may nevertheless be tendered for purchase and Consents may be effected if all of the following guaranteed delivery procedure conditions are met: (i) the tender for purchase and Consent is made by or through an Eligible Institution; (ii) prior to 12:00 Midnight, New York City time, on the Expiration Date, the Depositary receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery 95 105 (by telegram, telex, facsimile transmission, mail or hand delivery) substantially in the form provided by Holdings, that contains a signature guaranteed by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery, unless such tender is for the account of an Eligible Institution (in which case no signature guarantee shall be required), and sets forth the name and address of the holder of Discount Notes and the principal amount of Discount Notes tendered for purchase, states that the tender is being made thereby and guarantees that, within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, together with the Discount Notes and any required signature guarantees and any other documents required by such Letter of Transmittal, will be deposited by the Eligible Institution with the Depositary; and (iii) all tendered Discount Notes, or a confirmation of a book-entry transfer of such Discount Notes into the Depositary's account at a Book-Entry Transfer Facility as described above, as well as the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, and all other documents required by such Letter of Transmittal, shall be received by the Depositary within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. THE YELLOW NOTICE OF GUARANTEED DELIVERY SHOULD BE USED IN CONNECTION WITH TENDERS OF ALL DISCOUNT NOTES. Notwithstanding any other provision hereof, the purchase of Discount Notes pursuant to the Offer to Purchase will in all cases be made only after timely receipt by the Depositary of certificates for such Discount Notes and the Letter of Transmittal (or facsimile thereof) in respect thereof, properly completed and duly executed, together with any required signature guarantees and any other documents required by such Letter of Transmittal. ACCEPTANCE OF DISCOUNT NOTES FOR PAYMENT; PAYMENT OF THE CASH CONSIDERATION Upon the terms and subject to the conditions of the Offer to Purchase and the Solicitation, Holdings will accept all Discount Notes validly tendered prior to 12:00 Midnight, New York City time, on the Expiration Date and not validly withdrawn. The acceptance for purchase of Discount Notes validly tendered and not validly withdrawn and the payment of the Cash Consideration will be made as promptly as practicable after the Expiration Date. Subject to rules promulgated pursuant to the Exchange Act, Holdings expressly reserves the right to delay acceptance of any of the Discount Notes or to terminate the Offer to Purchase or the Solicitation and not accept for purchase any Discount Notes not theretofore accepted if any of the conditions set forth under the heading "-- Conditions" shall not have been satisfied or waived by Holdings. New Holdings will make payment of the Cash Consideration with respect to Discount Notes pursuant to the Offer to Purchase promptly following acceptance of the Discount Notes. In all cases, the purchase of Discount Notes accepted for purchase pursuant to the Offer to Purchase will be made only after timely receipt by the Depositary of Discount Notes (or confirmation of book-entry transfer thereof) and a properly completed and validly executed Letter of Transmittal (or a manually signed facsimile thereof) and any other documents required thereby. For purposes of the Offer to Purchase and the Solicitation, Holdings shall be deemed to have accepted validly tendered and not properly withdrawn Discount Notes when, as and if Holdings gives oral or written notice thereof to the Depositary. The Depositary will act as agent for the tendering holders of Discount Notes for the purposes of receiving the Cash Consideration from New Holdings transmitting the Cash Consideration to the tendering holders. Under no circumstances will any additional amount be paid by New Holdings or the Depositary by reason of any delay in making such payment. All questions as to the validity, form, eligibility (including the time of receipt), acceptance and withdrawal of tendered Discount Notes will be resolved by Holdings, whose determination will be final and binding. Holdings reserves the absolute right to reject any or all tenders that are not in proper form or the acceptance of which would, in the opinion of counsel for Holdings, be unlawful. Holdings also reserves the right to waive any irregularities or conditions of tender as to particular Discount Notes. Holdings' interpreta- 96 106 tion of the terms and conditions of the Offer to Purchase and the Solicitation (including the instructions in the Letter of Transmittal) will be final and binding. Unless waived, any irregularities or defects in connection with tenders of Discount Notes must be cured within such time as Holdings determines. Neither Holdings, New Holdings nor the Depositary shall be under any duty to give notification of irregularities or defects in such tenders or shall incur any liability for failure to give such notification. Tenders of Discount Notes will not be deemed to have been made until such irregularities have been cured or waived. If, for any reason whatsoever, acceptance for purchase of any Discount Notes tendered pursuant to the Offer to Purchase is delayed, or Holdings is unable to accept for purchase Discount Notes tendered pursuant to the Offer to Purchase, then, without prejudice to Holdings' and New Holdings' rights set forth herein, the Depositary may nevertheless, on behalf of Holdings and subject to rules promulgated pursuant to the Exchange Act, retain tendered Discount Notes, and such Discount Notes may not be withdrawn except to the extent that the tendering holder of such Discount Notes is entitled to withdrawal rights as described herein. See "-- Withdrawal of Tenders and Revocation of Consents." If any tendered Discount Notes are not accepted for purchase because of an invalid tender, the occurrence or non-occurrence of certain other events set forth herein or otherwise, then such unaccepted Discount Notes will be returned, at Holdings' expense, to the tendering holder thereof as promptly as practicable after the Expiration Date or the termination of the Offer to Purchase therefor. No alternative, conditional or contingent tenders will be accepted. A tendering holder, by execution of a Letter of Transmittal, or facsimile thereof, waives all rights to receive notice of acceptance of such holder's Discount Notes for purchase. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS Tenders of Discount Notes pursuant to the Offer to Purchase may be withdrawn and Consents may be revoked at any time until the "Consent Date," which shall be such time as the Requisite Consents (Consents of holders representing at least a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates) have been delivered by Holdings to the Trustee and the Supplemental Indenture has been executed. Thereafter, such tenders may be withdrawn and Consents may be revoked if the Offer to Purchase is terminated without any Discount Notes being accepted for purchase thereunder. The withdrawal of Discount Notes prior to the Consent Date in accordance with the procedures set forth hereunder will effect a revocation of the related Consent. Any valid revocation of Consents will automatically render the prior tender of the Discount Notes to which such Consents relate defective and Holdings will have the right, which it may waive, to reject such tender as invalid and ineffective. Any holder of Discount Notes who has tendered Discount Notes or who succeeds to the record ownership of Discount Notes in respect of which such tenders or Consents previously have been given may withdraw such Discount Notes or revoke such Consents prior to the Consent Date by delivery of a written notice of withdrawal or revocation, subject to the limitations described herein. To be effective, a written telegraphic, telex or facsimile transmission (or delivered by hand or by mail) notice of withdrawal of a tender or revocation of a Consent must (i) be timely received by the Depositary at one of its addresses set forth on the back cover hereof or prior to the applicable time provided herein with respect to the Discount Notes, (ii) specify the name of the person having tendered the Discount Notes to be withdrawn or as to which Consents are revoked, the principal amount of such Discount Notes to be withdrawn and, if certificates for Discount Notes have been tendered, the name of the registered holder(s) of such Discount Notes as set forth in such certificates, if different from that of the person who tendered such Discount Notes, (iii) identify the Discount Notes to be withdrawn or to which the notice of revocation relates and (iv)(a) be signed by the holder in the same manner as the original signature on the Letter of Transmittal or Notice of Guaranteed Delivery (as the case may be) by which such Discount Notes were tendered (including any required signature guarantees) or (b) be accompanied by evidence satisfactory to Holdings and the Depositary that the holder withdrawing such tender or revoking such Consents has succeeded to beneficial ownership of such Discount Notes. If certificates representing Discount Notes to be withdrawn or Consents to be revoked have been delivered or otherwise 97 107 identified to the Depositary, then the name of the registered holder and the serial numbers of the particular certificate evidencing the Discount Notes to be withdrawn or Consents to be revoked and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution, except in the case of Discount Notes tendered by an Eligible Institution (in which case no signature guarantee shall be required), must also be so furnished to the Depositary as aforesaid prior to the physical release of the certificates for the withdrawn Discount Notes. If Discount Notes have been tendered or if Consents have been delivered pursuant to the procedures for book-entry transfer as set forth herein, any notice of withdrawal or revocation of Consent must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Discount Notes. Holdings reserves the right to contest the validity of any revocation. A purported notice of revocation which is not received by the Depositary in a timely fashion will not be effective to revoke a Consent previously given. Any permitted withdrawals of tenders of Discount Notes and revocation of Consents may not be rescinded, and any Discount Notes properly withdrawn will thereafter be deemed not validly tendered and any Consents revoked will be deemed not validly delivered for purposes of the Offer to Purchase; provided, however, that withdrawn Discount Notes may be retendered and revoked Consents may be redelivered by again following one of the appropriate procedures described herein at any time prior to 12:00 Midnight, New York City time, on the Expiration Date. If Holdings extends the Offer to Purchase or is delayed in its acceptance for purchase of Discount Notes or is unable to purchase Discount Notes pursuant to the Offer to Purchase for any reason, then, without prejudice to Holdings' rights under the Offer to Purchase, the Depositary may, subject to applicable law, retain tendered Discount Notes on behalf of Holdings, and such Discount Notes may not be withdrawn (subject to Rule 14e-1 under the Exchange Act, which requires that Holdings deliver the consideration offered or return the Discount Notes deposited by or on behalf of the Discount Noteholders promptly after the termination or withdrawal of the Offer to Purchase), except to the extent that tendering holders are entitled to withdrawal rights as described herein. All questions as to the validity, form and eligibility (including the time of receipt) of notices of withdrawal or revocations of Consents will be determined by Holdings, whose determination will be final and binding on all parties. None of Holdings, the Depositary, the Dealer Managers or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or revocation of Consent or incur any liability for failure to give any such notification. LOST OR MISSING CERTIFICATES If a holder of Discount Notes desires to tender a Discount Note pursuant to the Offer to Purchase, but the Discount Note has been mutilated, lost, stolen or destroyed, such holder should write to or telephone the Trustee under the Discount Note Indenture at the address listed below, concerning the procedures for obtaining replacement certificates for such Discount Notes, arranging for indemnification or any other matter that requires handling by the Trustee: United States Trust Company of New York 114 West 47th Street New York, New York 10036-1532 Attn: Corporate Trust Division (212) 852-1000
DEALER MANAGERS Subject to the terms and conditions set forth in the Dealer Manager Agreement (the "Dealer Manager Agreement") dated January 25, 1995 (as amended), among FFL, Holdings, Food 4 Less and each subsidiary of Food 4 Less (together, the "Issuers") and BT Securities, CS First Boston and DLJ, as dealer managers and solicitation agents (the "Dealer Managers"), the Issuers have engaged BT Securities, CS First Boston and DLJ to act as Dealer Managers and in connection with the Offer to Purchase, the Solicitation, the RGC Offers and the F4L Exchange Offers. The Issuers will pay the Dealer Managers, as compensation for their 98 108 services as Dealer Managers, a fee equal to (i) 1.0% of the aggregate principal amount of Old F4L Notes and Old RGC Notes accepted for exchange in the F4L Exchange Offers and the RGC Offers, (ii) 0.5% of the aggregate accreted value of Discount Notes accepted for purchase in the Offer to Purchase, (iii) 0.5% of the aggregate principal amount of Old F4L Notes and Old RGC Notes in respect of which a consent is accepted in the F4L Exchange Offers and the RGC Offers (other than Old RGC Notes and Old F4L Notes accepted for exchange or purchase, as the case may be, in the RGC Offers and the F4L Exchange Offers) and (iv) 0.5% of the aggregate accreted value of Discount Notes in respect of which a consent is accepted in the Solicitation (other than Discount Notes accepted for purchase in the Offer to Purchase). In addition, the Issuers have agreed to reimburse each of the Dealer Managers for all of its respective reasonable out-of-pocket expenses, including the reasonable fees and expenses of its legal counsel, incurred in connection with the Offer to Purchase, the Solicitation, the RGC Offers and the F4L Exchange Offers. The Issuers have agreed to indemnify each of the Dealer Managers against certain liabilities in connection with Offer to Purchase, the Solicitation, the RGC Offers and the F4L Exchange Offers, including liabilities under the federal securities laws, and will contribute to payments the Dealer Managers may be required to make in respect thereof. Bankers Trust, an affiliate of BT Securities, has been a co-agent and a lender under the existing credit agreements of each of RGC and Food 4 Less and will be administrative agent and a lender under the New Credit Facility. See "Description of the New Credit Facility." BT Securities has provided services to Food 4 Less in connection with the Financing and in consideration therefor Food 4 Less will pay to BT Securities a fee of $5 million upon closing of the Merger. Such fee will be satisfied through the issuance by New Holdings to BT Securities of $5 million initial accreted value of New Discount Debentures. Such New Discount Debentures will be contributed to the partnership which will acquire all of the New Discount Debentures. DLJ has provided financial advisory services to Food 4 Less in connection with the Merger and will receive customary fees for such services. The Dealer Managers will also serve as underwriters for the Public Offerings and will receive customary fees for such services. In addition, affiliates of the Dealer Managers are investing in the capital stock of New Holdings pursuant to the New Equity Investment. After giving effect to the Merger, BTIP will own approximately 900,000 shares of Series A Preferred Stock and approximately 3,100,000 shares of Series B Preferred Stock, affiliates of CS First Boston will own approximately 1,000,000 shares of Series A Preferred Stock and affiliates of DLJ will own approximately 1,000,000 shares of Series A Preferred Stock. Affiliates of BTIP additionally own 509,812 shares of FFL common stock which they had previously acquired and which will be converted to New Holdings capital stock following the FFL Merger and the Reincorporation Merger. See "Principal Stockholders" and "Description of Capital Stock." Affiliates of each of BT Securities, CS First Boston and DLJ are also investing $5 million, $2.5 million and $2.5 million, respectively, in the partnership that will purchase the New Discount Debentures. See "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." Each of the Dealer Managers has from time to time provided investment banking and financial advisory services to one or more of Food 4 Less, Holdings and RGC and/or their respective affiliates and may continue to do so in the future. The Dealer Managers have received customary fees for such services. No fees or commission have been or will be paid to any broker, dealer or other person, other than the Dealer Managers, in connection with the Offer to Purchase, the Solicitation, the RGC Offers or the F4L Exchange Offers. DEPOSITARY Bankers Trust has been appointed as Depositary for the Offer to Purchase and the Solicitation. Questions and requests for assistance, and all correspondence in connection with the Offer to Purchase, the Solicitation, or requests for additional Letters of Transmittal and any other required documents, may be directed to the Depositary at one of its addresses and telephone numbers set forth on the back cover of this Offer to Purchase and Solicitation Statement. INFORMATION AGENT D.F. King & Co., Inc. is serving as Information Agent in connection with the Offer to Purchase and the Solicitation. The Information Agent will assist with the mailing of this Offer to Purchase and Solicitation 99 109 Statement and related materials to holders of Discount Notes, respond to inquiries of and provide information to holders of Discount Notes in connection with the Offer to Purchase and the Solicitation and provide other similar advisory services as Holdings may request from time to time. Requests for additional copies of this Offer to Purchase and Solicitation Statement, Letters of Transmittal and any other required documents should be directed to the Dealer Managers or to the Information Agent at one of its addresses and telephone numbers set forth on the back cover of this Offer to Purchase and Solicitation Statement. FEES AND EXPENSES In addition to the fees and expenses payable to the Dealer Managers, Holdings will pay the Depositary and the Information Agent reasonable and customary fees for their services (and will reimburse them for their reasonable out-of-pocket expenses in connection therewith), will pay the reasonable expenses of holders in delivering their Discount Notes to the Depositary and will pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Offer to Purchase and Solicitation Statement and related documents to the beneficial owners of the Discount Notes and in handling or forwarding tenders for purchase. In addition, Holdings will indemnify the Depositary and the Information Agent against certain liabilities in connection with their services, including liabilities under the federal securities laws. Holdings will pay all transfer taxes, if any, applicable to the purchase of Discount Notes pursuant to the Offer to Purchase. If, however, Discount Notes for principal amounts not accepted for tender are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Discount Notes, or if tendered Discount Notes are to be registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the purchase of Discount Notes pursuant to the Offer to Purchase, then the amount of any such transfer tax (whether imposed on the registered holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of such tax or exemption therefrom is not submitted, then the amount of such transfer tax will be deducted from the Cash Consideration otherwise payable to such tendering holder. Any remaining amount will be billed directly to such tendering holder. The total cash expenditures for printing, accounting and legal fees, and the fees and expenses of the Depositary, the Information Agent and the trustees under the old and new indentures, to be incurred by Food 4 Less and Holdings in connection with the Offer to Purchase, the RGC Offers and the F4L Exchange Offers are estimated to be approximately $9 million. MISCELLANEOUS The Offer to Purchase is not subject to Section 13(e) of, or Rules 13e-3 or 13e-4 or Regulation 14D promulgated under, the Exchange Act. The Offer to Purchase is being made in compliance with Regulation 14E under the Exchange Act. Other than with respect to the Depositary, the Information Agent and the Dealer Managers, neither Holdings nor any of its affiliates has engaged, or made any arrangements for, and has no contract, arrangement or understanding with, any broker, dealer, agent or other person regarding the exchange of Discount Notes hereunder, and no person has been authorized by Holdings, or any of its affiliates to provide any information or to make any representations in connection with the Offer to Purchase and the Solicitation, other than those expressly set forth in this Offer to Purchase and Solicitation Statement, and, if so provided or made, such other information or representations must not be relied upon as having been authorized by Holdings or any of its affiliates. The delivery of this Offer to Purchase and Solicitation Statement shall not, under any circumstances, create any implication that the information set forth herein is correct as of any time subsequent to the date hereof. 100 110 MARKET PRICES OF THE DISCOUNT NOTES In general, there has been limited trading of the Discount Notes and such trading has taken place primarily in the over-the-counter market. Prices and trading volumes of the Discount Notes in the over-the-counter market are not reported and can be difficult to monitor. Quotations for securities that are not widely traded, such as the Discount Notes, may differ from actual trading prices and should be viewed as approximations. Holders of Discount Notes are urged to contact their brokers with respect to current information regarding the Discount Notes that they hold. THE PROPOSED AMENDMENTS The 15.25% Senior Discount Notes due 2004 of Holdings were issued under the Discount Note Indenture dated as of December 15, 1992 between Holdings and United States Trust Company of New York, as Trustee. In connection with the consummation of the Merger, Holdings is making the Offer to Purchase in order to retire the Discount Notes and is seeking Consents to the Proposed Amendments in the Solicitation in order to permit the consummation of the Merger and to eliminate substantially all of the restrictive covenants in the Discount Note Indenture. Upon receipt of the Requisite Consents, the Supplemental Indenture to the Discount Note Indenture will be executed between Holdings and the Trustee. Following the consummation of the Merger, the obligations of Holdings under the Discount Note Indenture will be assumed by New Holdings. The Proposed Amendments would make the following changes to the Discount Note Indenture: 1. Eliminate the covenant entitled "Disposition of Proceeds of Public Offering Sale". 2. Eliminate the covenant entitled "Limitation on Change of Control". 3. Eliminate the covenant entitled "Limitation on Restricted Payments". 4. Eliminate the covenant entitled "Limitation on Incurrences of Additional Indebtedness". 5. Eliminate the covenant entitled "Limitation on Liens". 6. Eliminate the covenant entitled "Limitation on Disposition of Assets". 7. Eliminate the covenant entitled "Restrictions on Sale of Stock of Subsidiaries". 8. Eliminate the covenant entitled "Limitation on Transactions with Affiliates". 9. Eliminate the covenant entitled "SEC Reports and Other Information". 10. Amend the provisions regarding when Holdings may consolidate or merge with, or sell all or substantially all of its assets to, any other person or entity to eliminate the subsections thereof which require that immediately after giving effect to such transaction and the incurrence of any indebtedness in connection therewith, Holdings or the surviving entity, as the case may be, has a Net Worth (as defined) that meets the standards set forth therein. 11. The definitions relating solely to such eliminated covenants will be eliminated. The Supplemental Indenture will provide that the New Credit Facility constitutes a refinancing of the Loan Documents (as defined). The remaining sections of the Discount Note Indenture will not be changed by the Proposed Amendments. Copies of the Discount Note Indenture and the form of the Supplemental Indenture are available from Holdings upon request. For a description of the covenants being amended or eliminated, see "Description of the Discount Notes" set forth in Appendix A hereto. 101 111 THE RGC OFFERS, THE F4L EXCHANGE OFFERS AND THE PUBLIC OFFERINGS THE RGC OFFERS Concurrently with the Offer to Purchase and the Solicitation, Food 4 Less is offering to holders of the Old RGC Notes (i) to exchange such Old RGC Notes for New RGC Notes and $20.00 in cash for each $1,000 principal amount tendered for exchange or (ii) to tender for purchase Old RGC Notes for $1,010.00 in cash per $1,000 principal amount of Old RGC Notes accepted for purchase, in each case plus accrued and unpaid interest to the date of exchange or purchase. The consummation of the RGC Offers will occur simultaneously with the consummation of the Offer to Purchase. It is a condition to the consummation of the Offer to Purchase that the RGC Offers be successfully consummated. The obligation of Food 4 Less to accept for exchange or purchase any validly tendered Old RGC Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) satisfaction of a minimum tender amount (i.e., at least a majority of the aggregate principal amount of the outstanding Old RGC Notes being validly tendered for exchange for New RGC Notes and not withdrawn pursuant to the RGC Offers prior to the date of expiration); (ii) the receipt of the requisite consents to certain amendments to the indentures under which the Old RGC Notes were issued (i.e., consents from Old RGC Noteholders representing at least a majority in aggregate principal amount of each issue of Old RGC Notes held by persons other than RGC and its affiliates) on or prior to the date of expiration; (iii) the satisfaction or waiver, in Food 4 Less' sole discretion, of all conditions precedent to the Merger; (iv) the prior or contemporaneous consummation of the Offer to Purchase and the Solicitation hereunder, the F4L Exchange Offers, the Public Offerings and the New Discount Debenture Placement; and (v) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. The terms of the Old RGC Indentures are substantially identical. Noteholders participating in the RGC Offers will be required to consent to certain proposed amendments to the Old RGC Indentures. Such proposed amendments will modify certain terms of such indentures to permit the Merger and will eliminate substantially all the restrictive covenants in the Old RGC Indentures. The Old RGC Notes. The Old RGC 10 1/4% Notes were originally issued in July 1992, are currently outstanding in an aggregate principal amount of $300 million and will mature on July 15, 2002. The Old RGC 9% Notes were originally issued in March 1993, are currently outstanding in an aggregate principal amount of $150 million and will mature on April 1, 2003. Interest on the Old RGC 10 1/4% Notes accrues at a rate of 10 1/4% per annum and is payable semi-annually on each January 15 and July 15. Interest on the Old RGC 9% Notes accrues at a rate of 9% per annum and is payable semi-annually on each April 1 and October 1. The Old RGC 10 1/4% Notes are subject to redemption at any time on or after July 15, 1997, at the option of RGC, in whole or in part, on not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an integral multiple of $1,000 at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning July 15 of the years indicated below:
REDEMPTION YEAR PRICE ---- ---------- 1997...................................................... 105.0% 1998...................................................... 102.5% 1999 and thereafter....................................... 100.0%
in each case plus accrued and unpaid interest to the redemption date (subject to the right of holders of record on relevant record dates to receive interest due on an interest payment date). The Old RGC 9% Notes are subject to redemption at any time on or after April 1, 2000, at the option of RGC, in whole or in part, on not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an integral multiple of $1,000 at 100% of the principal amount thereof plus accrued interest to the redemption date (subject to the right of holders of record on relevant record dates to receive interest due on an interest payment date.) 102 112 Standard & Poor's has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline under the Old RGC Indentures. The consummation of the Merger (which is conditioned upon, among other things, successful consummation of the Offer to Purchase, the Other Debt Financing Transactions, the New Equity Investment and the Bank Financing) and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline would constitute a Change of Control Triggering Event under the Old RGC Indentures. Although Food 4 Less does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the RGC Offers, upon such a Change of Control Triggering Event the Company would be obligated to make the Change of Control Offer following the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. The Old RGC Indentures contain certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on incurrence of additional indebtedness; (ii) limitation on dividends and other restricted payments; (iii) limitation on transactions with affiliates; (iv) limitation on liens securing subordinated indebtedness; (v) limitation on other senior subordinated indebtedness; (vi) limitation on preferred stock of subsidiaries; (vii) limitation on dividend and other payment restrictions affecting subsidiaries; and (viii) limitation on mergers and sales of assets. Under the Old RGC Indentures, certain events constitute an event of default including: (i) the failure to make any principal and interest payment on the Old RGC Notes when due; (ii) the failure to comply with any other agreement contained in the Old RGC Indentures or the Old RGC Notes; (iii) a default under certain indebtedness; (iv) certain final judgments or orders for payments of money; and (v) certain events occurring under bankruptcy laws. Upon the consummation of the RGC Offers, supplemental indentures to each of the Old RGC Indentures will become effective, reflecting the proposed amendments to the Old RGC Indentures. Such supplemental indentures will eliminate substantially all of the restrictive covenants in the Old RGC Indentures, including covenants with respect to limitation on indebtedness, limitation on restricted payments, limitation on transactions with affiliates, limitation on liens securing subordinated indebtedness, restrictions on preferred stock of subsidiaries and limitation on dividends and other payment restrictions affecting subsidiaries. In addition, such supplemental indentures will modify the covenants which limit the ability of RGC to consolidate or merge with, or sell all or substantially all of its assets, to any other person or entity unless certain conditions are satisfied, by eliminating the subsections thereof which require that immediately after giving effect to such transaction on a pro forma basis RGC or the surviving entity, as the case may be, has a Consolidated Interest Coverage Ratio (as defined in the Old RGC Indentures) for its four most recently completed fiscal quarters of at least 1.8 to 1.0. The New RGC Notes. The New RGC Notes will be issued upon consummation of the RGC Offers to tendering holders of Old RGC Notes who tender Old RGC Notes in exchange for New RGC Notes and will be part of the same issue as the New RGC Notes offered pursuant to the Subordinated Note Public Offering. The New RGC Notes will bear interest at a fixed rate per annum equal to the greater of (a) 11% and (b) the RGC Applicable Treasury Rate (as hereinafter defined) plus 400 basis points (4.00 percentage points); provided, however, that in no event will the New RGC Notes bear interest at a rate per annum that is less than the interest rate on the New RGC Notes offered pursuant to the Subordinated Note Public Offering. The "RGC Applicable Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15 (519)) most nearly equal to the average life to stated maturity of the New RGC Notes; provided, that if the average life to stated maturity of the New RGC Notes is not equal to the constant maturity of the United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of the year) from the weekly average yields of the United States Treasury securities for which such yields are given. Interest will be payable on the New RGC Notes on each May 15 and November 15, beginning November 15, 1995. The New RGC Notes will mature on May 15, 2005. On or after May 15, 2000, the New RGC Notes may be redeemed in whole at any time or in part from time to time, at the option of the Company, at a 103 113 redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 months commencing on May 15 of the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2000...................................................... 104.125% 2001...................................................... 102.750% 2002...................................................... 101.375% 2003 and thereafter....................................... 100.000%
In the event that the interest rate on the New RGC Notes is greater than 11%, the above redemption prices will be correspondingly adjusted. In addition, on or prior to May 15, 1998 the Company may, at its option, use the net cash proceeds from one or more Public Equity Offerings to redeem up to an aggregate of 35% of the principal amount of the New RGC Notes originally issued, at a redemption price equal to 111% of the principal amount thereof if redeemed during the 12 months commencing on May 15, 1995, 109.625% of the principal amount thereof if redeemed during the 12 months commencing on May 15, 1996 and 108.25% of the principal amount thereof if redeemed during the 12 months commencing on May 15, 1997, in each case plus accrued and unpaid interest, if any, to the redemption date. In the event that the interest rate on the New RGC Notes is greater than 11%, the above redemption prices will be correspondingly adjusted. The New RGC Note Indenture (as defined) provides that if a Change of Control (as defined therein) occurs, each holder will have the right to require the Company to repurchase such holder's New RGC Notes pursuant to a Change of Control Offer (as defined therein) at 101% of the principal amount thereof plus accrued interest, if any, to the date of repurchase. The indenture governing the New RGC Notes (the "New RGC Note Indenture") contains certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on dividends and other restricted payments; (ii) limitation on incurrences of additional indebtedness; (iii) limitation on liens; (iv) limitation on asset sales; (v) limitation on dividend and other payment restrictions affecting subsidiaries; (vi) limitation on transactions with affiliates; (vii) limitation on preferred stock of subsidiaries; (viii) limitation on mergers and certain other transactions; (ix) limitation on other senior subordinated indebtedness; and (x) limitation on guarantees of certain indebtedness. The aggregate principal amount of Old RGC Notes and New RGC Notes, whether issued in the RGC Offers or pursuant to the Subordinated Note Public Offering, will be limited to $650 million at any one time outstanding. THE F4L EXCHANGE OFFERS Concurrently with the Offer to Purchase and the Solicitation, Food 4 Less is offering to holders of its Old F4L Senior Subordinated Notes and its Old F4L Senior Notes the opportunity to (i) exchange such Old F4L Senior Subordinated Notes for New F4L Senior Subordinated Notes, plus $20.00 in cash for each $1,000 principal amount exchanged and (ii) exchange such Old F4L Senior Notes for New F4L Senior Notes, plus $5.00 in cash for each $1,000 principal amount exchanged, in each case plus accrued and unpaid interest to the date of exchange. The consummation of the F4L Exchange Offers will occur simultaneously with the consummation of the Offer to Purchase. It is a condition to the consummation of the Offer to Purchase that the F4L Exchange Offers be successfully consummated. The obligation of Food 4 Less to accept for exchange any validly tendered Old F4L Note is conditioned upon, among other things, the satisfaction or waiver of certain conditions, including (i) satisfaction of a minimum tender amount (i.e., at least 80% of the aggregate principal amount of the outstanding Old F4L Notes being validly tendered and not withdrawn pursuant to the F4L Exchange Offers prior to the date of expiration); (ii) the receipt of the requisite consents to certain amendments to the indentures governing the Old F4L Notes (i.e., consents from Old F4L Noteholders representing at least a majority in aggregate 104 114 principal amount of each issue of Old F4L Notes held by persons other than Food 4 Less and its affiliates) on or prior to the date of expiration; (iii) the satisfaction or waiver, in Food 4 Less' sole discretion, of all conditions precedent to the Merger; (iv) the prior or contemporaneous consummation of the Offer to Purchase, the Solicitation hereunder and the Other Debt Financing Transactions; and (v) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment. Noteholders participating in the F4L Exchange Offers will be required to consent to certain amendments to the indentures governing the Old F4L Notes. Such proposed amendments will modify certain terms of such indentures to permit the Merger and will eliminate substantially all of the restrictive covenants in the Old F4L Indentures. The Old F4L Senior Subordinated Notes. The Old F4L Senior Subordinated Notes were issued in June 1991, are limited in aggregate principal amount to $145 million and will mature on June 15, 2001. The Old F4L Senior Subordinated Notes are unsecured general obligations of Food 4 Less, are subordinated to the prior payment when due of all Senior Indebtedness (as defined in the indenture (the "Old F4L Senior Subordinated Note Indenture") governing the Old F4L Senior Subordinated Notes) and are guaranteed on a senior subordinated basis by Food 4 Less' wholly-owned subsidiaries. The Old F4L Senior Subordinated Notes bear interest at a rate equal to 13.75% per annum and interest is payable semi-annually on June 15 and December 15 of each year. On or after June 15, 1996, the Old F4L Senior Subordinated Notes may be redeemed in whole or from time to time in part, at the option of Food 4 Less, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, together with accrued interest to the redemption date, if redeemed during the 12 months commencing on June 15 in the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 1996...................................... 106.111% 1997...................................... 104.583% 1998...................................... 103.056% 1999...................................... 101.528%
and thereafter at 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. In the event of a Change of Control (as defined in the Old F4L Senior Subordinated Note Indenture), the Old F4L Senior Subordinated Notes may be redeemed on or after June 15, 1994 and prior to June 15, 1996, at the option of Food 4 Less, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 months commencing on June 15 in the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 1994...................................... 109.167% 1995...................................... 107.639%
Food 4 Less is required to make a mandatory sinking fund payment on June 15, 2000, sufficient to retire 50% of the Old F4L Senior Subordinated Notes, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the redemption date. Food 4 Less may, at its option, receive credit against such sinking fund payment for 100% of the principal amount of any Old F4L Senior Subordinated Notes previously acquired by Food 4 Less in the open market and surrendered to the trustee under the Old F4L Senior Subordinated Note Indenture for cancellation or redeemed at the option of Food 4 Less and which were not previously used as a credit against any other required payment pursuant to the Old F4L Senior Subordinated Note Indenture. Food 4 Less intends to credit exchanges of Old F4L Senior Subordinated Notes accepted pursuant to the F4L Exchange Offers against its sinking fund obligations. The Old F4L Senior Subordinated Notes are subject to certain covenants as provided in the Old F4L Senior Subordinated Note Indenture. These covenants impose certain limitations on the ability of Food 4 Less 105 115 to, among other things, incur indebtedness, pay dividends or make certain other restricted payments, enter into certain transactions with affiliates, merge or consolidate with any other person, or sell, lease, transfer or otherwise dispose of substantially all of the properties or assets of Food 4 Less. In addition, upon the occurrence of a Change of Control, each holder has the right to require the repurchase of such holder's Old F4L Senior Subordinated Notes at a purchase price equal to 101% of the principal amount thereof plus accrued interest, if any, to the date of purchase. The Old F4L Senior Subordinated Note Indenture also requires Food 4 Less to offer to repurchase a specified portion of the Old F4L Senior Subordinated Notes if its net worth does not equal or exceed a specified minimum net worth at the end of any two consecutive fiscal quarters. Under the Old F4L Senior Subordinated Note Indenture, certain events constitute an event of default, including (i) the failure to make any principal and interest payment on the Old F4L Senior Subordinated Notes when due; (ii) the failure to comply with any other agreement contained in the Old F4L Senior Subordinated Note Indenture or the Old F4L Senior Subordinated Notes; (iii) a default under certain indebtedness; (iv) certain final judgments or orders for payments of money; and (v) certain events occurring under bankruptcy laws. Upon the consummation of the F4L Exchange Offers, a supplemental indenture to the Old F4L Senior Subordinated Note Indenture will become effective, reflecting the proposed amendments to the Old F4L Senior Subordinated Note Indenture. Such supplemental indenture will eliminate substantially all of the restrictive covenants in the Old F4L Senior Subordinated Note Indenture, including covenants with respect to maintenance of net worth, the limitation on restricted payments, limitation on incurrences of additional indebtedness, limitation on liens, limitation on disposition of assets, limitation on payment restrictions affecting subsidiaries, limitation on transactions with affiliates, limitation on change of control and the covenant requiring additional subsidiary guarantees under certain circumstances. In addition, such supplemental indenture will modify the covenant which limits the ability of Food 4 Less to consolidate or merge with, or sell all or substantially all of its assets to, any other person or entity unless certain conditions are satisfied by eliminating the subsections thereof which require that immediately after giving effect to such transaction and the incurrence of any indebtedness in connection therewith, Food 4 Less or the surviving entity, as the case may be, has a Net Worth (as defined) or Operating Coverage Ratio (as defined) that meets the standards set forth therein. The New F4L Senior Subordinated Notes. The New F4L Senior Subordinated Notes will be issued upon consummation of the F4L Exchange Offers to tendering holders of Old F4L Senior Subordinated Notes. The New F4L Senior Subordinated Notes will bear interest at a rate of 13.75% per annum and interest will be payable on each May 15 and November 15, beginning November 15, 1995. The New F4L Senior Subordinated Notes will mature on May 15, 2005. On or after June 15, 1996, the New F4L Senior Subordinated Notes may be redeemed in whole at any time or in part from time to time, at the option of the Company, at a redemption price equal to the applicable percentage of the principal amount thereof set below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 months commencing on June 15 of the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 1996...................................... 106.111% 1997...................................... 104.583% 1998...................................... 103.056% 1999...................................... 101.528%
and thereafter at 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. Upon a Change of Control (as defined), each holder of the New F4L Senior Subordinated Notes has the right to require the Company to repurchase such holder's New F4L Senior Subordinated Notes at a price equal to 101% of their principal amount, plus accrued interest, if any, to the date of repurchase. 106 116 The aggregate principal amount of Old F4L Senior Subordinated Notes and New F4L Senior Subordinated Notes will be limited to $145 million at any one time outstanding. The Old F4L Senior Notes. The Old F4L Senior Notes were issued in April 1992, are limited in aggregate principal amount to $175 million and will mature on April 15, 2000. The Old F4L Senior Notes are unsecured general obligations of Food 4 Less and are guaranteed on a senior basis by Food 4 Less' wholly-owned subsidiaries. The Old F4L Senior Notes bear interest at a rate equal to 10.45% per annum and interest is payable semi-annually on April 15 and October 15 of each year. The Old F4L Senior Notes are redeemable, at the option of Food 4 Less, in whole at any time or in part from time to time, on and after April 15, 1996 at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the twelve-month period commencing on April 15 of the year set forth below, plus, in each case, accrued and unpaid interest to the date of redemption:
REDEMPTION YEAR PRICE ---- ---------- 1996...................................... 104.48% 1997...................................... 102.99% 1998...................................... 101.49% 1999 and thereafter....................... 100.00%
In the event of a Change of Control (as defined in the indenture (the "Old F4L Senior Note Indenture") governing the Old F4L Senior Notes), each holder has the right to require the repurchase of such holder's Old F4L Senior Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. Food 4 Less is required to make a mandatory sinking fund payment of $87.5 million on April 15, 1999, sufficient to retire 50% of the Old F4L Senior Notes originally issued, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the date of redemption. Food 4 Less may, at its option, receive credit against such sinking fund payment for 100% of the principal amount of any Old F4L Senior Note previously acquired by Food 4 Less and surrendered to the trustee under the Old F4L Senior Note Indenture for cancellation or redeemed at the option of Food 4 Less and which, in each case, were not previously used for or as a credit against any other required payment pursuant to the Old F4L Senior Note Indenture. Food 4 Less intends to credit exchanges of Old F4L Senior Notes accepted pursuant to the F4L Exchange Offers against its sinking fund obligations. The Old F4L Senior Notes are subject to certain covenants as provided in the Old F4L Senior Note Indenture. These covenants impose certain limitations on the ability of Food 4 Less to, among other things, incur indebtedness, pay dividends or make certain other restricted payments, enter into certain transactions with affiliates, incur liens, guarantee indebtedness or merge or consolidate with any other person, or sell, lease, transfer or otherwise dispose of substantially all of the properties or assets of Food 4 Less. The Old F4L Senior Note Indenture also requires Food 4 Less to offer to repurchase a specified portion of the Old F4L Senior Notes if its net worth does not equal or exceed a specified minimum net worth at the end of any two consecutive fiscal quarters. Under the Old F4L Senior Note Indenture, certain events constitute an event of default. These events are as follows: (i) the failure to make any principal and interest payment on the Old F4L Senior Notes when due; (ii) the failure to comply with any other agreement contained in the Old F4L Senior Note Indenture or the Old F4L Senior Notes; (iii) a default under certain indebtedness; (iv) certain final judgments or orders for payments of money; and (v) certain events occurring under bankruptcy laws. Upon consummation of the F4L Exchange Offers, a supplemental indenture to the Old F4L Senior Note Indenture will become effective, reflecting the proposed amendments to the Old F4L Senior Note Indenture. Such supplemental indenture will eliminate substantially all of the restrictive covenants in the Old F4L Senior Note Indenture, including covenants with respect to the maintenance of net worth, the limitation on change of control, the limitation on restricted payments, the limitation on incurrences of additional indebtedness, the 107 117 limitation on liens, the limitation on disposition of assets, the limitation on payment restrictions affecting subsidiaries and the limitation on transactions with affiliates and the covenant requiring additional subsidiary guarantees under certain circumstances. In addition, the supplemental indenture will modify the covenant which limits the ability of Food 4 Less to consolidate or merge with, or sell all or substantially all of its assets to, any other person or entity unless certain conditions are satisfied, to eliminate the subsections thereof which require that immediately after giving effect to such transaction and the incurrence of any indebtedness in connection therewith, Food 4 Less or the surviving entity, as the case may be, has a Net Worth (as defined) or Operating Coverage Ratio (as defined) that meets the standards set forth therein. The New F4L Senior Notes. The New F4L Senior Notes that will be issued upon consummation of the F4L Exchange Offers to tendering holders of Old F4L Senior Notes will be part of the same issue as the New F4L Senior Notes issued pursuant to the Senior Note Public Offering. The New F4L Senior Notes will bear interest at a fixed rate per annum equal to the greater of (a) 10.45% and (b) the F4L Applicable Treasury Rate (as defined) plus 350 basis points (3.50 percentage points), provided, however, that in any event the New F4L Senior Notes will bear interest at a rate per annum no less than the rate on the New F4L Senior Notes offered in the Senior Note Public Offering. The "F4L Applicable Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by, and published in, the most recent Federal Reserve Statistical Release H.15 (519)) most nearly equal to the average life to stated maturity of the New F4L Senior Notes; provided, that if the average life to stated maturity of the New F4L Senior Notes is not equal to the constant maturity of the United States Treasury security for which a weekly average yield is given, the F4L Applicable Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of the year) from the weekly average yields of the United States Treasury securities for which such yields are given. Interest will be payable on the New F4L Senior Notes on each May 15 and November 15, beginning November 15, 1995. The New F4L Senior Notes will mature on May 15, 2004. On or after May 15, 2000, the New F4L Senior Notes may be redeemed in whole at any time or in part from time to time, at the option of the Company, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 months commencing on May 15 of the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2000..................................... 103.9188% 2001..................................... 102.6125% 2002..................................... 101.3063% 2003 and thereafter...................... 100.0000%
In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. In addition, on or prior to May 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% of the principal amount of the New F4L Senior Notes originally issued, at a redemption price equal to 110.45% of the principal amount thereof if redeemed during the 12 months commencing on May 15, 1995, 109.1438% of the principal amount thereof if redeemed during the 12 months commencing on May 15, 1996 and 107.8375% of the principal amount thereof if redeemed during the 12 months commencing on May 15, 1997, in each case plus accrued and unpaid interest, if any, to the redemption date. In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. In order to effect the foregoing redemption with the proceeds of a Public Equity Offering, the Company shall send the redemption notice not later than 60 days after the consummation of such Public Equity Offering. Upon a Change of Control (as defined), each holder of the New F4L Senior Notes has the right to require the Company to repurchase such holder's New F4L Senior Notes at a price equal to 101% of their principal amount, plus accrued interest, if any, to the date of repurchase. 108 118 The aggregate principal amount of Old F4L Senior Notes and New F4L Senior Notes, whether issued in the F4L Exchange Offers or pursuant to the Senior Note Public Offering, will be limited to $470 million at any one time outstanding. THE PUBLIC OFFERINGS Concurrently with the Offer to Purchase, the F4L Exchange Offers and the RGC Offers, Food 4 Less is (i) offering up to $295 million principal amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and (ii) offering up to $200 million principal amount of New RGC Notes pursuant to the Subordinated Note Public Offering. The New F4L Senior Notes offered for exchange pursuant to the Senior Note Public Offering will be part of the same issue as the New F4L Senior Notes issued pursuant to the F4L Exchange Offers and the New RGC Notes offered pursuant to the Subordinated Note Public Offering will be part of the same issue as the New RGC Notes offered for exchange pursuant to the RGC Offers. Food 4 Less does not expect to commence the Public Offerings until such time as the RGC Minimum Exchange has been satisfied and the Requisite Consents have been received. The consummation of the Public Offerings, the Offer to Purchase, the F4L Exchange Offers and the RGC Offers will occur simultaneously. It is a condition to the consummation of the Public Offerings that the Offer to Purchase, the F4L Exchange Offers and the RGC Offers be successfully consummated. See "The Merger and the Financing -- Sources and Uses." DESCRIPTION OF THE NEW CREDIT FACILITY In connection with the Merger, Food 4 Less will enter into the New Credit Facility with a syndicate of financial institutions for whom Bankers Trust will act as agent. All of Food 4 Less' obligations under the New Credit Facility will be assumed by the Company immediately following the Merger. Food 4 Less has accepted a commitment letter (the "Commitment Letter") from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. The following is a summary of the anticipated material terms and conditions of the New Credit Facility. This summary does not purport to be a complete description of the New Credit Facility and is subject to the detailed provisions of the loan agreement (the "Loan Agreement") and various related documents to be entered into in connection with the New Credit Facility. A draft copy of the Loan Agreement will be available upon request from Food 4 Less. GENERAL The New Credit Facility will provide for (i) term loans in the aggregate amount of $750 million, comprised of the $375 million Tranche A Loan, the $125 million Tranche B Loan, the $125 million Tranche C Loan, and the $125 million Tranche D Loan; and (ii) the $325 million New Revolving Facility under which working capital loans may be made and commercial or standby letters of credit in the maximum aggregate amount of up to $150 million may be issued, under which approximately $92.6 million of letters of credit are expected to be issued upon the closing of the Merger. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date in an amount not to exceed $225 million will be available for a period of 91 days following the Closing Date to finance the Change of Control Offer. In addition, if the total principal amount of the Old RGC Notes exchanged for New RGC Notes exceeds $225 million the Commitment Letter requires that there be a reduction, in an amount equal to such excess, in one or any combination of (i) the principal amount of proceeds from the Senior Note Public Offerings, (ii) the principal amount of proceeds from the Subordinated Note Public Offering or (iii) the principal amount available under the Tranche A Loan. Proceeds of the New Term Loans and loans under the Revolving Credit Facility on the Closing Date, together with proceeds from the New Discount Debenture Placement, the New Equity Investment and the Public Offerings, will be used to fund the cash requirements for the acquisition of RSI, refinance existing bank indebtedness of Ralphs and Food 4 Less, purchase the Discount Notes, Old RGC 9% Notes and Old RGC 10 1/4% Notes, repay a portion of other indebtedness, pay holders of the Ralphs EARs and pay various fees, expenses and other costs associated with the Merger and the Financing. The New Revolving Facility will be 109 119 available to provide for the working capital requirements and general corporate purposes of the Company and to issue commercial and standby letters of credit to support workers' compensation contingencies and for other corporate purposes. INTEREST RATE; FEES Borrowings under (i) the New Revolving Facility and the Tranche A Loan will bear interest at a rate equal to the Base Rate (as defined in the Loan Agreement) plus 1.50% per annum or the reserve adjusted Euro-Dollar Rate (as defined in the Loan Agreement) plus 2.75% per annum; (ii) the Tranche B Loan will bear interest at the Base Rate plus 2.00% per annum or the reserve adjusted Euro-Dollar Rate plus 3.25% per annum; (iii) the Tranche C Loan will bear interest at the Base Rate plus 2.50% per annum or the reserve adjusted Euro-Dollar Rate plus 3.75% per annum; and (iv) the Tranche D Loan will bear interest at the Base Rate plus 2.75% per annum or the reserve adjusted Euro-Dollar Rate plus 4.00% per annum, in each case as selected by the Company. Applicable interest rates on Tranche A Loan and the New Revolving Facility and the fees payable under the New Revolving Facility on letters of credit, will be reduced by up to 0.50% per annum after the New Term Loans have been reduced by amounts to be agreed upon by the Company and Bankers Trust and if the Company meets certain financial tests. Up to $30 million of the New Revolving Facility will be available as a swingline facility and loans outstanding under the swingline facility shall bear interest at the Base Rate plus 1.00% per annum (subject to adjustment as described in the preceding sentence). After the occurrence of a default under the New Credit Facility, interest will accrue at the rate equal to the rate on loans bearing interest at the rate determined by reference to the Base Rate plus an additional 2.00% per annum. The Company will pay the issuing bank a fee of 0.25% on each standby letter of credit and each commercial letter of credit and will pay the lenders under the New Credit Facility a fee equal to the margin on Eurodollar Rate loans under the Revolving Credit Facility (the "Eurodollar Margin") for standby letters of credit and a fee equal to the Eurodollar Margin minus 1% for commercial letters of credit. Each of these fees will be calculated based on the amount available to be drawn under a letter of credit. In addition, the Company will pay a commitment fee of 0.50% per annum on the undrawn amount of the Tranche A Loans from the closing of the Merger until the drawing or termination thereof and on the unused portions of the New Revolving Facility and for purposes of calculating this fee, loans under the swingline facility shall not be deemed to be outstanding. The New Credit Facility will require the Company to enter into hedging agreements to limit its exposure to increases in interest rates for a period of not less than two years. The New Credit Facility may be prepaid in whole or in part without premium or penalty. AMORTIZATION; PREPAYMENTS The Tranche A Loan will mature six years after the closing of the Merger and will be subject to amortization, commencing in the fifteenth month after the closing of the Merger on a quarterly basis in aggregate annual amounts of $45 million in the second year, $75 million in the third year, $80 million in the fourth year, $85 million in the fifth year, and $90 million in the sixth year. The Tranche B Loan will mature seven years after the closing of the Merger and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.25 million for the first six years and $117.5 million in the seventh year. The Tranche C Loan will mature eight years after the closing of the Merger and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.25 million for the first seven years and $116.25 million in the eighth year. The Tranche D Loan will mature nine years after the closing of the Merger and will be subject to amortization on a quarterly basis in aggregate annual amounts of $1.25 million for the first eight years and $115 million in the ninth year. The New Revolving Facility will mature on the same date as the Tranche A Loan. The Company will be required to reduce loans outstanding under the New Revolving Facility to $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period. The Company will be required to make certain prepayments, subject to certain exceptions, on the New Credit Facility with 75% of Consolidated Excess Cash Flow (as defined in the Loan Agreement) and with the proceeds from certain asset sales, issuances of debt and equity securities and any pension plan reversion. Such prepayments will be allocated pro rata between the Tranche A Loans, Tranche B Loans, Tranche C Loans and the Tranche D Loans and to scheduled amortization payments of the Tranche A Loans, the Tranche B Loans, Tranche C Loans, and the Tranche D Loans pro rata. Mandatory prepayments on the Tranche B Loans, the 110 120 Tranche C Loans and the Tranche D Loans will be used to make an offer to repay such loans and to the extent not accepted of 50% of such amount will be applied to reduce Tranche A Loans on a pro rata basis and the remaining 50% may be retained by the Company. GUARANTEES AND COLLATERAL New Holdings and all active subsidiaries of the Company (including the Subsidiary Guarantors) will guarantee the Company's obligations under the New Credit Facility. The Company's obligations and the guarantees of its subsidiaries will be secured by substantially all personal property of the Company and its subsidiaries, including a pledge of the stock of all subsidiaries of the Company (with the exception of the stock of Bell Markets, Inc., which has been pledged to secure notes payable to the former owners thereof, so long and only so long as such stock is subject to the liens of such former owners). New Holdings' guarantee will be secured by a pledge of the stock of the Company. The Company's obligations will also be secured by first priority liens on certain unencumbered real property fee interests of the Company and its subsidiaries and the Company and its subsidiaries will use their reasonable economic efforts to provide the lenders with a first priority lien on certain unencumbered leasehold interests of the Company and its subsidiaries. COVENANTS The obligation of the lenders under the New Credit Facility to advance funds is subject to the satisfaction of certain conditions customary in agreements of this type. In addition, the Company will be subject to certain customary affirmative and negative covenants contained in the New Credit Facility, including, without limitation, covenants that restrict, subject to specified exceptions, (i) the incurrence of additional indebtedness and other obligations, (ii) a merger or acquisition, (iii) asset sales, (iv) the granting of liens, (v) prepayment or repurchase of other indebtedness, (vi) engaging in transactions with affiliates, or (vii) cash capital expenditures. In addition, the New Credit Facility will require that the Company maintain certain specified financial covenants, including a minimum fixed charge coverage, a minimum EBITDA, a maximum ratio of total debt to EBITDA and a minimum net worth. EVENTS OF DEFAULT The New Credit Facility also provides for customary events of default. The occurrence of any of such events of default could result in acceleration of the Company's obligations under the New Credit Facility and foreclosure on the collateral securing such obligations, which could have material adverse results to holders of the Discount Notes. 111 121 DESCRIPTION OF OTHER INDEBTEDNESS THE NEW DISCOUNT DEBENTURES The New Discount Debentures will be issued in the New Discount Debenture Placement upon consummation of the Merger. The New Discount Debentures will be issued in an aggregate principal amount of $193,295,080 at maturity and will mature on June 15, 2005. The New Discount Debentures will be senior unsecured obligations of New Holdings and will be senior in right of payment to all subordinated indebtedness of New Holdings, including indebtedness under the Seller Debentures. Until May 15, 2000, no interest will accrue on the New Discount Debentures, but the Accreted Value (as defined in the indenture governing the New Discount Debentures (the "New Debenture Indenture")) will accrete at a rate of 13 5/8% (representing the amortization of the original issue discount) from the date of original issuance until May 15, 2000, on a semi-annual bond equivalent basis using a 360 day year comprised of twelve 30-day months, such that the Accreted Value shall be equal to the full principal amount of the New Discount Debentures on May 15, 2000. The initial Accreted Value per $1,000 principal amount of New Discount Debentures will be $517.33 (representing the original purchase price). Beginning on May 15, 2000, cash interest on the New Discount Debentures will accrue at a rate of 13 5/8% per annum and will be payable semi-annually in arrears on each May 15 and November 15 of each year, commencing November 15, 2000, to the holders of record on the immediately preceding May 1 and November 1. On or after May 15, 2000, the New Discount Debentures may be redeemed, at the option of New Holdings, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest, to the redemption date, if redeemed during the twelve-month period commencing on May 15 in the years set forth below:
YEAR REDEMPTION PRICE ---- ---------------- 2000...................................... 106.8125% 2001...................................... 105.1094% 2002...................................... 103.4063% 2003...................................... 101.7031% 2004 and thereafter....................... 100.0000%
Notwithstanding the foregoing, prior to May 15, 1998, New Holdings may use the net proceeds of an Initial Public Offering (as defined in the New Debenture Indenture) of New Holdings or the Company (or of FFL under certain circumstances) to redeem up to 35% of the New Discount Debentures at a redemption price equal to 110% of the Accreted Value thereof on the date of redemption. In the event of a Change of Control (as defined in the New Debenture Indenture), each holder has the right to require the repurchase of such holder's New Discount Debentures at a purchase price equal to 101% of the Accreted Value thereof on the Change of Control Payment Date (as defined in the New Debenture Indenture) (if such date is prior to May 15, 2000) or 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Change of Control Payment Date (if such date is on or after May 15, 2000). The New Debenture Indenture will contain covenants that, among other things, limit the ability of New Holdings to enter into certain mergers or consolidations or incur certain liens or of New Holdings or its subsidiaries to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined in the New Debenture Indenture), or engage in certain transactions with affiliates. Under certain circumstances, New Holdings will be required to make an offer to purchase New Discount Debentures at a price equal to 100% of the Accreted Value thereof on the date of purchase, if such date is prior to May 15, 2000, or 100% of the principal amount thereof, plus accrued interest to the date of purchase, if such date is on or after May 15, 2000, with the proceeds of certain Asset Sales (as defined in the New Debenture Indenture). The New Debenture Indenture will contain certain customary events of defaults, which will include the failure to pay interest and principal, the failure to comply with certain covenants in the New Discount Debentures or 112 122 the New Debenture Indenture, a default under certain indebtedness, the imposition of certain final judgments or warrants of attachment and certain events occurring under bankruptcy laws. Pursuant to the terms of a registration rights agreement to be entered into by New Holdings, New Holdings is obligated to file a shelf registration statement with the Commission with respect to the New Discount Debentures, to have such shelf registration statement declared effective prior to or at the closing of the Merger, to use its best efforts to cause such shelf registration statement to remain effective for up to three years, and to pay the expenses related thereto, including underwriting discounts and brokers' or dealers' commissions and mark-ups (subject to certain limitations). If New Holdings fails to comply with its obligations to keep such shelf registration statement effective, New Holdings will be obligated to pay certain liquidated damages. Under the registration rights agreement, the holder of the New Discount Debentures will be entitled to commence resales of the New Discount Debentures 60 days following closing of the Merger. New Holdings believes that the holder of the New Discount Debentures actively would seek to dispose of its entire interest in the New Discount Debentures promptly upon expiration of the 60 day holdback period following closing of the Merger. THE SELLER DEBENTURES The Seller Debentures will be issued to the stockholders of RSI upon consummation of the Merger. The Seller Debentures will be issued in an aggregate principal amount of $131.5 million and will mature on May 15, 2007. The Seller Debentures will be general unsecured obligations of New Holdings and will be subordinated to the prior payment when due of all Senior Indebtedness (as defined in the indenture governing the Seller Debentures (the "Debenture Indenture")), including Indebtedness under the New Discount Debentures and any Amended Discount Notes that remain outstanding following consummation of the Merger. The Seller Debentures will bear interest at a rate equal to 13 5/8% per annum. Interest will accrue on the Seller Debentures beginning from the date of issuance or from the most recent date to which interest has been paid and will be payable semi-annually in arrears on each interest payment date. New Holdings will have the option, in its sole discretion, to issue additional securities ("Secondary Securities") in lieu of a cash payment of any or all of the interest due for the period prior to the interest payment date five years after the date of issuance of the Seller Debentures. On or after May 15, 2000, the Seller Debentures may be redeemed, at the option of New Holdings, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve-month period commencing on May 15 in the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2000..................................... 106.8125% 2001..................................... 105.1094% 2002..................................... 103.4063% 2003..................................... 101.7031% 2004 and thereafter...................... 100.0000%
Notwithstanding the foregoing, prior to May 15, 1998, New Holdings may use the net proceeds of an Initial Public Offering (as defined in the Debenture Indenture) of New Holdings or Food 4 Less to redeem up to 35% of the Seller Debentures at a redemption price equal to 110% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption. In the event of a Change of Control (as defined in the Debenture Indenture), each holder has the right to require the repurchase of such holder's Seller Debentures at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Debenture Indenture will contain certain covenants that, among other things, limit the ability of New Holdings to enter into certain mergers or consolidations or incur certain liens or of New Holdings or its subsidiaries to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as 113 123 defined in the Debenture Indenture), or engage in certain transactions with affiliates. Under certain circumstances, New Holdings will be required to make an offer to purchase Seller Debentures at a price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date with the proceeds of certain Asset Sales (as defined in the Debenture Indenture). The Debenture Indenture will contain certain customary events of default, which will include the failure to pay interest and principal, the failure to comply with certain covenants in the Seller Debentures or the Debenture Indenture, a default under certain indebtedness, the imposition of certain final judgments or warrants of attachment and certain events occurring under bankruptcy laws. Pursuant to the terms of the Merger Agreement and a registration rights agreement to be executed concurrently with the closing of the Merger, New Holdings is obligated to file a shelf registration statement with the Commission with respect to the Seller Debentures, use its best efforts to cause such shelf registration statement to become effective and remain effective for up to three years, and pay the expenses related thereto. The effectiveness of such shelf registration statement is a condition to the consummation of the Merger. If New Holdings fails to comply with its obligations to keep such shelf registration statement effective, New Holdings will be obligated to pay certain liquidated damages. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS Latham & Watkins, counsel to Holdings ("Counsel"), has advised Holdings that the following discussion expresses their opinion as to the material federal income tax consequences expected to result from the Offer to Purchase and the Solicitation. Such opinion is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury Regulations, judicial authority and current administrative rulings and pronouncements of the Internal Revenue Service (the "Service"), any of which may be altered with retroactive effect, thereby changing the federal income tax consequences discussed below. There can be no assurance that the Service will not take a contrary view, and no ruling from the Service has been or will be sought. The tax treatment of a holder of Discount Notes may vary depending on such holder's particular situation. Certain holders (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. This discussion is limited to holders who have held Discount Notes as "capital assets" (generally, property held for investment) within the meaning of Section 1221 of the Code. EACH HOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE OFFER TO PURCHASE AND THE SOLICITATION, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS. PURCHASE OF DISCOUNT NOTES FOR CASH CONSIDERATION A holder whose Discount Notes are purchased for Cash Consideration pursuant to the Offer to Purchase will recognize gain or loss equal to the difference between (i) the amount of Cash Consideration received and (ii) the holder's adjusted tax basis in the Discount Notes purchased. Such gain or loss should be long-term capital gain or loss, provided the Discount Notes were held for more than one year and subject to the rules discussed below under "-- Market Discount." MARKET DISCOUNT A holder who acquired a Discount Note at a market discount (subject to a statutorily-defined de minimis exception) will generally be required to treat any gain on a sale thereof pursuant to the Offer to Purchase as ordinary income rather than capital gain to the extent of the accrued market discount, unless an election was made to include market discount in income as it accrued. In the case of a debt instrument issued with original issue discount, such as a Discount Note, market discount equals the excess of the debt instrument's "revised issue price" (the sum of the "issue price" of the debt instrument and the aggregate amount of original issue 114 124 discount includible in gross income by all prior holders of the debt instrument, reduced by the amount of all cash payments received by such previous holders) over a holder's initial tax basis in the debt instrument. CONSEQUENCES TO HOLDERS NOT PARTICIPATING IN THE OFFER TO PURCHASE Holders of Discount Notes who do not participate in the Offer to Purchase will not recognize any income, gain or loss for federal income tax purposes as a result of the Proposed Amendments. BACKUP WITHHOLDING A holder who exchanges Discount Notes for Cash Consideration may be subject to backup withholding at the rate of 31% unless (i) such holder is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A holder of Discount Notes who does not provide Holdings with his or her correct taxpayer identification number may be subject to penalties imposed by the Service. Holdings will report to the holders of Discount Notes and the Service the amount of any "reportable payments" and any amount withheld with respect to the Discount Notes during the calendar year. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF DISCOUNT NOTES IN LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF DISCOUNT NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER TO PURCHASE AND THE SOLICITATION, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN OR OTHER TAX LAWS. LEGAL MATTERS The validity of the Discount Notes to be amended in connection with the Offer to Purchase and the Solicitation will be passed upon for Holdings and New Holdings by Latham & Watkins, Los Angeles, California. Certain legal matters in connection with the Offer to Purchase and the Solicitation will be passed upon for the Dealer Managers by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated balance sheets of Ralphs Supermarkets, Inc. as of January 30, 1994 and January 29, 1995 and the related consolidated statements of operations, cash flows and stockholders' equity for the year ended January 31, 1993, the year ended January 30, 1994 and the year ended January 29, 1995, have been included in this Offer to Purchase and Solicitation Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated balance sheets of Food 4 Less Holdings, Inc., a California corporation, and subsidiaries as of June 26, 1993 and June 25, 1994 and the related consolidated statements of operations, cash flows and shareholders' equity of Food 4 Less Holdings, Inc. for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993 and the 52 weeks ended June 25, 1994, and the related financial statement schedules and the balance sheet of Food 4 Less Holdings, Inc., a Delaware corporation, as of January 4, 1995 included in this Offer to Purchase and Solicitation Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 115 125 INDEX TO FINANCIAL STATEMENTS
PAGE ----- RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY): Independent Auditors' Report (KPMG Peat Marwick LLP).................................. F-2 Consolidated balance sheets at January 30, 1994 and January 29, 1995 ................. F-3 Consolidated statements of operations for the years ended January 31, 1993, January 30, 1994 and January 29, 1995....................................................... F-4 Consolidated statements of cash flows for the years ended January 31, 1993, January 30, 1994 and January 29, 1995....................................................... F-5 Consolidated statements of stockholders' equity for the years ended January 31, 1993, January 30, 1994 and January 29, 1995............................................... F-6 Notes to consolidated financial statements............................................ F-7 FOOD 4 LESS HOLDINGS, INC. (A CALIFORNIA CORPORATION): Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-28 Consolidated balance sheets as of June 26, 1993, June 25, 1994 and January 7, 1995 (unaudited)......................................................................... F-29 Consolidated statements of operations for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 (unaudited) and January 7, 1995 (unaudited)......................................................... F-31 Consolidated statements of cash flows for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 (unaudited) and January 7, 1995 (unaudited)......................................................... F-32 Consolidated statements of shareholder's equity for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 7, 1995 (unaudited)......................................................................... F-34 Notes to consolidated financial statements............................................ F-35 FOOD 4 LESS HOLDINGS, INC. (A DELAWARE CORPORATION): Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-50 Balance sheet as of January 4, 1995................................................... F-51 Notes to the balance sheet............................................................ F-52
F-1 126 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Ralphs Supermarkets, Inc.: We have audited the consolidated balance sheets of Ralphs Supermarkets, Inc. and subsidiary as of January 30, 1994 and January 29, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended January 31, 1993, the year ended January 30, 1994 and the year ended January 29, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ralphs Supermarkets, Inc. and subsidiary as of January 30, 1994 and January 29, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended January 29, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California March 9, 1995 F-2 127 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- Current Assets: Cash and cash equivalents......................................... $ 55,080 $ 35,125 Accounts receivable............................................... 30,420 43,597 Inventories....................................................... 202,354 221,388 Prepaid expenses and other current assets......................... 18,111 19,793 ---------- ---------- Total current assets...................................... 305,965 319,903 Property, plant and equipment, net................................ 601,897 624,724 Excess of cost over net assets acquired, net...................... 376,414 365,418 Beneficial lease rights, net...................................... 55,553 49,164 Deferred debt issuance costs, net................................. 26,583 23,011 Deferred income taxes............................................. 109,125 112,491 Other assets...................................................... 8,113 15,203 ---------- ---------- Total assets.............................................. $1,483,650 $1,509,914 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt.............................. $ 70,975 $ 83,989 Short-term debt................................................... -- 51,500 Bank overdrafts................................................... 37,716 45,669 Accounts payable.................................................. 138,554 130,889 Accrued expenses.................................................. 101,543 99,804 Current portion of self-insurance reserves........................ 30,138 27,552 ---------- ---------- Total current liabilities................................. 378,926 439,403 Long-term debt.................................................... 927,909 883,020 Self-insurance reserves........................................... 49,872 44,954 Lease valuation reserve........................................... 32,575 28,957 Other non-current liabilities..................................... 89,299 86,393 ---------- ---------- Total liabilities......................................... 1,478,581 1,482,727 ---------- ---------- Stockholders' equity: Common stock, $.01 par value per share Authorized 50,000,000 shares; issued and outstanding, 25,587,280 shares at January 30, 1994 and January 29, 1995.................................. 256 256 Additional paid-in capital........................................ 175,292 175,292 Accumulated deficit............................................... (170,479) (148,361) ---------- ---------- Total stockholders' equity................................ 5,069 27,187 ---------- ---------- Commitments and contingencies (See Notes 2 and 8) Total liabilities and stockholders' equity (deficit)...... $1,483,650 $1,509,914 ========== ==========
See accompanying notes to consolidated financial statements. F-3 128 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, 1993 JANUARY 30, 1994 JANUARY 29, 1995 ------------------ ------------------ ------------------ Sales............................ $2,843,816 100.0% $2,730,157 100.0% $2,724,604 100.0% Cost of sales.................... 2,217,197 78.0 2,093,727 76.7 2,101,033 77.1 ---------- ----- ---------- ----- ---------- ----- Gross profit................... 626,619 22.0 636,430 23.3 623,571 22.9 Selling, general and administrative expenses..... 470,012 16.5 471,000 17.2 467,022 17.2 Amortization of excess cost over net assets acquired.... 10,997 0.4 10,996 0.4 10,996 0.4 Provision for restructuring.... 7,100 0.2 2,374 0.1 -- -- ---------- ----- ---------- ----- ---------- ----- Operating income............... 138,510 4.9 152,060 5.6 145,553 5.3 Other expenses: Interest expense, net.......... 125,611 4.4 108,755 4.0 112,651 4.1 Loss on disposal of assets..... 2,607 0.1 1,940 0.1 784 0.0 Provision for legal settlement.................. 7,500 0.3 -- -- -- -- Provision for earthquake losses...................... -- -- 11,048 0.4 -- -- ---------- ----- ---------- ----- ---------- ----- Earnings before income taxes and extraordinary item............. 2,792 0.1 30,317 1.1 32,118 1.2 Income tax expense (benefit)..... 8,346 0.3 (108,049) (4.0) -- -- ---------- ----- ---------- ----- ---------- ----- Earnings (loss) before extraordinary item............. (5,554) (0.2) 138,366 5.1 32,118 1.2 Extraordinary item-debt refinancing, net of tax benefit $4,173......................... (70,538) (2.5) -- -- -- -- ---------- ----- ---------- ----- ---------- ----- Net earnings (loss).............. $ (76,092) (2.7)% $ 138,366 5.1% $ 32,118 1.2% ========== ===== ========== ===== ========== =====
See accompanying notes to consolidated financial statements. F-4 129 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ------------ Cash flows from operating activities: Net earnings (loss)................................. $ (76,092) $ 138,366 $ 32,118 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.................... 76,873 74,452 76,043 Amortization of discounts and deferred debt issuance costs................................. 20,978 9,768 9,032 LIFO charge (credit)............................. 1,115 (2,054) 2,085 Loss on sale of assets........................... 6,841 4,314 784 Provision for post-retirement benefits........... 3,275 3,370 2,555 Provision for legal settlement................... 7,500 -- -- Other changes in assets and liabilities: Accounts receivable................................. 6,376 326 (13,177) Inventories at replacement cost..................... (13,682) 6,724 (21,120) Prepaid expenses and other current assets........... 3,703 (1,658) (1,682) Other assets........................................ (616) 4,449 (7,287) Interest payable.................................... (13,393) (4,822) (2,419) Accounts payable and accrued liabilities............ 23,054 (1,622) (1,047) Income taxes payable................................ (527) (1,480) (2,906) Deferred tax asset.................................. -- (109,125) (3,366) Business interruption credit........................ -- (581) -- Earthquake losses................................... -- (11,048) -- Self insurance reserves............................. 8,456 7,031 (7,503) Other liabilities................................... (170) (12,407) (6,692) --------- --------- -------- Cash provided by operating activities............... 53,691 104,003 55,418 --------- --------- -------- Cash flows from investing activities: Capital expenditures................................ (102,697) (62,181) (64,018) Proceeds from sale of property, plant and equipment........................................ 219 16,700 13,257 --------- --------- -------- Cash used in investing activities................... (102,478) (45,481) (50,761) --------- --------- -------- Cash flows from financing activities: Net borrowings under lines of credit................ 2,100 (31,100) 51,500 Redemption of preferred stock....................... (3,000) -- -- Capitalized financing and acquisition costs......... (22,426) (5,108) (2,496) Increase (decrease) in bank overdrafts.............. (8,865) 655 7,952 Proceeds from issuance of long-term debt............ 668,269 150,000 -- Dividends paid...................................... -- -- (10,000) Principal payments on long-term debt................ (577,902) (164,081) (71,568) --------- --------- -------- Cash provided by (used in) financing activities..... 58,176 (49,634) (24,612) --------- --------- -------- Net increase (decrease) in cash and cash equivalents......................................... 9,389 8,888 (19,955) Cash and cash equivalents at beginning of period...... 36,803 46,192 55,080 --------- --------- -------- Cash and cash equivalents at end of period............ $ 46,192 $ 55,080 $ 35,125 ========= ========= ========
See accompanying notes to consolidated financial statements. F-5 130 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
RALPHS RALPHS SUPERMARKETS, INC. GROCERY COMPANY -------------------- -------------------- ADDITIONAL OUTSTANDING COMMON OUTSTANDING COMMON PAID-IN- ACCUMULATED SHARES STOCK SHARES STOCK CAPITAL DEFICIT TOTAL ----------- ------ ----------- ------ ---------- ----------- --------- BALANCES AT FEBRUARY 2, 1992...................... -- $ -- 100 -- $ 175,548 $(232,753) $ (57,205) Capitalization of Ralphs Supermarkets, Inc. .... 25,587,280 256 (100) -- (256) -- -- Net Loss.................. -- -- -- -- -- (76,092) (76,092) ---------- ---- ---- ---- --------- --------- --------- BALANCES AT JANUARY 31, 1993...................... 25,587,280 256 -- -- 175,292 (308,845) (133,297) Net earnings.............. -- -- -- -- -- 138,366 138,366 ---------- ---- ---- ---- --------- --------- --------- BALANCES AT JANUARY 30, 1994...................... 25,587,280 256 -- -- 175,292 (170,479) 5,069 Net Earnings.............. -- -- -- -- -- 32,118 32,118 Dividends Paid............ -- -- -- -- -- (10,000) (10,000) ---------- ---- ---- ---- --------- --------- --------- BALANCES AT JANUARY 29, 1995...................... 25,587,280 $256 -- $ -- $ 175,292 $(148,361) $ 27,187 ========== ==== ==== ==== ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 131 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION At February 2, 1992, Ralphs Grocery Company was an indirect wholly owned subsidiary of Federated Stores, Inc. ("Federated"). Two wholly owned subsidiaries of Federated, Federated Holdings III, Inc. ("Holdings III") and Allied Stores Corporation ("Allied") directly owned the common stock of Ralphs Grocery Company approximately 84% and 16% respectively. In January 1990 Holdings III and Allied, and certain other subsidiaries of Federated, each filed petitions for relief under Chapter 11, Title 11 of the United States Code ("Chapter 11"). In March 1990, Federated filed a petition for relief under Chapter 11. Pursuant to the plans of reorganization for Federated and certain of its subsidiaries, Ralphs Supermarkets, Inc. was formed to hold the outstanding shares of common stock of Ralphs Grocery Company. On February 3, 1992, Holdings III and Allied contributed their shares of Ralphs Grocery Company to Ralphs Supermarkets, Inc. in exchange for the issuance by Ralphs Supermarkets, Inc. of Ralphs Supermarkets, Inc. shares in the same proportion in Ralphs Grocery Company shares were owned ("Internal Reorganization"). For financial reporting purposes, this transaction was recorded at predecessor cost. For Federal tax purposes, a new basis was established at Ralphs Supermarket, Inc. as more fully described in Note 11. Under the plans of reorganization for Federated, Holdings III and certain other subsidiaries of Federated (the "FSI Plan"), all Ralphs Supermarkets, Inc. shares of common stock held by Holdings III were to be distributed to certain creditors of Federated and Holdings III, including The Edward J. DeBartolo Corporation ("EJDC"), Bank of Montreal ("BMO"), Banque Paribas ("BP") and Camdev Properties Inc. ("Camdev"), and Federated. The FSI Plan was confirmed by the Bankruptcy Court in January 1992 and was consummated on February 3, 1992. Under the plan of reorganization of Allied and certain affiliates including Federated Department Stores, Inc. (the "Allied-Federated Plan"), a portion of Allied's Holding Company shares were to be distributed to BMO and BP. The Allied-Federated Plan was confirmed by the Bankruptcy Court in January 1992 and was consummated shortly after the FSI Plan. Thus, following consummation of both the FSI Plan and the Allied-Federated Plan and the transfer on July 19, 1993 of the shares of common stock in Ralphs Supermarkets, Inc. held by Federated Stores, Inc. to Camdev, the approximate ownership of Ralphs Supermarkets, Inc. is as follows:
APPROXIMATE PERCENT OWNERSHIP OF RALPHS SUPERMARKETS, INC. COMMON STOCK AS OF JULY 19, 1993 ------------------- EJDC................................................ 60.4% BMO................................................. 10.1% BP.................................................. 10.1% Camdev.............................................. 12.8% Federated Department Stores, Inc. (as successor by merger to Allied)................................. 6.6%
Pursuant to certain agreements entered into contemporaneously with the effectiveness of the FSI Plan and the Allied-Federated Plan, certain income tax liabilities of Ralphs Grocery Company, Federated, Allied, Federated Department Stores, Inc. and other affiliates have been settled with the Internal Revenue Service. In addition, Ralphs Grocery Company and certain affiliates including Federated Department Stores, Inc., Allied and Federated (the "Affiliated Group") entered into an agreement (the "Tax Indemnity Agreement") pursuant to which Federated Department Stores, Inc. agreed to pay certain tax liabilities, if any, relating to Ralphs Grocery Company being a member of the Affiliated Group. The Tax Indemnity Agreement provides a formula to determine the amount of additional tax liabilities through February 3, 1992 that Ralphs Grocery F-7 132 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company would be obligated to pay the Affiliated Group. However, such additional liability, if any, is limited to $10 million subject to certain adjustments. Under the Tax Indemnity agreement, both Ralphs Supermarkets, Inc. and Ralphs Grocery Company have agreed to pay Federated Department Stores, Inc. $1 million annually for each of five years starting on February 3, 1992, and an additional $5 million on February 3, 1997. These total payments of $10 million have been recorded in the consolidated financial statements at February 2, 1992. The five $1 million installments are to be paid by Ralphs Grocery Company and the $5 million is the joint obligation of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company. Also, in the event Federated Department Stores, Inc. is required to pay certain tax liabilities on behalf of Ralphs Grocery Company, both Ralphs Supermarkets, Inc. and Ralphs Grocery Company have agreed to reimburse Federated Department Stores, Inc. up to an additional $10 million, subject to certain adjustments. This additional obligation is the joint and several obligation of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company. The $5 million payment and the potential $10 million payment may be paid, at the option of both Ralphs Supermarkets, Inc. and Ralphs Grocery Company, in cash or newly issued Ralphs Supermarkets, Inc. Common Stock. In connection with the consummation of the FSI Plan and the Allied-Federated Plan, Ralphs Grocery Company and certain parties entered into an agreement (the "Comprehensive Settlement Agreement") pursuant to which the parties thereto, among other things, agreed to deliver releases to the various parties to the Comprehensive Settlement Agreement as well as certain additional parties. Under the Comprehensive Settlement Agreement, Ralphs Grocery Company received general releases from Allied, Federated, Federated Department Stores, Inc. and certain other affiliates which released it from any and all claims which could have been asserted by the parties thereto prior to the effective dates of FSI Plan and the Allied-Federated Plan other than for claims arising under the Comprehensive Settlement Agreement, the FSI Plan, the Allied-Federated Plan and the Tax Indemnity Agreement. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation These consolidated financial statements present the statements of financial position of Ralphs Supermarkets, Inc. and subsidiary as of January 31, 1993, January 30, 1994 and January 29, 1995 and the results of their operations and their cash flows for the three years then ended. Ralphs Grocery Company is deemed to be the predecessor entity of Ralphs Supermarkets, Inc. For purposes of these consolidated financial statements Ralphs Supermarkets, Inc. and Ralphs Grocery Company will be collectively referred to as "Ralphs". (b) Reporting Period Ralphs' fiscal year ends on the Sunday closest to January 31. Fiscal year-ends are as follows: January 31, 1993 (Fiscal 1992) January 30, 1994 (Fiscal 1993) January 29, 1995 (Fiscal 1994) (c) Cash and Cash Equivalents For purposes of the statements of cash flows, Ralphs considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. F-8 133 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (d) Inventories Inventories are stated at the lower cost or market. Cost is determined primarily using the last-in, first-out (LIFO) method. The replacement cost of inventories exceeded the LIFO inventory cost by $15.5 million and $17.6 million at January 30, 1994 and January 29, 1995, respectively. (e) Property, Plant and Equipment Property, plant and equipment are stated at cost. Property and equipment held under capital leases are stated at the present value of the minimum lease payments at the inception of the lease. Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of assets. Plant and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Useful lives range from 10 to 40 years for buildings and improvements and 3 to 20 years for fixtures and equipment. Interest is capitalized in connection with the construction of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Interest cost capitalized during fiscal 1992, 1993 and 1994 was $1.074 million, $.740 million and $.324 million, respectively. (f) Deferred Debt Issuance Costs Direct costs incurred as a result of financing transactions are capitalized and amortized over the terms of the applicable debt agreements using the effective interest method. (g) Pre-opening Costs Pre-opening costs of new stores are deferred and expensed at the time the store opens. If a new store is ultimately not opened, the costs are expensed directly to selling, general and administrative expense at the time it is determined that the store will not be opened. (h) Self Insurance Reserves Ralphs is self-insured for a portion of workers' compensation, general liability and automobile accident claims. Ralphs establishes reserve provisions based on an independent actuary's review of claims filed and an estimate of claims incurred but not yet filed. (i) Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired, resulting from the May 3, 1988 acquisition of Ralphs is being amortized using the straight-line method over 40 years. Ralphs assesses the recoverability of this intangible asset by determining whether the amortization of the asset balance over its remaining life can be recovered through projected undiscounted operating income (including interest, depreciation and all amortization expense except amortization of excess of cost over net assets acquired) over the remaining amortization period of the excess of cost over net assets acquired. The amount of excess of cost over net assets acquired impairment, if any, is measured based on projected discounted future results using a discount rate reflecting Ralphs' average cost of funds. Accumulated amortization aggregated $63.4 million and $74.4 million at January 30, 1994 and January 29, 1995, respectively. F-9 134 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (j) Acquired Leases Beneficial lease rights and lease valuation reserves are recorded as the net present value of the differences between contractual rents under existing lease agreements and fair value of entering such lease agreements as of the May 3, 1988 acquisition of Ralphs. All beneficial lease rights and lease valuation reserves arose solely as a result of the May 3, 1988 acquisition. Adjustments to the carrying value of these assets would typically occur only through additional business combinations or in the event of early lease termination. Beneficial lease rights are amortized using the straight-line method over the terms of the leases. Lease valuation reserves are amortized using the interest method over the terms of the leases. (k) Discounts and Promotional Allowances Promotional allowances and vendor discounts are recorded as a reduction of cost of sales in the accompanying statements of operations. Allowance proceeds received in advance are deferred and recognized over the period earned. (l) Income Taxes Through February 2, 1992, Ralphs operated under a tax-sharing agreement with Federated and was included in the consolidated Federal tax returns of Federated. Through January 28, 1990, Ralphs was included in the combined state tax returns of Federated; however, Ralphs filed separate state tax returns subsequent to January 28, 1990. Under the tax-sharing agreement, tax-sharing payments were made to Federated based on the amount that Ralphs would be liable for had Ralphs filed separate tax returns, taking into account applicable carryback and carryforward provision of the tax laws. Subsequent to February 2, 1992, Ralphs is responsible for filing tax returns with the Internal Revenue Service and state taxing authorities. Prior to February 3, 1992 Ralphs paid alternative minimum tax to Federated under its tax sharing agreement. As a result of the Internal Reorganization, Ralphs will not be entitled to offset its future Federal regular tax liability with the payments made to Federated. Effective for the fiscal year ended February 2, 1992, Ralphs adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." At the date of adoption such change had no impact on the consolidated financial results. (m) Reclassification Certain amounts in the accompanying financial statements have been reclassified to conform to the current year's presentation. (n) Consolidation Policy The consolidated financial statements include the accounts of Ralphs Supermarkets, Inc., and its wholly owned subsidiary, Ralphs Grocery Company, and its wholly owned subsidiary, collectively referred to as the Company. All material intercompany balances and transactions are eliminated in consolidation. (o) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (i) Cash and short-term investments The carrying amount approximates fair value because of the short maturity of those instruments. F-10 135 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ii) Long-term debt The fair value of Ralphs' long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to Ralphs for debt of the same remaining maturities. (iii) Interest Rate Swap Agreements The fair value of interest rate swap agreements is the estimated amount that Ralphs would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current credit-worthiness of the swap counterparties. (p) Advertising The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense was $17.5 million, $16.4 million and $18.2 million in fiscal 1992, 1993 and 1994, respectively. (q) Transaction Costs In connection with the proposed merger, Ralphs has capitalized in other assets approximately $2.3 million of transaction costs, principally attorney and accounting fees. Upon completion of the merger these amounts will be reclassified to excess of cost of net assets acquired and amortized accordingly. (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Land........................................... $ 159,904 $ 161,725 Buildings and improvements..................... 191,179 199,133 Leasehold improvements......................... 161,341 170,430 Fixtures and equipment......................... 354,626 372,077 Capital leases................................. 86,964 124,861 --------- ---------- 954,014 1,028,226 Less: Accumulated depreciation................. (312,746) (354,539) Less: Accumulated capital lease amortization... (39,371) (48,963) --------- ---------- Property, plant and equipment, net............. $ 601,897 $ 624,724 ========= ==========
(4) ACCRUED EXPENSES Accrued expenses are summarized as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Accrued wages, vacation and sick leave......... $ 34,763 $43,766 Taxes other than income tax.................... 11,084 10,055 Interest....................................... 11,090 8,670 Other.......................................... 44,606 37,313 -------- ------- $101,543 $99,804 ======== =======
F-11 136 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) LONG-TERM DEBT Long-term debt is summarized as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) First mortgage notes payable in monthly installments, commencing June 1, 1994 of $1.6 million including interest at an effective rate of 9.651%; interest only payable monthly prior to June 1, 1994. Final payment due June 1, 1999. Secured by land and buildings with a net book value of $188.8 million.......................... $ 178,013 $ 176,634 Notes payable in varying monthly installments including interest ranging from 11.5% to 18.96%. Final payment due through November 30, 1996. Secured by equipment with a net book value of $28.5 million.................................... 9,721 6,291 Capitalized lease obligations at interest rates ranging from 7.25% to 14% maturing at various dates through 2019 (note 6)...................... 61,150 89,084 Note payable to bank............................... 300,000 245,000 Initial Notes and Exchange Notes, 9% due 2003...... 150,000 150,000 Senior Subordinated Debentures, 10 1/4%, due 2002............................................. 300,000 300,000 --------- --------- Total long-term debt............................... 998,884 967,009 Less current maturities............................ (70,975) (83,989) --------- --------- Long-term debt..................................... $ 927,909 $ 883,020 ========= =========
During the third quarter of 1992, the Company implemented a recapitalization plan (the "Recapitalization Plan") which was completed during the first quarter of 1993 by the Company's offering of $150.0 million aggregate principal amount of its 9% Senior Subordinated notes due 2003 (the "Initial Notes") in private placement under the Securities Act of 1933, as amended (the "Securities Act"). The proceeds of the Initial Notes were used to (i) purchase for cancellation of $60.0 million aggregate principal amount of the Company's 14% Senior Subordinated Debentures due 2000 (the "14% Subordinated Debentures") from a noteholder who had made an unsolicited offer to sell such 14% Subordinated Debentures, (ii) defease the remaining $38.1 million aggregate principal amount of the 14% Subordinated Debentures, (iii) prepay $36.1 million of borrowings under the Company's $350.0 million 1992 term loan facility entered into as part of the Recapitalization Plan and (iv) pay fees and expenses associated with such transactions and for other purposes. As part of a registration rights agreement entered into with the initial purchasers of the Initial Notes, the Company agreed to offer to exchange up to $150.0 million aggregate principal amount of the Exchange Notes for all of the outstanding Initial Notes (the "Exchange Offer"). The terms of the Exchange Notes are substantially identical (including principal amount, interest rate and maturity) in all respects to the terms of the Initial Notes except that the Exchange Notes are freely transferable by the holders thereof (with certain exceptions) and are not subject to any covenant upon the Company regarding registration under the Securities Act. On June 24, 1993, the Company completed the Exchange Offer exchanging $149.7 million aggregate principal amount of Exchange Notes for Initial Notes ($.3 million of Initial Notes remain outstanding). The note payable to bank and working capital line, under the 1992 Credit Agreement, are secured by first priority liens on Ralphs' inventory and receivables, servicemarks and registered trademarks, equipment (other than equipment located at facilities subject to existing liens in favor of equipment financiers) and after-acquired real property interests and all existing real property interests (other than those that are subject to prior encumbrances) and bears interest at the rates, as selected by Ralphs as follows: (i) 1 3/4% over the prime F-12 137 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) rate, or (ii) 2 3/4% over the Eurodollar Rate. Interest calculated pursuant to (i) above is payable quarterly, otherwise interest is payable quarterly or at the selected borrowings option maturity. During the 52 weeks ended January 29, 1995, interest rates under these borrowings ranged from 5.9375% to 10.25%. Ralphs is required to pay an annual administrative fee of $300,000 pursuant to the 1992 Credit Agreement as well as a commitment fee of 0.5% on the average daily amounts available for borrowing under the $120.0 million working capital credit line. The 1992 Credit Agreement, which includes a $350.0 million term loan and $120.0 million working capital credit line, also supports up to $60.0 million of letters of credit which reduce the available borrowings on the credit line. The 1992 Credit Agreement is subject to quarterly principal payment requirements, which commenced on March 31, 1993, with payment in full on June 30, 1998. As of January 29, 1995, $52.4 million of letters of credit and $51.5 million in borrowings were outstanding, with $16.1 million available under the working capital credit line. In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate cap agreement with an effective date of November 6, 1992 and a three-year maturity. The interest rate cap agreement hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal amount against increases in short-term rates. This agreement satisfies interest rate protection requirements under the 1992 Credit Agreement. In addition to the interest rate cap agreement, Ralphs entered into an interest rate swap agreement on $150.0 million notional principal amount. Under the interest rate swap agreement, Ralphs is required to pay interest based on LIBOR at the end of each six month calculation period and Ralphs will receive interest payments based on LIBOR at the beginning of each six month calculation period. This interest rate swap agreement has a three-year term expiring November 6, 1995. Ralphs is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, Ralphs does not anticipate nonperformance by the counterpart. The following details the impact of the hedging activity on the weighted average interest rate for each of the last three fiscal years.
WITH HEDGE WITHOUT HEDGE ---------- ------------- 1992........................................ 10.52% 10.22% 1993........................................ 8.96% 8.96% 1994........................................ 9.37% 9.18%
The Initial Notes and Exchange Notes are unsecured obligations of Ralphs subordinated in right of payment to amounts due on the aforementioned senior debt. Interest at 9% is payable each April 1 and October 1 through April 1, 2003, when the notes mature. The 10 1/4% Senior Subordinated Debentures are unsecured obligations of Ralphs subordinated in right of payment to amounts due on the senior debt. Interest at 10 1/4% is payable each January 15 and July 15 through July 15, 2002, when the debentures mature. The aforementioned debt agreements contain various restrictive covenants pertaining to net worth levels, limitations on additional indebtedness and capital expenditures, financial ratios and dividends. The 1992 Credit Agreement requires Ralphs to reduce its working capital credit line to zero for 30 consecutive days annually. The current annual period extends from July 1 to June 30. The Company has not yet complied with this annual covenant. The Company intends to either satisfy this covenant by June 30, 1995 or seek to obtain the necessary waiver from its lenders, if such event of non-compliance ultimately occurs but there is no assurance that such waiver will be granted, or, if granted, will be on terms acceptable to the Company. At January 29, 1995, Ralphs is in compliance with all its 1992 Credit Agreement restrictive covenants. The Company currently anticipates that it may be out of compliance with certain other maintenance covenants at the end of the second quarter of 1995. The Company intends to seek the necessary waivers from its lenders should these events of non-compliance ultimately occur, but there is no assurance that such waivers will be granted, or, if granted, will be on terms acceptable to the Company. F-13 138 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate maturities on long-term debt for each of the five years subsequent to fiscal 1994 are as follows:
(DOLLARS IN THOUSANDS) ------------ 1995........................................ $ 83,989 1996........................................ 86,792 1997........................................ 84,771 1998........................................ 53,605 1999........................................ 175,400 2000 and thereafter......................... 482,452 -------- $967,009 ========
The unaudited fair value of each class of financial instruments (where practical), all held for non-trading purposes, is as follows in (000s): Long-term debt............................... $953,883 Interest rate swap agreement................. $ 1,252 Interest rate cap agreement.................. $ (366)
(6) LEASES Ralphs has leases for retail store facilities, warehouses and manufacturing plants for periods up to 30 years. Generally, the lease agreements include renewal options for five years each. Under most leases, Ralphs is responsible for property taxes, insurance, maintenance and expense related to the lease property. Certain store leases require excess rentals based on a percentage of sales at that location. Certain equipment is leased by Ralphs under agreements ranging from 3 to 15 years. The agreements usually do not include renewal option provisions. Minimum rental payments due under capital leases and operating leases subsequent to fiscal 1994 are as follows:
CAPITAL OPERATING LEASES LEASES TOTAL -------- -------- -------- (DOLLARS IN THOUSANDS) 1995............................................... $ 21,640 $ 61,324 $ 82,964 1996............................................... 19,093 60,847 79,940 1997............................................... 18,288 58,182 76,470 1998............................................... 15,901 53,321 69,222 1999............................................... 11,784 52,839 64,623 2000 and thereafter................................ 53,959 373,021 426,980 -------- -------- -------- Total minimum lease payments....................... $140,665 $659,534 $800,199 ======== ======== Less amounts representing interest................. (51,581) -------- Present value of net minimum lease payments........ 89,084 Less current portion of lease obligations.......... (13,151) -------- Long-term capital lease obligations................ $ 75,933 ========
F-14 139 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total rent expense is summarized as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Capital Leases Contingent rental............ $ 2,443 $ 2,241 $ 2,256 Rentals from subleases....... (2,144) (2,048) (1,734) Operating Leases Minimum rentals.............. 49,001 54,965 55,906 Contingent rentals........... 5,058 3,645 3,763 Rentals from subleases....... (1,123) (1,150) (1,791) ------- ------- ------- $53,235 $57,653 $58,400 ======= ======= =======
(7) SELF-INSURANCE Ralphs is a qualified self-insurer in the State of California for worker's compensation and for automobile liability. For fiscal 1992, 1993 and 1994 self insurance loss provisions amounted to (in thousands) $25,950, $30,323 and $14,003, respectively. Ralphs discounts self-insurance liabilities using an 8% discount rate for all years presented. Management believes that this rate approximates the time value of money over the anticipated payout period (approximately 8 years) for essentially risk free investments. Based on a review of modifications in its workers compensation and general liability insurance programs, Ralphs adjusted its self-insurance costs during Fiscal 1994, resulting in a reduction in the loss provision in Fiscal 1994 of approximately $18.9 million. Ralphs' historical self-insurance liability for the previous two fiscal years is as follows:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Self-insurance liability............... $ 97,864 $ 87,830 Less: Discount......................... (17,854) (15,324) -------- -------- Net self-insurance liability........... $ 80,010 $ 72,506 ======== ========
The Company expects that cash payments for claims over the next five years will aggregate approximately $28 million (unaudited) in fiscal year 1995, $19 million (unaudited) in fiscal year 1996, $13 million (unaudited) in fiscal year 1997, $8 million (unaudited) in fiscal year 1998 and $7 million (unaudited) in fiscal year 1999. (8) COMMITMENTS AND CONTINGENCIES In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against Ralphs and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in the retail market for fluid milk and to fix the retail price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14, and December 23, 1992, respectively. The Court has yet to certify any of these classes. A demurrer to the complaints was denied. Notwithstanding that it believes there is no merit to these cases, Ralphs had reached an agreement in principle to settle them. F-15 140 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) However, no settlement agreement has been signed. The Company does not believe that the resolution of these cases will have a material adverse effect on its future financial condition. Any settlement would be subject to court approval. On March 25, 1991, George A. Koteen Associates, In. ("Koteen Associates") commenced an action in San Diego Superior Court alleging that Ralphs breached an alleged utility rate consulting agreement. In December 1992, a jury returned a verdict of approximately $4.9 million in favor of Koteen Associates and in March 1993, attorney's fees and certain other costs were awarded to the plaintiff. Ralphs has appealed the judgment and fully reserved in Fiscal 1992 against an adverse ruling by the appellate courts. In April 1994, Ralphs was served with a complaint filed by over 240 former employees at Ralphs' bakery in the Atwater district of Los Angeles (the "Bakery Plaintiffs"). The action was commenced in the United States District Court for the Central District of California, and, among other claims, the Bakery Plaintiffs alleged that Ralphs breached its collective bargaining agreement and violated the Workers Adjustment Retraining Notification Act (the "WARN Act") when it downsized and subsequently closed the bakery. In their complaint, the Bakery Plaintiffs are seeking damages for lost wages and benefits as well as punitive damages. The Bakery Plaintiffs also named Ralphs and two of its management employees in fraud, conspiracy and emotional distress causes of action. In addition, the Bakery Plaintiffs sued their union local for breach of its duty of fair representation and other alleged misconduct, including fraud and conspiracy. The defendants have answered the complaint and discovery is ongoing. Trial is set for February, 1996, and Ralphs is vigorously defending this suit. Management believes, based on its assessment of the facts, that the resolution of this case will not have a material effect on the Company's financial position or results of operations. In addition, Ralphs is a defendant in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on Ralphs' financial position or results of operations. Environmental Matters In January 1991, the California Regional Water Quality Control Board for the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a subsurface characterization of Ralphs' Atwater property. This request was part of an ongoing effort by the Regional Board, in connection with the U.S. Environmental Protection Agency (the "EPA"), to identify contributors to groundwater contamination in the San Fernando Valley. Significant parts of the San Fernando Valley, including the area where Ralphs' Atwater property is located, have been designated federal Superfund sites requiring response actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, because of regional groundwater contamination. On June 18, 1991, the EPA made its own request for information concerning the Atwater property. Since that time, the Regional Board has requested further investigation by Ralphs. Ralphs has conducted the requested investigations and has reported the results to the Regional Board. Approximately 25 companies have entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate and design a remediation system for contaminated groundwater beneath an area which includes the Atwater property. Ralphs is not a party to the Consent Order, but is cooperating with requests of the subject companies to allow installation of monitoring or recovery wells on Ralphs' property. Based upon available information, management does not believe this matter will have a material adverse effect on the Company's financial condition or results of operations. Ralphs has removed underground storage tanks and remediated soil contamination at the Atwater property. In some instances the removals and the contamination were associated with grocery business operations, in others they were associated with prior property users. Although the possibility of other F-16 141 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) contamination from prior operations or adjacent properties exists at the Atwater property, management does not believe that the costs of remediating such contamination will be material to the Company. Apart from the Atwater property, the Company has recently had environmental assessments performed on a significant portion of its facilities, including warehouse and distribution facilities. The Company believes that any responsive actions required at the examined properties as a result of such assessments will not have a material adverse effect on its financial condition or results of operations. Ralphs has incurred approximately $4.5 million in non-recurring capital expenditures for conversion of refrigerants during 1994. Other than these expenditures, Ralphs has not incurred material capital expenditures for environmental controls during the previous three years, nor does management anticipate incurring such expenditures during the current fiscal year or the succeeding fiscal year. Ralphs is subject to a variety of environmental laws, rules, regulations and investigative or enforcement activities, as are other companies in the same or similar business. The Company believes it is in substantial compliance with such laws, rules and regulations. These laws, rules, regulations and agency activities change from time to time, and such changes may affect the ongoing business and operations of the Company. (9) REDEEMABLE PREFERRED STOCK Ralphs' non-voting preferred stock consisted of 10,000,000 shares of authorized $.01 par value preferred stock. At February 3, 1991 and February 2, 1992, 170,000 shares of Class A Preferred Stock and 130,000 shares of Class B Preferred Stock were issued and outstanding. All of the outstanding shares of preferred stock were redeemed by Ralphs during February 1992 at their initial issuance price of $3.0 million. (10) EQUITY APPRECIATION RIGHTS PLANS Effective August 26, 1988, Ralphs adopted an Equity Appreciation Plan ("1988 Plan"), whereby certain officers received equity rights representing, in aggregate, the right to receive 15% of the increase in the appraised value (as defined in the 1988 Plan) of the Ralphs' equity over an initial value of $120.0 million. The 1988 Plan was amended in January 1992 by agreement among Ralphs and the Equity Rights holders ("Amended Plan"). Ralphs accrued for the increase in equity appreciation rights over the contractually defined vesting period (fully accrued in fiscal 1991), based upon the maximum allowable contractual amount which approximated ending appraised value. Under the Amended Plan, all outstanding Equity Rights vested in full are no longer subject to forfeiture by the holders, except in the event a holder's employment is terminated for cause within the meaning of the Amended Plan. The appraised value of Ralphs' equity is to be determined as of May 1 each year by an investment banking company engaged for this purpose utilizing the methodology specified in the Amended Plan (which is unchanged from that specified in the 1988 Plan); however, under the Amended Plan the appraised value of Ralphs' equity for purposes of the plan may not be less than $400.0 million nor exceed $517.0 million. The amount of equity rights redeemable at any given time is defined in each holders' separate agreement. On exercise of an equity right, the holder will be entitled to receive a pro rata percentage of any such increase in appraised value. In addition, the Amended Plan provides for the possible additional further payment to the holder of each exercised Equity Right of an amount equal to the "Deferred Value" of such Equity Right as defined in the Amended Plan. Ralphs did not incur any expense under the Equity Appreciation Rights Plan in fiscal 1992, fiscal 1993 and fiscal 1994. F-17 142 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount of Equity Rights redeemable for each of the four years subsequent to fiscal 1994 are as follows:
(DOLLARS IN THOUSANDS) 1995...................................................... $ 6,669 1996...................................................... 12,389 1997...................................................... 3,636 1998...................................................... 10,150 ------- $32,844 =======
(11) INCOME TAXES Income tax expense (benefit) consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Current Federal...................................... $ 4,173 $ (2,424) $ 713 State........................................ -- 3,500 2,653 ------- ---------- ------- $ 4,173 $ 1,076 $ 3,366 ------- ---------- ------- Deferred Federal...................................... $ -- $ (109,125) $(3,366) State........................................ -- -- -- ------- ---------- ------- $ -- $ (109,125) $(3,366) ------- ---------- ------- Total income tax expense (benefit)........... $ 4,173 $ (108,049) $ -- ======= ========== =======
Income tax expense (benefit) has been classified in the accompanying statements of operations as follows:
1992 1993 1994 ------- --------- --------- Earnings before extraordinary items............. $ 8,346 $(108,049) $ -- Extraordinary item.............................. (4,173) -- -- ------- --------- --------- Net tax expense (benefit)....................... $ 4,173 $(108,049) $ -- ======= ========= =========
F-18 143 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences between income tax expense and income taxes computed using the top marginal U.S. Federal income tax rate of 34% for Fiscal 1992 and of 35% for fiscal 1993 and fiscal 1994 applied to earnings (loss) before income taxes (including, in Fiscal 1992, the extraordinary loss of $74.8 million) were as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Amount of expected expense (benefit) computed using the statutory Federal rate.............. $ (24,450) $ 10,611 $ 11,241 Utilization of financial operating loss....... -- (10,611) (11,241) Amortization of excess cost over net assets acquired................................... 3,356 -- -- State income taxes, net of Federal income tax benefit.................................... -- 3,500 2,653 Accounting limitation (recognition) of deferred tax benefit....................... 20,041 (109,125) (3,366) Alternative minimum tax....................... 4,173 625 -- Other, net.................................... 1,053 (3,049) 713 --------- ---------- ---------- Total income tax expense (benefit).... $ 4,173 $ (108,049) $ -- ========= ========== ==========
Ralphs' deferred tax assets, recorded under SFAS 109, were comprised of the following:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Deductible intangible assets............................... $ 56,000 $ 43,000 Net operating loss carryforward and tax credit............. 40,125 55,000 Self insurance accrual..................................... 43,000 25,000 Software basis difference and amortization................. -- -- Fees collected in advance.................................. -- 2,600 Property, plant and equipment basis difference and depreciation............................................. 21,000 16,000 Equity appreciation rights................................. 16,000 11,000 Favorable lease basis differences.......................... 16,000 16,000 State deferred taxes....................................... 17,000 19,000 Other...................................................... 40,000 51,103 --------- --------- 249,125 238,703 Less valuation allowance................................. (140,000) (126,212) --------- --------- Total............................................ $ 109,125 $ 112,491 ========= =========
On October 15, 1992, Ralphs filed an election with the Internal Revenue Service under Section 338(h)(10). Under this Section, Ralphs is required to restate, for Federal tax purposes, its assets and liabilities to fair market value as of February 3, 1992. The effect of this transaction is to record a new Federal tax basis to reflect a change of control for Federal tax purposes resulting from the Internal Reorganization. No change of control for financial reporting purposes was affected. In August, 1993, The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted. The Act increased the Federal income tax rate from 34 to 35 percent for filers whose taxable income exceeded $10.0 million. In the current year, the effect of the Federal income tax rate change was to increase the net F-19 144 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred tax assets. In addition, the Act also provided for the deductibility of certain intangibles, including costs in excess gross assets acquired. The Act has significantly impacted the aggregate deferred tax asset position of Ralphs at January 29, 1995. Ralphs elected to retroactively apply certain provisions of the Act related to the February 3, 1992 change of control for Federal tax purposes. As such, approximately $610.7 million in excess of cost over net assets acquired became fully deductible for Federal tax purposes. This amount is deductible over 15 years. This excess in the tax basis over the financial statement basis of excess of cost over net assets acquired aggregated $123.0 million at January 29, 1995. During the year ended January 30, 1994, Ralphs recorded the incremental impact of the Act on deductible temporary differences and increased its deferred income tax assets by a net amount of $109.1 million. The decision to reduce the valuation allowance was based upon several factors. Specific among them, was the Company's completion of its restructuring plan which effectively reduced estimated interest expense by approximately $9.0 as compared to the year ended January 31, 1993. In addition, the January 31, 1993 operating results were negatively effected by several charges including provisions for restructuring, legal settlements and a loss on retirement of debt all aggregating approximately $90 million on a pre-tax basis. Although there can be no assurance as to future taxable income, the Company believes that, based upon the above mentioned events, as well as the Company's expectation of future taxable income, it is more likely than not that the recorded deferred tax asset will be realized. In order to realize the net deferred tax asset currently recorded, Ralphs will need to generate sufficient future taxable income, assuming current tax rates, of approximately $320.0 million. At January 29, 1995, the Company has Federal net operating loss (NOL) carryforwards of approximately $162.0 million and Federal and state Alternative Minimum Tax Credit carryforwards of approximately $2.1 million which can be used to offset Federal taxable income and regular taxes payable, respectively. The NOL carryforwards begin expiring in 2008. During the past three fiscal years, the Company has generated Federal taxable losses of approximately $162.0 million versus financial pre-tax earnings of approximately $65.2 million for the same periods. These differences result principally from excess tax versus financial amortization on certain intangible assets (excess of cost over net assets acquired), as well as several other originating temporary differences. (12) EMPLOYEE BENEFIT PLANS Ralphs has a defined benefit pension plan covering substantially all employees not already covered by collective bargaining agreements with at least one year of credit service (defined at 1,000 hours). Ralphs' policy is to fund pension costs at or above the minimum annual requirement. On February 23, 1990, the Company adopted a Supplemental Executive Retirement Plan covering certain key officers of Ralphs. The Company has purchased split dollar life insurance policies for participants under this plan. Under certain circumstances, the cash surrender value of certain split dollar life insurance policies will offset Ralphs obligations under the Supplemental Executive Retirement Plan. During the second quarter of 1994, the Company approved and adopted a new non-qualified retirement plan, the Ralphs Grocery Company Retirement Supplemental Plan ("Retirement Supplement Plan") effective January 1, 1994 and amended the existing Supplemental Executive Retirement Plan effective April 9, 1994. These changes to the retirement plans were made pursuant to the enactment of the 1993 Omnibus Budget Reconciliation Act. F-20 145 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At January 29, 1995, the Company recorded a $4.0 million additional minimum liability in offsetting intangible asset to reflect the changes in the new and amended plans. Under the provisions of the Retirement Supplement Plan, participants are entitled to receive benefits based on earnings over the indexed amount of $150,000. The following actuarially determined components were included in the net pension expense:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost...................................... $ 2,076 $ 2,228 $ 2,901 Interest cost on projected benefit obligation..... 2,471 2,838 3,821 Actual return on assets........................... (2,794) (2,695) (1,447) Net amortization and deferral..................... 237 (46) (1,100) ----------- ----------- ----------- Net pension expense............................. $ 1,990 $ 2,325 $ 4,175 ======== ======== ========
The funded status of Ralphs' pension plan, (based on December 31, 1993 and 1994 asset values), is as follows:
JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Assets Exceed Accumulated Benefits: Actuarial present value of benefit obligations: Vested benefit obligation................................... $29,659 $31,621 Accumulated benefit obligation.............................. 29,950 31,856 Projected benefit obligation................................ 42,690 45,246 Plan assets at fair value................................... 32,968 38,179 ----------- ----------- Projected benefit obligation in excess of Plan Assets......... (9,722) (7,067) Unrecognized net gain......................................... 4,567 3,611 Unrecognized prior service cost............................... (1,778) (1,659) Unrecognized net asset........................................ -- -- ----------- ----------- Accrued pension cost........................................ $(6,933) $(5,115) ======== ======== Accumulated Benefits Exceed Assets: Actuarial present value of benefit obligations: Vested benefit obligation................................... 2,982 Accumulated benefit obligation.............................. 2,982 Projected benefit obligation................................ 7,102 Plan assets at fair value................................... -- ----------- Projected benefit obligation in excess of plan assets......... (7,102) Unrecognized net gain......................................... (229) Unrecognized prior service cost............................... 8,354 Adjustment required to recognized minimum liability........... (4,005) ----------- Accrued pension cost........................................ $(2,982) ========
The accrued pension cost for accumulated benefits that exceeded assets at January 30, 1994 was immaterial to the consolidated financial statements. F-21 146 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Service costs for fiscal 1992 and 1993 were calculated using a discount rate of 8.5% and a rate of increase in future compensation levels of 6%. The 1994 discount rate and the rate of increase in future compensation levels were reduced to 7.75% and 5.0%, respectively, to reflect the decline in interest rates in 1994. The discount rate will be increased to 8.25% in 1995 in order to reflect the increase in the current long-term interest rate. A long-term rate of return on assets of 9% was used for fiscal 1992, 1993 and 1994. The pension plan assets consist primarily of common stocks, bonds, debt securities, and a money market fund. Plan benefits are based primarily on years of service and on average compensation during the last years of employment. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. In both Fiscal 1992 and Fiscal 1993 the multi-employer pension plan was deemed to be overfunded based upon the collective bargaining agreement then currently in force. During Fiscal 1993 the agreement called for pension benefits which resulted in additional required expense. The UFCW health and welfare benefit plans were overfunded and those employers who contributed to these plans received a prorata share of excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs' share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder, $12.7 million, was recognized in Fiscal 1994. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. The expense related to these plans is summarized as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Multi-employer pension plans.............. $ 7,973 $17,687 $ 8,897 ======= ======= ======= Multi-employer health and welfare......... $71,183 $45,235 $66,351 ======= ======= =======
Ralphs maintains the Ralphs Grocery Company Savings Plan Plus -- Prime and the Ralphs Grocery Savings Plan Plus -- Basic (collectively referred to as the "401(k) Plan") covering substantially all employees who are not covered by collective bargaining agreements and who have at least one year of credited service (defined at 1,000 hours). The 401(k) Plan provided for both pre-tax and after-tax contributions by participating employees. With certain limitations, participants may elect to contribute from 1% to 12% of their annual compensation on a pre-tax basis to the Plan. Ralphs has committed to match a minimum of 20% of an employee's contribution to the 401(k) Plan that do not exceed 5% of the employee's compensation. Expenses under the 401(k) Plan for fiscal 1992, 1993 and 1994 were $407,961, $431,774 and $446,826, respectively. Ralphs has an executive incentive compensation plan which covers approximately 39 key employees. Benefits to participants are earned based on a percentage of base compensation upon attainment of a targeted formula of earnings. Expense under this plan for fiscal 1992, 1993 and 1994 was $2.5 million, $2.6 million and $2.4 million, respectively. Ralphs has also adopted an incentive plan for certain members of management. Benefits to participants are earned based on a percentage of base compensation upon attainment of a targeted formula of earnings. Expense under this plan for fiscal 1992, 1993 and 1994 was $2.8 million, $3.0 million and $3.1 million, respectively. The aforementioned incentive plans may be cancelled by the Board of Directors at any time. F-22 147 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Ralphs sponsors a postretirement medical benefit plan (Postretirement Medical Plan) covering substantially all employees who are not members of a collective bargaining agreement and who retire under certain age and service requirements. The Postretirement Medical Plan is a traditional type medical plan providing outpatient, inpatient and various other covered services. Such benefits are funded from Ralphs' general assets. The calendar year deductible is $1,270 per individual, indexed to the Medical Consumer Price Index. The net periodic cost of the Postretirement Medical Plan includes the following components:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Service cost.............................. $ 1,908 $ 1,767 $ 1,396 Interest cost............................. 1,367 1,603 1,387 Return on plan assets..................... -- -- -- Net amortization and deferral............. -- -- (228) ----------- ----------- ----------- Net postretirement benefit cost......... $ 3,275 $ 3,370 $ 2,555
The funded status of the postretirement benefit plan is as follows:
52 WEEKS 52 WEEKS ENDED ENDED JANUARY 30, JANUARY 29, 1994 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees.............................................. $ 1,237 $ 1,303 Fully eligible plan participants...................... 357 1,499 Other active plan participants........................ 16,062 10,289 Plan assets at fair value............................. -- -- ----------- ----------- Funded status......................................... (17,656) (13,091) Plan assets in excess of projected obligations........ -- -- Unrecognized gain (loss).............................. 6,302 13,676 Unrecognized prior service cost....................... -- (358) ----------- ----------- Accrued postretirement benefit obligation............. $ (23,958) $ (26,409) ======== ========
Service cost was calculated using a medical cost trend of 10.5% for fiscal 1992. Service cost was calculated using a medical cost trend of 10.5% and a decreasing medical cost trend rate of 14%-8% for 1993 and 1994 respectively. The discount rate for 1993 was 8.5% and was reduced to 7.75% in 1994 to reflect the decline in interest rates in 1994. In 1995, the discount rate will increase to 8.25% in order to reflect the increase in the current long-term interest rate. The long-term rate of return of plan assets is not applicable as the plan is not funded. The effect of a one-percent increase in the medical cost trend would increase the fiscal 1994 service and interest cost to 18%. The accumulated postretirement benefit obligation at January 29, 1995 would also increase by 27%. F-23 148 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) QUARTERLY RESULTS (UNAUDITED) Quarterly results for fiscal 1993 and 1994 are as follows:
GROSS OPERATING INCOME NET SALES PROFIT INCOME TAXES EARNINGS -------- ------ --------- ------- -------- (DOLLARS IN MILLIONS) FY 1993 Quarters 12 weeks ended 04/25/93......................... $ 632.4 $142.4 $ 31.4 $ 1.0 $ 3.9 12 weeks ended 07/18/93......................... 629.0 145.2 36.8 (1.0) 12.9 12 weeks ended 10/10/93......................... 612.8 141.5 31.7 -- 7.0 16 weeks ended 01/30/94......................... 856.0 207.4 52.2 (108.0) 114.6 -------- ------ ------ ------- ------ Total................................... $2,730.2 $636.5 $152.1 $(108.0) $138.4 ======== ====== ====== ======= ====== FY 1994 Quarters 12 weeks ended 04/24/94......................... $ 616.0 $141.7 $ 34.1 $ -- $ 8.4 12 weeks ended 07/17/94......................... 625.0 142.9 32.9 -- 7.2 12 weeks ended 10/09/94......................... 615.4 138.8 30.8 -- 4.3 16 weeks ended 01/29/95......................... 868.2 200.2 47.8 -- 12.2 -------- ------ ------ ------- ------ Total................................... $2,724.6 $623.6 $145.6 $ -- $ 32.1 ======== ====== ====== ======= ======
(14) SUPPLEMENTAL CASH FLOW INFORMATION
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JANUARY 31, JANUARY 30, JANUARY 29, 1993 1994 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Supplemental cash flow disclosures: Interest paid, net of amounts capitalized................... $ 118,391 $93,738 $99,067 Income taxes paid........................................... $ 7,169 $ 2,423 $ 6,270 Capital lease assets and obligations assumed................ $ -- $15,395 $41,131
(15) STOCK OPTION PLAN On February 3, 1992, 3,162,235 options for Common Stock of the Company were granted under the Ralphs Non-qualified Stock Option Plan. All options were vested, but not exercisable, on the date of the grant. Options granted to certain officers become exercisable at the rate of 20% on each September 30 of calendar years 1992 through 1996. Options granted to other officers become exercisable as to 10% of the grant on each of September 30, 1992 and 1993, 15% on each of September 30, 1994 through September 30, 1997, and 20% on September 20, 1998. F-24 149 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the Ralphs Non-qualified Stock Option Plan.
NUMBER OF PRICE OPTIONS RANGE --------- ------ Options Outstanding at January 30, 1994: Beginning of year............................................. 3,162,235 $20.21 Granted....................................................... -- -- Exercised..................................................... -- -- Cancelled..................................................... -- -- Expired....................................................... -- -- End of year................................................ 3,162,235 $20.21 --------- ------ Exercisable at end of year...................................... 811,760 -- --------- ------ Available for grant at end of year.............................. -- -- --------- ------ Options Outstanding at January 29, 1995: Beginning of year............................................. 3,162,235 $20.21 Granted....................................................... -- -- Exercised..................................................... -- -- Cancelled..................................................... -- -- Expired....................................................... -- -- End of year................................................ 3,162,235 $20.21 --------- ------ Exercisable at end of year...................................... 1,330,924 -- --------- ------ Available for grant at end of year.............................. -- -- --------- ------
The option price for outstanding options at January 29, 1995 assumes a grant date fair market value of Common Stock of the Company equal to $20.21 per share, which represents the high end of a range of estimated values of the Common Stock of the Company on February 3, 1992, the date of the grant. (16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value is discussed in Note 2. The unaudited fair value of each class of financial instruments (where practical), all held for non-trading purposes, is as follows in (000s):
JANUARY 30, 1994 JANUARY 29, 1995 ----------------------- ----------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Long term debt................................ $998,884 $1,014,634 $967,009 $ 953,883 Interest rate swap agreements................. n/a 1,153 n/a 1,252 Interest rate cap agreements.................. n/a (19) n/a (366)
In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate cap agreement with an effective date of November 6, 1992 and a three year maturity. The interest rate cap agreement hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal amount against increases in short-term rates. This F-25 150 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreement satisfies interest rate protection requirements under the 1992 Credit Agreement. In addition to the interest rate cap agreement, Ralphs entered into an interest rate swap agreement on $150.0 million national principal amount. Under the interest rate swap agreement, Ralphs is required to pay interest based on LIBOR at the end of each six month calculation period and Ralphs will receive interest payments based on LIBOR at the beginning of each six month calculation period. This interest rate swap agreement has a three-year term expiring November 6, 1995. Ralphs is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, Ralphs does not anticipate nonperformance by the counterpart. The following details the impact of the hedging activity on the weighted average rate for each of the last three fiscal years.
WITH HEDGE WITHOUT HEDGE ---------- ------------- 1992........................................................ 10.52% 10.22% 1993........................................................ 8.96% 8.96% 1994........................................................ 9.37% 9.18%
(17) THE MERGER (UNAUDITED) On September 14, 1994, Food 4 Less Supermarkets, Inc. ("Food 4 Less"), Food 4 Less Holdings, Inc. ("Holdings"), and the parent company of Holdings, Food 4 Less, Inc. ("FFL"), entered into a definitive Agreement and Plan of Merger (as amended from time to time, the "Merger Agreement") with Ralphs Supermarkets, Inc. (the "Holding Company") and its stockholders. Pursuant to the terms of the Merger Agreement, Food 4 Less will be merged with and into Holding Company (the "RSI Merger") and Holding Company will continue as the surviving corporation. Food 4 Less is a multiple format supermarket operator that operates in three geographic areas: Southern California, Northern California and certain areas of the Midwest. Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), which is currently a wholly-owned subsidiary of Holding Company, will merge with and into Holding Company (the "RGC Merger," and together with the RSI Merger, the "Merger"), and Holding Company will change its name to Ralphs Grocery Company (the "New Company"). Prior to the Merger, FFL will merge with and into Holdings, which will be the surviving corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging with a newly-formed, wholly-owned subsidiary ("New Holdings"), incorporated in Delaware (the "Reincorporation Merger"). As a result of the Merger, the FFL Merger and the Reincorporation Merger, the New Company will become a wholly-owned subsidiary of New Holdings. Agreement has been reached with each of the California Attorney General and the Federal Trade Commission for approval of the Merger. Food 4 Less and Ralphs have agreed in a settlement agreement with the Attorney General to divest 27 specific stores in Southern California. Under the agreement, the Company must divest 14 stores by June 30, 1995, and the balance of 13 stores by December 31, 1995. In order to consummate the Merger, Food 4 Less has made an Offer to Exchange and Offer to Purchase and Solicit Consents with respect to the holders of the 9% Senior Subordinated Notes (the "Old RGC 9% Notes") due April 1, 2003 of Ralphs and the 10 1/4% Senior Subordinated Notes due July 15, 2002 of RGC (the "Old RGC 10 1/4% Notes," and together with the Old RGC 9% Notes, the "Old RGC Notes") (i) to exchange (as so amended and restated, the "Exchange Offers") such Old RGC Notes for New Senior Subordinated Notes due 2005 (the "New Notes") plus a cash payment of $20.00 in cash for each $1,000 principal amount of Old RGC Notes tendered for exchange or (ii) to purchase (the "Cash Offers," and together with the Exchange Offers, the "Offers") Old RGC Notes for $1,010 in cash per $1,000 principal amount of Old RGC Notes accepted for purchase, in each case, plus accrued and unpaid interest to the date of exchange or purchase. The Offers are subject to the terms and conditions set forth in an Amended and F-26 151 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Restated Prospectus and Solicitation Statement, which has been filed by Food 4 Less with the Securities and Exchange Commission and which is subject to further change (the "Prospectus"), including: (1) satisfaction of a minimum tender amount (i.e., at least a majority of the aggregate principal amount of the outstanding Old RGC Notes being validly tendered for exchange for New Notes and not withdrawn pursuant to the Offers prior to the date of expiration); (2) the receipt of the requisite consents to certain amendments to the indentures (the "Indentures") under which the Old RGC Notes were issued (i.e., consents from holders of Old RGC Notes representing at least a majority in aggregate principal amount of each issue of Old RGC Notes held by persons other than Ralphs and its affiliates) on or prior to the date of expiration; (3) the satisfaction or waiver, in Food 4 Less' sole discretion, of all conditions precedent to the Merger; (4) the prior or contemporaneous consummation of other exchange offers, consent solicitations and public offerings contemplated by the Prospectus; and (5) the prior or contemporaneous consummation of the bank financing and the equity investment described in the Prospectus. As a result of the RSI Merger and the RGC Merger, the New Notes and any outstanding Old RGC Notes not tendered in the Offers will be the obligations of the New Company. Conditions to the consummation of the RSI Merger include the receipt of necessary consents and the completion of financing of the transaction. The purchase price for Holding Company is approximately $1.5 billion, including the assumption or repayment of debt. The consideration payable to the stockholders of Holding Company consists of $375 million in cash, $131.5 million principal amount of 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 to be issued to the selling shareholders of Holding Company (the "Seller Debentures") by New Holdings and $18.5 million initial accreted value of 13 5/8% Senior Discount Debentures due 2005 (the "New Discount Debentures"). New Holdings will use $100 million of the cash received from a new equity investment (the "New Equity Investment"), together with the Seller Debentures and the New Discount Debentures, to acquire approximately 48% of the capital stock of Holding Company immediately prior to consummation of the RSI Merger. New Holdings will then contribute the $250 million of purchased shares of Holding Company stock to Food 4 Less, and pursuant to the RSI Merger the remaining shares of Holding Company stock will be acquired for $275 million in cash. Standard & Poor's has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline pursuant to the Indentures. The consummation of the Merger and the resulting change in composition of the Board of Directors of RGC, together with the anticipated Rating Decline, would constitute a Change of Control Triggering Event under the Indentures. Although RGC does not anticipate that there will be a significant amount of Old RGC Notes outstanding following consummation of the Exchange Offers, upon such a Change of Control Triggering Event, the New Company would be obligated to make the Change of Control Offer following the Merger for all outstanding Old RGC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. Due to the increased size, dual format strategy and integration related costs, after giving effect to or in connection with the Merger, RGC believes that its future operating results will not be directly comparable to the historical operating results of RGC. Upon consummation of the Merger, the operations and activities of RGC will be significantly impacted due to conversions of some existing stores to Food 4 Less warehouse stores as well as the consolidation of various operating functions and departments. This consolidation may result in a restructuring charge for the New Company. The amount of the restructuring charge is not determinable due to various factors, including uncertainties inherent in the completion of the Merger, however, the restructuring charge may be material in relation to the stockholders' equity and financial position of RGC and the New Company. Following the consummation of the Merger, the New Company will be highly leveraged. F-27 152 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Food 4 Less Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Food 4 Less Holdings, Inc. (a California corporation) and subsidiaries (the Company) as of June 26, 1993 and June 25, 1994, and the related consolidated statements of operations, shareholder's equity and cash flows for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Food 4 Less Holdings, Inc. and subsidiaries as of June 26, 1993 and June 25, 1994, and the results of their operations and their cash flows for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California July 29, 1994 (except with respect to the matter discussed in Note 13, as to which the date is October 14, 1994, and with respect to the matter discussed in Note 14, as to which the date is April 13, 1995) F-28 153 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
JUNE 26, JUNE 25, JANUARY 7, 1993 1994 1995 -------- -------- ---------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents................................ $ 25,089 $ 32,996 $ 15,750 Trade receivables, less allowances of $1,919, $1,386 and $1,264 at June 26, 1993, June 25, 1994 and January 7, 1995, respectively.................................... 22,048 25,039 25,992 Notes and other receivables.............................. 1,278 1,312 777 Inventories.............................................. 191,467 212,892 223,261 Patronage receivables from suppliers..................... 2,680 2,875 5,093 Prepaid expenses and other............................... 6,011 6,323 12,542 -------- -------- -------- Total current assets............................. 248,573 281,437 283,415 INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER COOPERATIVES: A.W.G.................................................... 6,693 6,718 6,718 Certified and Other...................................... 6,657 5,984 5,694 PROPERTY AND EQUIPMENT: Land..................................................... 23,912 23,488 23,488 Buildings................................................ 12,827 12,827 24,148 Leasehold improvements................................... 81,049 97,673 106,484 Store equipment and fixtures............................. 129,178 148,249 153,538 Transportation equipment................................. 31,758 32,259 32,363 Construction in progress................................. 757 12,641 14,459 Leased property under capital leases..................... 77,553 78,222 78,222 Leasehold interests...................................... 93,863 93,464 93,226 -------- -------- -------- 450,897 498,823 525,928 Less: Accumulated depreciation and amortization.......... 96,948 134,089 155,758 -------- -------- -------- Net property and equipment............................ 353,949 364,734 370,170 OTHER ASSETS: Deferred financing costs, less accumulated amortization of $11,611, $17,083 and $20,166 at June 26, 1993, June 25, 1994 and January 7, 1995, respectively............ 33,778 28,536 25,529 Goodwill, less accumulated amortization of $26,254, $33,945 and $38,113 at June 26, 1993, June 25, 1994 and January 7, 1995, respectively..................... 280,895 267,884 263,658 Other, net............................................... 27,295 24,787 29,438 -------- -------- -------- $957,840 $980,080 $984,622 ======== ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-29 154 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 26, JUNE 25, JANUARY 7, 1993 1994 1995 -------- -------- ---------- (UNAUDITED) CURRENT LIABILITIES: Accounts payable........................................ $140,468 $180,708 $ 164,981 Accrued payroll and related liabilities................. 40,319 42,805 39,976 Accrued interest........................................ 5,293 5,474 7,454 Other accrued liabilities............................... 40,467 53,910 60,619 Income taxes payable.................................... 2,053 2,000 689 Current portion of self-insurance liabilities........... 23,552 29,492 28,616 Current portion of long-term debt....................... 12,778 18,314 22,290 Current portion of obligations under capital leases..... 2,865 3,616 3,634 -------- -------- --------- Total current liabilities....................... 267,795 336,319 328,259 LONG-TERM DEBT............................................ 335,576 310,944 342,396 OBLIGATIONS UNDER CAPITAL LEASES.......................... 41,864 39,998 38,071 SENIOR SUBORDINATED DEBT.................................. 145,000 145,000 145,000 SENIOR HOLDINGS DISCOUNT NOTES............................ 50,230 58,997 64,541 DEFERRED INCOME TAXES..................................... 22,429 14,740 14,740 SELF-INSURANCE LIABILITIES AND OTHER...................... 72,313 64,058 55,701 COMMITMENTS AND CONTINGENCIES............................. -- -- -- SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 1,600,000 shares authorized and 1,385,265, 1,381,782 and 1,384,309 shares issued at June 26, 1993, June 25, 1994 and January 7, 1995, respectively........................ 14 14 14 Additional paid-in capital.............................. 106,452 105,182 105,460 Notes receivable from shareholders...................... (714) (586) (702) Retained deficit........................................ (83,119) (94,586) (108,858) -------- -------- --------- Total shareholders' equity (deficit)............ 22,633 10,024 (4,086) -------- -------- --------- $957,840 $980,080 $ 984,622 ======== ======== =========
The accompanying notes are an integral part of these consolidated balance sheets. F-30 155 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ----------- ----------- ----------- ------------ ------------ (UNAUDITED) SALES...................................... $2,913,493 $2,742,027 $2,585,160 $1,416,213 $1,404,665 COST OF SALES (including purchases from related parties of $277,812, $204,028, $175,929, $106,060 and $99,367 for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994, and for the 28 weeks ended January 8, 1994 and January 7, 1995, respectively)...................... 2,392,655 2,257,835 2,115,842 1,153,989 1,167,205 ---------- ---------- ---------- ---------- ---------- GROSS PROFIT............................... 520,838 484,192 469,318 262,224 237,460 SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET...................................... 469,751 434,908 388,836 221,464 199,161 AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED.......................... 7,795 7,571 7,691 4,132 4,168 RESTRUCTURING CHARGE....................... -- -- -- -- 5,134 ---------- ---------- ---------- ---------- ---------- OPERATING INCOME........................... 43,292 41,713 72,791 36,628 28,997 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs........... 63,907 68,713 71,545 38,635 40,145 Amortization of deferred financing costs................................. 6,304 4,901 5,472 2,948 3,083 ---------- ---------- ---------- ---------- ---------- 70,211 73,614 77,017 41,583 43,228 LOSS (GAIN) ON DISPOSAL OF ASSETS.......... (1,364) (2,083) 37 87 (459) PROVISION FOR EARTHQUAKE LOSSES............ -- -- 4,504 -- -- ---------- ---------- ---------- ---------- ---------- LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY CHARGES.................... (25,555) (29,818) (8,767) (5,042) (13,772) PROVISION FOR INCOME TAXES................. 3,441 1,427 2,700 700 500 ---------- ---------- ---------- ---------- ---------- LOSS BEFORE EXTRAORDINARY CHARGES.......... (28,996) (31,245) (11,467) (5,742) (14,272) EXTRAORDINARY CHARGES: Loss on extinguishment of debt, net of income tax benefit of $2,484.......... 6,716 -- -- -- -- Gain on partially depreciated assets replaced by insurance companies, net of income tax expense of $702......... (1,898) -- -- -- -- ---------- ---------- ---------- ---------- ---------- NET LOSS................................... $ (33,814) $ (31,245) $ (11,467) $ (5,742) $ (14,272) ========== ========== ========== ========== ========== LOSS PER COMMON SHARE: Loss before extraordinary charges........ $ (20.74) $ (22.43) $ (8.29) $ (4.15) $ (10.32) Extraordinary charges.................... (3.45) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net loss................................. $ (24.19) $ (22.43) $ (8.29) $ (4.15) $ (10.32) ========== ========== ========== ========== ========== Average Number of Common Shares Outstanding........................... 1,397,939 1,393,289 1,382,710 1,383,127 1,383,170
The accompanying notes are an integral part of these consolidated statements. F-31 156 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ----------- ----------- ----------- ------------- ------------- (UNAUDITED) CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Cash received from customers........... $ 2,913,493 $ 2,742,027 $ 2,585,160 $ 1,416,213 $ 1,404,665 Cash paid to suppliers and employees... (2,752,442) (2,711,779) (2,441,353) (1,361,103) (1,389,667) Interest paid.......................... (56,234) (58,807) (56,762) (29,178) (32,621) Income taxes (paid) refunded........... (4,665) 2,971 (247) 1,652 (1,811) Interest received...................... 1,266 993 903 486 836 Other, net............................. 4,734 8,093 121 2,388 583 ----------- ----------- ----------- ------------ ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............................. 106,152 (16,502) 87,822 30,458 (18,015) CASH PROVIDED (USED) BY INVESTING ACTIVITIES: Proceeds from sale of property and equipment........................... 17,395 15,685 11,953 12,307 7,120 Payment for purchase of property and equipment........................... (60,263) (53,467) (57,471) (20,404) (39,049) Proceeds (payment) for sale (purchase) of other assets..................... (4,754) (18) 813 -- -- Business acquisition costs, net of cash acquired............................ (27,563) -- (11,050) -- -- Receivable received from seller of business acquired................... 12,259 -- -- -- -- Other, net............................. -- -- -- 61 (907) ----------- ----------- ----------- ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES.... (62,926) (37,800) (55,755) (8,036) (32,836) CASH PROVIDED (USED) BY FINANCING ACTIVITIES: Proceeds from issuance of long-term debt................................ 177,500 26,557 28 28 -- Net increase (decrease) in revolving loan................................ (23,900) 4,900 (4,900) (4,900) 48,700 Payments of long-term debt............. (184,389) (14,319) (14,224) (10,395) (13,272) Proceeds from the issuance of preferred stock............................... -- 46,348 -- -- -- Proceeds from issuance of common stock, net................................. 341 3,652 -- -- -- Purchase of treasury stock, net........ (313) (545) (1,192) (726) 92 Payments of capital lease obligation... (2,814) (2,840) (3,693) (1,565) (1,909) Deferred financing costs and other..... (6,656) (8,839) (179) (161) (6) ----------- ----------- ----------- ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............................. (40,231) 54,914 (24,160) (17,719) 33,605 ----------- ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 2,995 612 7,907 4,703 (17,246) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 21,482 24,477 25,089 25,089 32,996 ----------- ----------- ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 24,477 $ 25,089 $ 32,996 $ 29,792 $ 15,750 =========== =========== =========== ============ ============
The accompanying notes are an integral part of these consolidated statements. F-32 157 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FIFTY-TWO FIFTY-TWO FIFTY-TWO TWENTY-EIGHT TWENTY-EIGHT WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 8, JANUARY 7, 1992 1993 1994 1994 1995 ----------- ----------- ----------- ------------ ------------ (UNAUDITED) RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Net loss................................ $(33,814) $(31,245) $(11,467) $(5,742) $ (14,272) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization........ 61,181 62,541 62,555 33,320 33,878 Accretion of Holdings Discount Notes.............................. -- 3,882 8,767 4,721 5,544 Extraordinary charge................. 4,818 -- -- -- -- Restructuring charge................. -- -- -- -- 5,134 Loss (gain) on sale of assets........ (1,364) (4,613) 65 87 (459) Equity loss on investments in supplier cooperative............... 472 207 -- -- Change in assets and liabilities, net of effects from acquisition of businesses: Accounts and notes receivable...... (7,688) 17,145 (3,220) (9,568) (2,725) Inventories........................ 202 17,697 (17,125) (16,106) (10,369) Prepaid expenses and other......... (2,834) (6,163) (5,717) (5,659) (9,097) Accounts payable and accrued liabilities..................... 71,369 (83,286) 55,301 23,752 (20,228) Self-insurance liabilities......... 15,034 2,935 (3,790) 3,301 (4,110) Deferred income taxes.............. 2,033 4,004 2,506 1,714 -- Income taxes payable............... (3,257) 394 (53) 638 (1,311) -------- -------- -------- ------- --------- Total adjustments.................... 139,966 14,743 99,289 36,200 (3,743) -------- -------- -------- ------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.............................. $106,152 $(16,502) $ 87,822 $30,458 $ (18,015) ======== ======== ======== ======= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of property and equipment through issuance of capital lease obligation........................... -- -- $ 2,575 -- -- ======== ======== ======== ======= ========= Reduction of goodwill and deferred income taxes......................... -- -- $ 9,896 -- -- ======== ======== ======== ======= ========= Acquisition of businesses: Fair value of assets acquired........ -- -- $ 11,241 -- -- Net cash paid in acquisition......... -- -- (11,050) -- -- -------- -------- -------- ------- --------- Liabilities assumed.................. -- -- $ 191 -- -- ======== ======== ======== ======= ========= Final purchase price allocation for the Alpha Beta Acquisition: Property and equipment valuation adjustment......................... $ 44,231 -- -- -- -- ======== ======== ======== ======= ========= Additional acquisition liabilities... $ 14,305 -- -- -- -- ======== ======== ======== ======= ========= Deferred tax benefit................. $ 12,800 -- -- -- -- ======== ======== ======== ======= =========
The accompanying notes are an integral part of these consolidated statements. F-33 158 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ------------------ --------------- TOTAL NUMBER NUMBER SHARE- ADD'L SHARE- OF OF HOLDERS' PAID-IN RETAINED HOLDERS' SHARES AMOUNT SHARES AMOUNT NOTES CAPITAL (DEFICIT) EQUITY --------- ------ ------ ------ --------- -------- --------- -------- BALANCES AT JUNE 29, 1991........... 1,396,878 $ 14 (1,250) $ (125) $(930) $103,658 $ (18,060) $ 84,557 Net loss.......................... -- -- -- -- -- -- (33,814) (33,814) Issuance of Common Stock.......... 1,636 -- -- -- (190) 341 -- 151 Purchase of Treasury Stock........ -- -- (3,947) (463) 131 -- -- (332) Sale of Treasury Stock............ -- -- 1,560 159 (50) -- -- 109 Payments of Shareholders' Notes... -- -- -- -- 100 -- -- 100 --------- ---- ------ ------ ----- -------- --------- -------- BALANCES AT JUNE 27, 1992........... 1,398,514 14 (3,637) (429) (939) 103,999 (51,874) 50,771 Net loss.......................... -- -- -- -- -- -- (31,245) (31,245) Issuance of Common Stock Warrants....................... -- -- -- -- -- 3,652 -- 3,652 Purchase of Treasury Stock........ -- -- (9,612) (770) 225 -- -- (545) Elimination of Treasury Stock..... (13,249) -- 13,249 1,199 -- (1,199) -- -- --------- ---- ------ ------ ----- -------- --------- -------- BALANCES AT JUNE 26, 1993........... 1,385,265 14 -- -- (714) 106,452 (83,119) 22,633 Net loss.......................... -- -- -- -- -- -- (11,467) (11,467) Purchase of Common Stock.......... (3,483) -- -- -- 78 (1,270) -- (1,192) Payments of Shareholders' Notes... -- -- -- -- 50 -- -- 50 --------- ---- ------ ------ ----- -------- --------- -------- BALANCES AT JUNE 25, 1994........... 1,381,782 14 -- -- (586) 105,182 (94,586) 10,024 Payment of Shareholders' Notes (unaudited).................... -- -- -- -- 70 -- -- 70 Issuance of Common Stock (unaudited).................... 3,644 -- -- -- (191) 340 -- 149 Purchase of Common Stock (unaudited).................... (1,117) -- -- -- 5 (62) -- (57) Net loss (unaudited).............. -- -- -- -- -- -- (14,272) (14,272) --------- ---- ------ ------ ----- -------- --------- -------- BALANCES AT JANUARY 7, 1995 (unaudited)....................... 1,384,309 $ 14 -- $ -- $(702) $105,460 $(108,858) $ (4,086) ========= ==== ====== ====== ===== ======== ========= ========
The accompanying notes are an integral part of these consolidated statements. F-34 159 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND ACQUISITIONS Food 4 Less Holdings, Inc. ("Holdings" or together with its subsidiaries, the "Company"), a majority-owned subsidiary of Food 4 Less, Inc. ("FFL"), was formed on December 8, 1992 for the purpose of issuing Senior Discount Notes (the "Holdings Discount Notes") in a principal amount sufficient to yield gross proceeds of approximately $50.0 million, together with Common Stock Purchase Warrants (the "Warrants") in a private placement offering. FFL is a holding company with no operations or activities and its only asset is its investment in Holdings. In conjunction with the offering of the Holdings Discount Notes and Warrants, the stockholders of Food 4 Less Supermarkets, Inc. (together with its subsidiaries, "Supermarkets") exchanged their common stock in Supermarkets for common stock in Holdings, and Supermarkets became a 100%-owned subsidiary of Holdings. Supermarkets is a multiple format supermarket operator that tailors its retail strategy to the particular needs of the individual communities it serves. It operates in three geographic areas: Southern California, Northern California and certain areas of the Midwest. Supermarkets has three first-tier subsidiaries: Cala Co. ("Cala"), Falley's, Inc. ("Falley's") and Food 4 Less of Southern California, Inc. ("F4L-SoCal"), formerly known as Breco Holding Company, Inc. ("BHC"). Cala Foods, Inc. ("Cala Foods") and Bell Markets, Inc. ("Bell") are subsidiaries of Cala, and Alpha Beta Company ("Alpha Beta") is a subsidiary of F4L-SoCal. (a) Acquisitions On March 29, 1994, the Company purchased certain operating assets formerly owned by Food Barn Stores, Inc. (the "Food Barn Stores") from Associated Wholesale Grocers, Inc. ("AWG") (the "Food Barn Acquisition") for $11,241,000 (including acquisition costs of $180,000). The financial statements reflect the preliminary allocation of the purchase price as the purchase price allocation has not been finalized. The effect of the acquisition was not material to the Company's financial position and results of operations. Falley's has agreed to purchase merchandise (as defined) for the Food Barn Stores from AWG through March 24, 2001. Falley's has pledged its patronage dividends and notes receivable from AWG as security under this supply agreement. On June 17, 1991, Supermarkets acquired all of the common stock of Alpha Beta for $270,513,000 (including acquisition costs of $41,477,000) in a transaction accounted for as a purchase. In January 1990, Supermarkets purchased certain operating assets of ABC Market Corp. ("ABC") for $14,675,000, plus approximately $1,000,000 in fees and expenses. On June 30, 1989, Supermarkets acquired Bell for approximately $13,700,000, which includes $8,000,000 of notes and the assumption of Bell's long-term debt. The transaction was accounted for as a purchase. Certified Grocers of California, Ltd. ("Certified") has guaranteed up to $4,000,000 of notes issued by the Company to the seller in connection with the purchase and the performance of a lease. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Business Holdings is a nonoperating holding company formed for the purpose of issuing the Holdings Discount Notes and the Warrants. The Company is engaged primarily in the operation of retail supermarkets. (b) Basis of Presentation Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The results of operations of Alpha Beta, F4L-SoCal F-35 160 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (BHC), Bell, ABC and the Food Barn Stores have been excluded from the consolidated financial statements prior to their respective acquisition dates. The excess of the purchase price over the fair value of the net assets acquired is classified as goodwill. All intercompany transactions have been eliminated in consolidation. Interim Financial Statements. The consolidated balance sheet of the Company as of January 7, 1995 and the consolidated statements of operations and cash flows for the interim periods ended January 7, 1995 and January 8, 1994 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated financial position, results of operations and cash flows for these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles, and, therefore, should be read in conjunction with the Company's financial statements and notes thereto included herein. Results of operations for interim periods are not necessarily indicative of the results for a full fiscal year. (c) Fiscal Years The Company's fiscal year is the 52 or 53-week period which ends on the last Saturday in June. Fiscal years 1994, 1993, and 1992 include 52 weeks. (d) Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. (e) Inventories Inventories, which consist of grocery products, are stated at the lower of cost or market. Cost has been principally determined using the last-in, first-out ("LIFO") method. If inventories had been valued using the first-in, first-out ("FIFO") method, inventories would have been higher by $13,103,000, $13,802,000 and $16,202,000 (unaudited) at June 26, 1993, June 25, 1994 and January 7, 1995, respectively, and gross profit and operating income would have been greater by $3,554,000, $4,441,000, $699,000, $2,200,000 (unaudited) and $2,400,000 (unaudited) for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994, and the 28 weeks ended January 7, 1995, respectively. (f) Pre-opening Costs The costs associated with opening new stores are deferred and amortized over one year following the opening of each new store. (g) Closed Store Reserves When a store is closed, the Company provides a reserve for the net book value of any store assets, net of salvage value, and the net present value of the remaining lease obligation, net of sublease income. For the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995, utilization of this reserve was $4.0 million, $2.4 million, $1.1 million, $0.5 million (unaudited) and $0.5 million (unaudited), respectively. (h) Investments in Supplier Cooperatives The investment in Certified is accounted for on the cost method. There are certain restrictions on the sale of this investment. F-36 161 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (i) Investment in Food 4 Less of Modesto, Inc. During the 52 weeks ended June 26, 1993, the Company sold its 20% investment in Food 4 Less of Modesto, Inc. ("Modesto") for gross proceeds of $4.5 million, which included a $1.5 million note receivable, resulting in a gain of $2.5 million. The Company previously accounted for this investment using the cost method. (j) Property and Equipment Property and equipment are stated at cost and are depreciated principally using the straight-line method over the following estimated useful lives: Buildings and improvements.................. 5-40 years Equipment and fixtures...................... 3-10 years Property under capital leases and leasehold interests................................. 3-45 years (lease term)
(k) Deferred Financing Costs Costs incurred in connection with the issuance of debt are amortized over the term of the related debt using the effective interest method. (l) Goodwill and Covenants Not to Compete The excess of the purchase price over the fair value of the net assets of businesses acquired is amortized on a straight-line basis over 40 years beginning at the date of acquisition. Covenants not to compete, which are included in Other Assets, are amortized on a straight-line basis over the term of the covenant. Current and undiscounted future operating cash flows are compared to current and undiscounted future goodwill amortization to determine if an impairment of goodwill has occurred and is continuing. As of June 25, 1994, no impairment exists. (m) Income Taxes On June 27, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the SFAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. Under SFAS 109, the Company recognizes to a greater degree the future tax benefits of expenses which have been recognized in the financial statements. The implementation of SFAS No. 109 did not have a material effect on the accompanying consolidated financial statements. (n) Notes Receivable from Shareholders Notes receivable from shareholders represent loans to employees of the Company for purchases of the Company's stock. The notes are due over various periods, bear interest at the prime rate, and are secured by each shareholder's shares of common stock. F-37 162 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (o) Self-Insurance Certain of the Company's subsidiaries are self-insured for a portion of workers' compensation, general liability and automobile accident claims. The Company establishes reserves based on an independent actuary's review of claims filed and an estimate of claims incurred but not yet filed. (p) Discounts and Promotional Allowances Promotional allowances and vendor discounts are recorded as a reduction of cost of sales in the accompanying consolidated statements of operations. Allowance proceeds received in advance are deferred and recognized over the period earned. (q) Provision for Earthquake Losses On January 17, 1994, Southern California was struck by a major earthquake which resulted in the temporary closing of 31 of the Company's stores. The closures were caused primarily by loss of electricity, water, inventory, or structural damage. All but one of the closed stores reopened within a week of the earthquake. The final closed store reopened on March 24, 1994. The Company is insured against earthquake losses (including business interruption), subject to certain deductibles. The pre-tax financial impact, net of insurance claims, was approximately $4.5 million. At June 25, 1994, the Company had received all expected insurance proceeds related to this claim. (r) Extraordinary Items For the 52 weeks ended June 27, 1992, the Company classified the write-off of deferred financing costs associated with the early extinguishment of debt as an extraordinary item. For the 52 weeks ended June 27, 1992, the Company also classified the difference between the net book value and replacement cost of property and equipment destroyed during the April 1992 civil unrest in Los Angeles and replaced by insurance companies as an extraordinary item. Proceeds received from insurance companies for business interruption related to the civil unrest are included as a component of selling, general, administrative and other expenses. (s) Loss Per Common Share Loss per common share is computed based on the weighted average number of shares outstanding during the applicable period. Fully diluted loss per share has been omitted as it is anti-dilutive for all periods presented. (t) Reclassifications Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the June 25, 1994 presentation. F-38 163 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LONG-TERM DEBT AND SENIOR SUBORDINATED DEBT The Company's long-term debt is summarized as follows:
JUNE 26, JUNE 25, 1993 1994 ------------ ------------ Bank Term Loan, principal due quarterly through January 1999, with interest payable monthly in arrears........ $148,478,000 $137,064,000 10.45 percent Senior Notes principal due 2000 with interest payable semi-annually in arrears............. 175,000,000 175,000,000 15.25 percent Senior Holdings Discount Notes due 2004; after December 15, 1997, interest payable semi-annually in arrears.............................. 50,230,000 58,997,000 Revolving Loan.......................................... 4,900,000 -- 10.625 percent first real estate mortgage due 1998, $12,000 of principal plus interest payable monthly secured by land and building with a net book value of $2,122,000............................................ 1,558,000 1,521,000 9.2 to 9.25 percent notes payable, collateralized by equipment, due September 1994, $67,000 of principal plus interest payable monthly, plus balloon payment of $992,000.............................................. 1,772,000 1,103,000 10.8 percent notes payable, collateralized by equipment, due September 1995, $72,000 of principal plus interest payable monthly, plus balloon payment of $1,004,000... 2,447,000 1,819,000 10.0 percent secured promissory note, collateralized by the stock of Bell, due 1996, interest payable quarterly through June 1996........................... 8,000,000 8,000,000 10.08 percent notes payable, collateralized by equipment, due November 1996, $34,000 of principal plus interest payable monthly, plus balloon payment of $493,000.............................................. 1,515,000 1,242,000 10.15 percent notes payable, collateralized by equipment, due December 1996, $45,000 of principal and interest payable monthly, plus balloon payment of $640,000.............................................. 1,994,000 1,675,000 10.0 percent real estate mortgage due 2000, $8,000 of principal and interest payable monthly................ 474,000 419,000 Other long-term debt.................................... 2,216,000 1,415,000 ------------ ------------ 398,584,000 388,255,000 Less -- current portion................................. 12,778,000 18,314,000 ------------ ------------ $385,806,000 $369,941,000 ============ ============
In June 1991, Supermarkets and certain of its subsidiaries entered into a Credit Agreement (the "Credit Agreement") with certain banks, comprised of a $315,000,000 Term Loan (the "Bank Term Loan") facility, a $70,000,000 Revolving Loan (the "Revolving Loan") facility and a $55,000,000 standby letter of credit facility (the "Letter of Credit Facility"). At June 25, 1994, $137,064,000 was outstanding under the Bank Term Loan, there were no borrowings outstanding under the Revolving Loan and $48,131,000 of standby letters of credit had been issued on behalf of the Company. A commitment fee of 1/2 of 1 percent is charged on the average daily unused portion of the Revolving Loan and the Letter of Credit Facility; such commitment fees are due quarterly in arrears. Interest on borrowings under the Bank Term Loan is at the bank's Base Rate (as defined) plus 1.25 percent or the Eurodollar Rate (as defined) plus 2.5 percent. At June 25, 1994, the weighted average interest rate on the Bank Term Loan was 6.5 percent. In accordance with certain requirements of the Credit Agreement, the Company purchased an interest rate cap for a principal amount of approximately $91.4 million on the three-month Libor rate at 5.5% which expires on January 3, 1995. Quarterly principal installments on the Bank Term Loan continue to December 1998, with $15,580,000 F-39 164 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payable in fiscal year 1995, $21,245,000 payable in fiscal year 1996, $22,661,000 payable in fiscal 1997, $40,489,000 payable in fiscal 1998, and $37,089,000 payable in fiscal 1999. Interest on borrowings under the Revolving Loan is at the bank's Base Rate (as defined) plus 1.25 percent. At June 25, 1994, the interest rate on the Revolving Loan was 8.5 percent. To the extent borrowings under the Revolving Loan are not paid earlier, they are due in June 1996. The common stock of F4L-SoCal, Falley's, Cala and certain of their direct and indirect subsidiaries has been pledged as security under the Credit Agreement. In April 1992, Supermarkets and its wholly-owned subsidiaries issued $175,000,000 of 10.45 percent Senior Notes (the "Senior Notes"). These notes are due in two equal sinking fund payments on April 15, 1999 and 2000. They are general unsecured obligations of the Company and rank senior in right of payment to all subordinated indebtedness (as defined). The Senior Notes rank pari passu in right of payment with all borrowings and other obligations of the Company under its bank Credit Agreement; however, the obligations under the Credit Agreement are secured by substantially all the assets of the Company and its subsidiaries. The Senior Notes may be redeemed beginning in 1996 at 104.5 percent, declining ratably to 100 percent in 1999. The proceeds received, net of issuance costs, were used to pay down borrowings under the Bank Term Loan. Deferred financing costs related to the portion of the Bank Term Loan that was retired of $6.7 million, net of related tax benefit of $2.5 million, are classified as an extraordinary item in the Company's consolidated statement of operations for the 52 weeks ended June 27, 1992. Scheduled maturities of principal of Long-Term Debt at June 25, 1994 are as follows: 1995.................................................. $ 18,314,000 1996.................................................. 23,384,000 1997.................................................. 32,322,000 1998.................................................. 40,701,000 1999.................................................. 124,823,000 Later years........................................... 148,711,000 ------------ $388,255,000 ============
Supermarkets issued $145,000,000 principal amount of Senior Subordinated Notes (the "Subordinated Notes") in connection with the acquisition of Alpha Beta as described in Note 1. The Subordinated Notes bear interest, payable semi-annually on June 15 and December 15, at an annual rate of 13.75 percent. The Subordinated Notes are subordinated to all Senior Indebtedness (as defined) of the Company, and may be redeemed beginning in 1996 at a redemption price of 106 percent. The redemption price declines ratably to 100 percent in 2000. On December 31, 1992, Holdings issued $103.6 million aggregate principal amount of Holdings Discount Notes and 121,118 Warrants for gross proceeds of $50.0 million. The expenses related to the issuance of the Discount Notes and the Warrants were paid by Supermarkets. The Holdings Discount Notes are due in two equal sinking fund payments on December 15, 2003 and 2004. They are general unsecured obligations of Holdings and will rank senior in right of payment to all future subordinated indebtedness of Holdings and pari passu in right of payment to all future senior indebtedness of Holdings. As a debt obligation of Holdings, the Holdings Discount Notes are structurally subordinate to all existing and future liabilities and obligations (whether or not borrowed for money) of Supermarkets. The first cash interest payment is due June 15, 1998. The debt agreements, among other things, require Supermarkets to maintain minimum levels of net worth (as defined), to maintain minimum levels of earnings (as defined), to maintain a hedge agreement to provide interest rate protection, and to comply with certain ratios related to interest expense (as defined), fixed charges (as defined), working capital and indebtedness. In addition, the debt agreements limit, among other things, additional borrowings, dividends on, and redemption of, capital stock, capital expenditures, incurrence of lease obligations, and the acquisition and disposition of assets. At June 26, 1993 and June 25, 1994, the F-40 165 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company was in compliance with the financial covenants of its debt agreements. At June 25, 1994, dividends and certain other payments are restricted based on terms in the debt agreements. (4) LEASES The Company's operations are conducted primarily in leased properties. Substantially all leases contain renewal options. Rental expense under operating leases was as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ----------- ----------- ----------- Minimum rents................................. $46,706,000 $44,504,000 $49,788,000 Rents based on sales.......................... 7,656,000 5,917,000 3,806,000
Following is a summary of future minimum lease payments under operating leases at June 25, 1994: 1995................................................... $ 52,542,000 1996................................................... 48,966,000 1997................................................... 45,325,000 1998................................................... 38,925,000 1999................................................... 34,423,000 Later years............................................ 269,332,000 ------------ $489,513,000 ============
The Company has entered into lease agreements for new supermarket sites which were not in operation at June 25, 1994. Future minimum lease payments under such operating leases generally begin when such supermarkets open and at June 25, 1994 are: 1995 -- $5,990,000; 1996 -- $11,772,000; 1997 -- $11,825,000; 1998 -- $11,810,000; 1999 -- $11,819,000; later years -- $218,480,000. Certain leases qualify as capital leases under the criteria established in Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and are classified on the consolidated balance sheets as leased property under capital leases. Future minimum lease payments for the property under capital leases at June 25, 1994 are as follows: 1995.................................................... $ 7,948,000 1996.................................................... 7,521,000 1997.................................................... 6,995,000 1998.................................................... 6,374,000 1999.................................................... 6,071,000 Later years............................................. 44,108,000 ----------- Total minimum lease payments.................. 79,017,000 Less: amounts representing interest..................... 35,403,000 ----------- Present value of minimum lease payments................. 43,614,000 Less: current portion................................... 3,616,000 ----------- $39,998,000 ===========
Accumulated depreciation related to capital leases was $20,356,000 and $24,041,000 at June 26, 1993 and June 25, 1994, respectively. F-41 166 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is leasing a distribution facility and four store locations from the previous owner of Alpha Beta. The agreement contains a purchase option for the land, buildings and improvements and equipment at a price that equals or exceeds the estimated fair market value throughout the term of the lease. (5) INVESTMENT IN A.W.G. The investment in Associated Wholesale Grocers ("A.W.G.") consists principally of the cooperative's six percent interest-bearing seven and eight-year patronage certificates received in payment of certain rebates. Following is a summary of future maturities based upon current redemption terms: 1995..................................................... $ -- 1996..................................................... -- 1997..................................................... 795,000 1998..................................................... 1,420,000 1999..................................................... 1,520,000 Later years.............................................. 2,983,000 ---------- $6,718,000 ==========
(6) INCOME TAXES The provision (benefit) for income taxes consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ---------- ---------- ----------- Current: Federal..................................... $2,507,000 $ -- $ 3,251,000 State and other............................. 934,000 82,000 712,000 ---------- ---------- ----------- 3,441,000 82,000 3,963,000 ---------- ---------- ----------- Deferred: Federal..................................... -- 1,345,000 78,000 State and other............................. -- -- (1,341,000) ---------- ---------- ----------- -- 1,345,000 (1,263,000) ---------- ---------- ----------- $3,441,000 $1,427,000 $ 2,700,000 ========== ========== ===========
F-42 167 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the provision (benefit) for income taxes to amounts computed at the federal statutory rates of 34% for fiscal 1992 and 1993 and 35% for fiscal 1994 is as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ------------ ------------ ----------- Federal income taxes at statutory rate on loss before provision for income taxes and extraordinary charges........................... $ (8,689,000) $(10,138,000) $(3,068,000) State and other taxes, net of federal tax benefit......................................... 934,000 82,000 (1,000) Alternative minimum tax........................... 2,507,000 -- -- Effect of permanent differences resulting from: Amortization of goodwill........................ 2,706,000 2,850,000 2,820,000 Original issue discount......................... -- 208,000 526,000 Accounting limitation of deferred tax benefit..... 5,983,000 8,425,000 2,423,000 ------------ ------------ ----------- $ 3,441,000 $ 1,427,000 $ 2,700,000 ============ ============ ===========
The provision (benefit) for deferred taxes consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ------------ ------------ ----------- Depreciation...................................... $ 6,282,000 $ 7,756,000 $ 2,536,000 Difference between book and tax basis of assets sold............................................ 2,514,000 3,198,000 (4,223,000) Deferred revenues and allowances.................. (7,028,000) 40,000 (2,349,000) Original issue discount........................... -- (1,308,000) (2,981,000) Pre-opening costs................................. 1,072,000 (512,000) 174,000 Accounts receivable reserves...................... -- (270,000) 249,000 Unicap............................................ (124,000) (5,000) (536,000) Capital lease obligation.......................... (2,010,000) (1,385,000) 2,792,000 Self-insurance reserves........................... (13,558,000) (4,082,000) (535,000) Inventory shrink reserve.......................... (528,000) 777,000 (869,000) LIFO.............................................. 7,104,000 (554,000) (1,010,000) Closed store reserve.............................. 964,000 1,092,000 440,000 Accrued expense................................... -- -- (582,000) Accrued payroll and related liabilities........... (2,656,000) 193,000 1,721,000 Damaged inventory reimbursement................... 1,195,000 -- -- Acquisition costs................................. 4,974,000 2,626,000 1,397,000 Sales tax reserves................................ -- (715,000) (418,000) Deferred rent subsidy............................. -- (483,000) (624,000) Net operating loss usage.......................... -- -- 5,782,000 Tax credits benefited............................. -- (1,392,000) (4,477,000) Accounting limitation (recognition) of deferred tax benefit..................................... 1,588,000 (3,283,000) 1,896,000 Other, net........................................ 211,000 (348,000) 354,000 ------------ ------------ ----------- $ -- $ 1,345,000 $(1,263,000) ============ ============ ===========
F-43 168 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of the Company's deferred tax assets (liabilities) are as follows:
JUNE 26, JUNE 25, 1993 1994 ------------ ------------ Deferred tax assets: Accrued payroll and related liabilities............... $ 4,064,000 $ 2,448,000 Other accrued liabilities............................. 14,796,000 18,271,000 Property and equipment................................ 9,674,000 2,997,000 Self-insurance liabilities............................ 30,907,000 27,744,000 Loss carryforwards.................................... 27,863,000 20,675,000 Tax credit carryforwards.............................. 1,392,000 5,869,000 Other................................................. 1,223,000 580,000 ------------ ------------ Gross deferred tax assets.......................... 89,919,000 78,584,000 Valuation allowance................................... (46,316,000) (35,467,000) ------------ ------------ Net deferred tax assets............................ $ 43,603,000 $ 43,117,000 ------------ ------------ Deferred tax liabilities: Inventories........................................... $(20,243,000) $(16,738,000) Property and equipment................................ (38,298,000) (30,516,000) Obligations under capital leases...................... (5,802,000) (8,733,000) Other................................................. (1,689,000) (1,870,000) ------------ ------------ Gross deferred tax liability....................... (66,032,000) (57,857,000) ------------ ------------ Net deferred tax liability......................... $(22,429,000) $(14,740,000) ============ ============
The Company recorded a valuation allowance to reserve a portion of its gross deferred tax assets at June 25, 1994 due primarily to financial and tax losses in recent years. Under SFAS 109, this valuation allowance will be adjusted in future periods as appropriate. However, the timing and extent of such future adjustments to the allowance cannot be determined at this time. At June 25, 1994, approximately $8,864,000 of the valuation allowance for deferred tax assets will reduce goodwill when the allowance is no longer required. At June 25, 1994, the Company has net operating loss carryforwards for federal income tax purposes of $59,071,000, which expire in 2007 through 2008. The Company has federal and state Alternative Minimum Tax ("AMT") credit carryforwards of approximately $4,090,000 which are available to reduce future regular taxes in excess of AMT. Currently, there is no expiration date for these credits. FFL files a consolidated federal income tax return, under which the federal income tax liability of FFL and its subsidiaries (which since June 23, 1989 include the Company) is determined on a consolidated basis. FFL has entered into a federal income tax sharing agreement with the Company and certain of its subsidiaries (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides that in any year in which the Company is included in any consolidated tax liability of FFL and has taxable income, the Company will pay to FFL the amount of the tax liability that the Company would have had on such due date if it had been filing a separate return. Conversely, if the Company generates losses or credits which actually reduce the consolidated tax liability of FFL and its other subsidiaries, FFL will credit to the Company the amount of such reduction in the consolidated tax liability. These credits are passed between FFL and the Company in the form of cash payments. In the event any state and local income taxes are determinable on a combined or consolidated basis, the Tax Sharing Agreement provides for a similar allocation between FFL and the Company of such state and local taxes. F-44 169 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company currently has an Internal Revenue Service examination in process covering its 1990 and 1991 fiscal years. The Internal Revenue Service has not yet made any additional tax assessments related to these years. (7) RELATED PARTY TRANSACTIONS Supermarkets has a five-year consulting agreement with an affiliated company effective June 17, 1991 for management, financing, acquisition and other services. The agreement is automatically renewed on January 1 of each year for the five-year term unless ninety (90) days' notice is given by either party. The contract provides for annual management fees equal to $2 million plus an additional amount based on Supermarkets' performance and advisory fees for acquisition and financing transactions. Fees paid or accrued associated with management services were $2,270,000 during the 52 weeks ended June 25, 1994, $2,000,000 during the 52 weeks ended June 26, 1993, and $2,000,000 during the 52 weeks ended June 27, 1992. Advisory fees paid or accrued were $170,000 during the 52 weeks ended June 25, 1994, $1,795,000 for the 52 weeks ended June 26, 1993, and $116,000 for the 52 weeks ended June 27, 1992. Advisory fees paid or accrued for financing transactions are capitalized and amortized over the term of the related financing. In connection with the acquisitions of Alpha Beta, ABC and the Food Barn Stores, the Company capitalized fees of $8,000,000, $500,000 and $92,000, respectively, which were paid to this affiliated company for acquisition services. (8) COMMITMENTS AND CONTINGENCIES The Company is contingently liable to former stockholders of certain predecessors of F4L-SoCal for any prorated gains which may be realized within ten years of the acquisition of the respective companies resulting from the sale of the Certified stock. Such gains are only payable if Certified is purchased or dissolved, or if the Company sells the shares to Certified within the period noted above. Supermarkets is a partner in a supplier partnership, in which it is contingently liable for the partnership's long-term debt. Supermarkets' portion of such debt is approximately $1,650,000. The Company has entered into lease agreements with the developers of several new sites in which the Company has agreed to provide construction financing. At June 25, 1994, the Company had capitalized construction costs of $10,435,000 on total commitments of $19,250,000. In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against the Company and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in and to fix the price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14 and December 23, 1992, respectively. To date, the Court has yet to certify any of these classes, while a demurrer to the complaints was denied. The Company will vigorously defend itself in these class action suits. In addition, the Company or its subsidiaries are defendants in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on the Company's financial position or results of operations. The Company self-insures its workers compensation and general liability. For the 52 weeks ended June 25, 1994, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 27, 1992, self-insurance loss provisions were $19,880,000, $38,040,000 and $46,140,000, respectively. The Company discounts its self- insurance liability using a 7% discount rate for all years presented. Management believes that this rate F-45 170 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximates the time value of money over the anticipated payout period (approximately 10 years) for essentially risk free investments. The Company's historical self-insurance liability for the three most recent fiscal years is as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ----------- ----------- ---------- Self-insurance liability.............. $95,605,000 $100,773,000 $90,898,000 Less: Discount........................ (13,046,000) (15,279,000) (9,194,000) ----------- ----------- ---------- Net self-insurance liability.......... $82,559,000 $85,494,000 $81,704,000 =========== =========== ==========
The Company expects that cash payments for claims will aggregate approximately $14 million (unaudited), $20 million (unaudited), $17 million (unaudited), $12 million (unaudited) and $7 million (unaudited) for its fiscal years ended in June 1995, 1996, 1997, 1998 and 1999. (9) EMPLOYEE BENEFIT PLANS The Company implemented SOP No. 93-6, Employer Accounting for Employee Stock Ownership Plans, effective June 26, 1994. The implementation of SOP No. 93-6 did not have a material effect on the accompanying unaudited consolidated financial statements. The Company and its subsidiaries sponsor several defined contribution benefit plans. The full-time employees of Falley's who are not members of a collective bargaining agreement are covered under a 401(k) plan under which the Company matches certain employee contributions with cash or FFL stock (the "Falley's ESOP"). As part of the original stock sale agreement between FFL and the Falley's ESOP, which has been amended from time to time, an affiliate of the Company has assumed the obligation to purchase any FFL shares as to which terminated plan participants have exercised a put option under the terms of Falley's ESOP. As part of that agreement, the Company may, at its sole discretion, after providing a right of first refusal to the affiliate, purchase FFL shares put under the provisions of the plan. During the year ended June 25, 1994, the Company elected to purchase $1.0 million of FFL shares as to which terminated plan participants had exercised their put option. FFL shares purchased by the Company are classified as additional paid-in-capital. As of the most recent valuation letter, dated December 16, 1994, the fair value of the shares allocated which are subject to a repurchase obligation by an affiliate of the Company was approximately $14,326,000 (unaudited). The Company also sponsors two ESOPs for employees of the Company who are members of certain collective bargaining agreements (the "Union ESOPs"). The Union ESOPs provide for annual contributions based on hours worked at a rate specified by the terms of the collective bargaining agreements. The Company contributions are made in the form of Holdings stock or cash for the purchase of Holdings stock and are to be allocated to participants based on hours worked. During the 28 weeks ended January 7, 1995, the Company recorded a charge against operations of approximately $230,000 (unaudited) for benefits under the Union ESOPs. There were no shares issued to the Union ESOPs at January 7, 1995. All other full-time employees of the Company who are not members of a collective bargaining agreement are covered under a separate 401(k) plan (the "Management Plan"). The Management Plan provides for annual contributions which are determined at the discretion of the Company. The Company contributions are allocated to participants based on employee compensation and matching of certain employee contributions. A portion of the Company contribution allocated based on compensation is made in the form of stock or cash for the purchase of stock. F-46 171 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total charges against operations related to all employee benefit plans sponsored by the Company and its subsidiaries were $337,000, $284,000 and $699,000 for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994, respectively. No contributions were made with stock and no stock was acquired by any plans in fiscal 1992, fiscal 1993 or fiscal 1994. The Company contributes to multi-employer pension plans administered by various trustees. Contributions to these plans are based upon negotiated wage contracts. These plans may be deemed to be defined benefit plans. Information related to accumulated plan benefits and plan net assets as they may be allocated to the Company at June 25, 1994 is not available. The Company contributed $78.6 million, $69.4 million and $57.2 million to these plans for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994, respectively. Management is not aware of any plans to terminate such plans. The United Food and Commercial Workers health and welfare plans were overfunded and those employers who contributed to the plans are to receive a pro rata share of the excess reserves in these plans through a reduction of current contributions. The Company's share of the excess reserve was $24.2 million, of which $8.1 million was recognized in the 52 weeks ended June 25, 1994, with the remainder to be recognized in future periods as the credits are taken. Offsetting the reduction in employer contributions was a $5.5 million union contract ratification bonus and contractual wage increases. (10) COMMON STOCK WARRANTS Concurrent with the purchase of the Holdings Discount Notes, the Noteholders purchased 121,118 Warrants for $30.16 per Warrant. Each Warrant is exercisable on or after December 15, 1997 or earlier, upon the occurrence of certain events and allows the holder to acquire one share of common stock at $.01 per share. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (a) Cash and Cash Equivalents The carrying amount approximates fair value as a result of the short maturity of these instruments. (b) Short-Term Notes and Other Receivables The carrying amount approximates fair value as a result of the short maturity of these instruments. (c) Investments In and Notes Receivable From Supplier Cooperatives The Company maintains a non-current deposit with Certified in the form of Class B shares of Certified. Certified is not obligated in any fiscal year to redeem more than a prescribed number of the Class B shares issued. Therefore, it is not practicable to estimate the fair value of this investment. The Company maintains a non-current note receivable from A.W.G. There are no quoted market prices for this investment and a reasonable estimate could not be made without incurring excessive costs. Additional information pertinent to the value of this investment is provided in Note 5. (d) Long-Term Debt The fair value of the $175.0 million Senior Notes, the $145.0 million Subordinated Notes, the $103.6 million Holdings Discount Notes and the Bank Term Loan is based on quoted market prices. Market quotes for the fair value of the remainder of the Company's debt are not available, and a reasonable estimate F-47 172 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the fair value could not be made without incurring excessive costs. Additional information pertinent to the value of the unquoted debt is provided in Note 3. The estimated fair values of the Company's financial instruments are as follows:
JUNE 25, 1994 ----------------------------- CARRYING FAIR AMOUNT VALUE ------------ ------------ Cash and cash equivalents............................... $ 32,996,000 $ 32,996,000 Short-term notes and other receivables.................. 4,187,000 4,187,000 Investments in and notes receivable from supplier cooperatives.......................................... 12,702,000 -- Long-term debt for which it is: - Practicable to estimate fair values................. 516,061,000 547,112,000 - Not practicable..................................... 17,194,000 --
(12) OTHER INCOME, NET The components of other income items included in SG&A are as follows:
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, 1992 1993 1994 ---------- ---------- --------- Interest income.................................... $1,266,000 $ 993,000 $ 903,000 Licensing fees..................................... 493,000 246,000 270,000 Other income (expense)............................. 769,000 3,710,000 (177,000) ---------- ---------- --------- $2,528,000 $4,949,000 $ 996,000 ========= ========= =========
(13) RESTATEMENT The Company has restated the statements of operations for its fiscal years ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 to classify certain buying, occupancy and labor costs associated with making its products available for sale as cost of sales. These amounts were previously classified as selling, general, administrative and other net, and depreciation and amortization of property and equipment and totalled $236,152,000, $224,469,000, $219,548,000 and $114,334,000 (unaudited) for the fiscal years ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994, respectively. The Company has also classified a portion of its self-insurance costs as interest expense that was previously recorded in selling, general, administrative and other, net. These amounts were $4,960,000, $5,865,000, $5,836,000 and $3,275,000 (unaudited) for the fiscal years 1992, 1993 and 1994 and the 28 weeks ended January 8, 1994, respectively. Depreciation and amortization costs not classified in cost of sales are included in selling, general, administrative and other, net. The change in classification did not affect the net loss, loss before provision for income taxes and extraordinary charges or loss per common share. (14) SUBSEQUENT EVENT (UNAUDITED) On September 14, 1994, the Company, Supermarkets, and FFL entered into a definitive Agreement and Plan of Merger (the "Merger") with Ralphs Supermarkets, Inc. ("Ralphs") and the stockholders of Ralphs. Pursuant to the terms of the Merger Agreement, Supermarkets will, subject to certain terms and conditions being satisfied or waived, be merged into Ralphs and Ralphs will become a wholly-owned subsidiary of the Company. Conditions to the consummation of the Merger include, among other things, receipt of regulatory approvals and other necessary consents and the completion of financing for the transaction. The purchase price for Ralphs is approximately $1.5 billion, including the assumption of debt. F-48 173 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate purchase price, payable to the stockholders of Ralphs, will consist of $375 million in cash, $131.5 million initial principal amount of 13 5/8% Senior Subordinated Pay-in Kind Debentures due 2007 ("Seller Debentures") and $18.5 million of initial accreted value of 13 5/8% Senior Discount Debentures due 2005 ("New Discount Debentures"). In addition, Supermarkets will enter into an agreement with a stockholder of Ralphs pursuant to which such stockholder will act as a consultant to Supermarkets with respect to certain real estate and general commercial matters for a period of five years from the closing of the Ralphs Merger in exchange for the payment of a consulting fee. The financing required to complete the Merger will include the issuance of significant additional equity by FFL, the issuance of new debt securities by the Company and Supermarkets and the incurrence of additional bank financing by Supermarkets. The equity issuance would be made to a group of investors led by Apollo Advisors, L.P. ("Apollo"), which will purchase $140 million in FFL stock. Apollo will receive a $5 million fee for its commitment to make an equity investment. The issuance of new debt securities would be in the form of senior notes of Supermarkets of up to $295 million and senior subordinated notes of Supermarkets of up to $200 million. The bank financing would be made pursuant to a commitment by Bankers Trust Company to provide up to $1,075 million in such financing. In connection with the receipt of new financing, the Company and Supermarkets will also be required to complete certain exchange offers, consent solicitations and or other transactions with the holders of their currently outstanding debt securities. The Company will issue an additional $81.5 million of initial accreted value of New Discount Debentures for $59.0 million in cash and $22.5 million in lieu of cash for fees associated with the Merger. The Company will redeem the Discount Notes, with a book value of $64.5 million at January 7, 1995, for $83.9 million in cash. As of January 29, 1995, Ralphs had outstanding indebtedness of approximately $1,018.5 million. Ralphs had sales of $2,724.6 million, operating income of $145.6 million and earnings before income taxes of $32.1 million for its most recent fiscal year ended January 29, 1995. Upon consummation of the Merger, the operations and activities of Supermarkets will be significantly impacted due to conversions of the Supermarkets' existing Southern California conventional stores to either Ralphs or Food 4 Less warehouse stores as well as the consolidation of various operating functions and departments. The Merger will result in restructuring charges that are currently estimated to be approximately $45 million, of which approximately $5.1 million was recorded in the Company's results of operations for the 28 weeks ended January 7, 1995. The remaining estimated restructuring charges will be recorded as an expense once the Merger is completed. (15) RESTRUCTURING CHARGE (UNAUDITED) The Company has converted 11 of its conventional format supermarkets to warehouse format stores. During the 28 weeks ended January 7, 1995, the Company recorded a restructuring charge for the write-off of property and equipment at the 11 stores of $5.1 million. F-49 174 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholder of Food 4 Less Holdings, Inc.: We have audited the accompanying balance sheet of Food 4 Less Holdings, Inc. (a Delaware corporation) (the Company) as of January 4, 1995. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Food 4 Less Holdings, Inc. as of January 4, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California January 4, 1995 (except with respect to the matter discussed in Note 2, as to which the date is April 13, 1995) F-50 175 FOOD 4 LESS HOLDINGS, INC. BALANCE SHEET JANUARY 4, 1995 Cash................................................................................ $1,000 ====== SHAREHOLDER'S EQUITY: Preferred stock, $.01 par value, 50,000,000 shares authorized, none outstanding... $ -- Common stock, $.01 par value, 60,000,000 shares authorized, 1,000 shares outstanding.................................................................... 10 Additional paid-in capital........................................................ 990 ------ Total shareholder's equity................................................ $1,000 ======
The accompanying notes are an integral part of this balance sheet. F-51 176 FOOD 4 LESS HOLDINGS, INC. NOTES TO THE BALANCE SHEET (1) ORGANIZATION Food 4 Less Holdings, Inc., a Delaware corporation (the Company), is a wholly-owned subsidiary of Food 4 Less Holdings, Inc., a California corporation (Holdings). The Company was incorporated in December 1994 for the purpose of reincorporating Holdings into a Delaware corporation. The Company and Holdings have no operations or activities. Holdings is a holding company whose sole asset is its ownership in Food 4 Less Supermarkets, Inc. (Food 4 Less). Holdings is majority owned by Food 4 Less, Inc. (FFL) which is also a holding company whose sole asset is its ownership of Holdings stock. On December 31, 1992, Holdings issued $103.6 million aggregate principal amount of Holdings Discount Notes and 121,118 Warrants for gross proceeds of $50.0 million. The proceeds were contributed to Food 4 Less in exchange for Food 4 Less preferred stock. The Holdings Discount Notes are due in two equal sinking fund payments on December 15, 2003 and 2004. They are general unsecured obligations of Holdings. As a debt obligation of Holdings, the Holdings Discount Notes are structurally subordinate to all existing and future liabilities and obligations (whether or not borrowed for money) of Food 4 Less. The first cash interest payment is due June 15, 1998. (2) ACQUISITION OF RALPHS SUPERMARKETS, INC. On September 14, 1994 Food 4 Less entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Ralphs Supermarkets Inc. (RSI) and its stockholders. Pursuant to the terms of the Merger Agreement, Food 4 Less will, subject to certain conditions being waived or satisfied, be merged with and into RSI (the "RSI Merger"). Immediately following the RSI Merger, Ralphs Grocery Company ("RGC"), which is currently a wholly-owned subsidiary of RSI, will merge with and into RSI (the "RGC Merger," and together with the RSI Merger, the "Merger"), and RSI will change its name to Ralphs Grocery Company (Ralphs). Prior to the Merger, FFL will merge with and into Holdings, which will be the surviving corporation (the "FFL Merger"). Immediately following the FFL Merger, Holdings will change its jurisdiction of incorporation by merging into the Company (the "Reincorporation Merger"). As a result of the Merger, the FFL Merger and the Reincorporation Merger, Ralphs will become a wholly-owned subsidiary of the Company. As a result of the Reincorporation Merger, the Holdings Discount Notes will become the obligations of the Company. Conditions to the consummation of the RSI Merger include the receipt of regulatory approvals and other necessary consents and the completion of financing. The purchase price for RSI is approximately $1.5 billion, including the assumption of debt. The consideration payable to the stockholders of RSI consists of $375 million in cash, $131.5 million principal amount of 13 5/8% Senior Subordinated Pay-in Kind Debentures due 2007 (Seller Debentures) and $18.5 million of initial accreted value 13 5/8% Senior Discount Debentures (New Discount Debentures) due 2005 to be issued by the Company. In connection with the Merger, the Company will issue preferred stock to new equity investors for gross proceeds of $140 million in cash, for which they will pay a $5 million fee. One hundred million dollars of the cash proceeds received from the new equity investors, together with the $131.5 million principal amount of the Seller Debentures and $18.5 million of the New Discount Debentures will be used to acquire approximately 48% of the capital stock of RSI immediately prior to consummation of the RSI Merger. The Company will issue an additional $81.5 million of initial accreted value of New Discount Debentures for $59.0 million in cash and $22.5 million in lieu of cash for fees associated with the Merger. The Company will then contribute the $250 million of purchased shares of RSI stock, together with the remaining net cash proceeds received from the new equity investors and the issuance of New Discount Debentures, to Food 4 Less, and pursuant to the RSI Merger the remaining shares of RSI stock will be acquired for $275 million in cash by Food 4 Less. As a result of the Reincorporation Merger, $103.6 million of the Holdings 15.25% Discount Notes with a book value of $64.5 million at January 7, 1995 will be redeemed for $83.9 million. F-52 177 APPENDIX A DESCRIPTION OF DISCOUNT NOTES The Discount Notes were issued under the Discount Note Indenture, dated as of December 15, 1992, between Holdings and United States Trust Company of New York, as Trustee. Upon receipt of the Requisite Consents, the Supplemental Indenture will be executed between Holdings and the Trustee giving effect to the Proposed Amendments. Set forth below is a description of the principal terms of the Discount Notes as currently in effect and as proposed to be amended by the Proposed Amendments. The following summary of certain provisions of the Discount Note Indenture, and as amended by the Supplemental Indenture, does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Discount Note Indenture and the Supplemental Indenture, including the definitions of certain terms therein and those terms made a part of the Discount Note Indenture and the Supplemental Indenture by reference to the TIA as in effect on the date of the Discount Note Indenture and the Supplemental Indenture. The definitions of certain capitalized terms used in the following summary are set forth below under "Certain Definitions." Copies of the Discount Note Indenture and the Supplemental Indenture are available from Holdings upon request. As used below in this "Description of Discount Notes," "Holdings" means Food 4 Less Holdings, Inc., but not any of its subsidiaries. Following the consummation of the Reincorporation Merger, the obligations of Holdings under the Discount Note Indenture and the Supplemental Indenture will become the obligations of New Holdings. If the Proposed Amendments become effective, provisions substantially in the form of the italicized sections indicated below will be deleted from the Discount Note Indenture. The remaining (unitalicized) sections of the Discount Note Indenture will not be changed by the Proposed Amendments. All references to the "Discount Notes" contained in this Appendix A shall include references to the Discount Notes, as amended upon execution of the Supplemental Indenture and effectiveness of the Proposed Amendments. PRINCIPAL, MATURITY AND INTEREST The Discount Notes were issued at a substantial discount from their principal amount and the purchase discount on the Discount Notes accretes from the date of their original issuance on December 31, 1992 until December 15, 1997. The Discount Notes are limited in aggregate principal amount of $103,600,000 and will mature on December 15, 2004. The Discount Notes bear interest at the rate of 15.25% per annum and interest accrues on the Discount Notes beginning December 15, 1997, or from the most recent date to which interest has been paid, and is payable semiannually in arrears on June 15 and December 15 of each year, commencing June 15, 1998, to the Holders of record on the immediately preceding June 1 and December 1. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months and actual number of days elapsed. The Discount Notes are payable both as to principal and interest at the office or agency of Holdings maintained for such purpose within or without the City and State of New York, or at the option of Holdings, payment of interest may be made by check mailed to the Holders of the Discount Notes at their respective addresses set forth in the register of Holders of Discount Notes. Until otherwise designated by Holdings, Holdings' office or agency in New York is the office of the Trustee maintained for such purpose. The Discount Notes are issued in denominations of $1,000 and integral multiples thereof. OPTIONAL REDEMPTION The Discount Notes are redeemable, at the option of Holdings, in whole at any time or in part from time to time, on and after December 15, 1997 at the following redemption prices (expressed as percentages of the Accreted Value) if redeemed during the twelve-month period commencing on December 15 of the year set forth below, plus in each case, accrued interest thereon to the date of redemption:
REDEMPTION YEAR PRICE ---- ---------- 1997............................................... 107.63% 1998............................................... 106.10 1999............................................... 104.58 2000............................................... 103.05 2001............................................... 101.53 2002 and thereafter................................ 100.00
A-1 178 In addition, in the event of an Initial Public Offering up to 25% of the Discount Notes may be redeemed prior to December 15, 1997, at the option of Holdings, at a redemption price equal to the sum of the applicable percentage of the Accreted Value thereof set forth below, plus the Proportionate Share of the Discount Notes, if any, to the date of redemption, if redeemed during the 12 months commencing on December 15 of the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 1992............................................... 120.000% 1993............................................... 117.525 1994............................................... 115.050 1995............................................... 112.575 1996............................................... 110.100
MANDATORY REDEMPTION Holdings will make a mandatory sinking fund payment on December 15, 2003, sufficient to retire 50% of the Discount Notes originally issued, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the date of redemption. Holdings may, at its option, receive credit against such sinking fund payment for 100% of the principal amount of any Discount Notes previously acquired by Holdings and surrendered to the Trustee for cancellation or redeemed at the option of Holdings and which, in each case, were not previously used for or as a credit against any other required payment pursuant to the Discount Note Indenture. Holdings may use the same Discount Note as a credit only once. RANKING The Discount Notes are unsecured obligations of Holdings and rank senior in right of payment to all subordinated indebtedness of Holdings and pari passu in right of payment to all future senior indebtedness of Holdings. As a debt obligation of Holdings, the Discount Notes are effectively subordinated to all existing indebtedness and other liabilities (including trade payables) of its subsidiaries, including the indebtedness of Food 4 Less. As of January 7, 1995, the aggregate amount of indebtedness and other liabilities of Food 4 Less that effectively rank senior to the Discount Notes would have been $924.2 million. CERTAIN COVENANTS LIMITATION ON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control (the "Change of Control Date"), each Holder shall have the right to require the repurchase of such Holder's Discount Notes pursuant to the offer described in paragraph (b), below (the "Change of Control Offer"), at a purchase price equal to 101% of the Accreted Value thereof plus either, (i) if the date of purchase is prior to December 15, 1997, the Proportionate Share, if any, with respect to the Discount Notes to the date of purchase and (ii) if the date of purchase is on or after December 15, 1997, the aggregate principal amount thereof plus accrued interest to the date of purchase. Within 10 days after any Change of Control Date requiring Holdings to make a Change of Control Offer pursuant to this covenant, Holdings shall so notify the Trustee. (b) The notice to the Holders shall contain all instructions and materials necessary to enable such Holders to tender Discount Notes pursuant to the Change of Control Offer. Within 30 days following any Change of Control Date, Holdings shall send, by first class mail, a notice to each Holder, with copies to the Trustee, which notice shall govern the terms of the Change of Control Offer. LIMITATION ON RESTRICTED PAYMENTS. Holdings shall not, and shall cause each of its Subsidiaries not to, directly or indirectly, make any Restricted Payment if, at the time of such Restricted Payment, or after giving effect thereto, (a) a Default or an Event of Default shall have occurred and be continuing, or (b) the Net Worth of Holdings on the last day of the full fiscal quarter immediately preceding the date of such Restricted Payment (pro forma to give effect thereto) is not greater than $75 million, or (c) Holdings' Operating Coverage Ratio, calculated on a pro forma basis as if such Restricted Payment had been made at the beginning of the Pro Forma Period, shall be less than 2.0 to 1.0, or (d) the aggregate amount expended for all Restricted Payments, including such Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment, as determined in good faith by the Board of Directors of Holdings, which determination shall be evidenced by a Board Resolution), subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such Consolidated Net Income is a loss, minus 100% of such loss) of Holdings earned subsequent to the Issue Date and on or prior to the date the Restricted Payment occurs (the "Reference Date") plus (ii) 100% of the aggregate Net Cash Proceeds and 50% of the Net Proceeds which do not constitute Net Cash Proceeds received by Holdings from any person (other than a Subsidiary) from the issuance and sale (including upon exchange or conversion for other securities of Holdings) subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any A-2 179 Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from issuances and sales financed directly or indirectly using funds borrowed from Holdings or any Subsidiary, until and to the extent such borrowing is repaid). Notwithstanding the foregoing, if no Default or Event of Default shall have occurred and be continuing as a consequence thereof, the provisions set forth in the immediately preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of declaration, (2) the acquisition of any shares of Capital Stock in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of shares of Qualified Capital Stock or (3) Permitted Payments; provided that (x) the declaration of each dividend paid in accordance with clause (1) above, each acquisition or repayment made in accordance with, or of the type set forth in, clause (2) above and each payment described in clause (iii) of the definition of "Permitted Payments" shall each be counted for purposes of computing amounts expended pursuant to subclause (d) in the immediately preceding paragraph, and (y) no amounts pursuant to clause (i) or (ii) of the definition of "Permitted Payments" shall be so counted. Prior to any Restricted Payment under the first paragraph of this covenant, Holdings shall deliver to the Trustee an Officers' Certificate setting forth the computation by which the amount available for Restricted Payments pursuant to such paragraph was determined. The Trustee shall have no duty of responsibility to determine the accuracy or correctness of this computation and shall be fully protected in relying on such officers' certificate. LIMITATION ON INCURRENCES OF ADDITIONAL INDEBTEDNESS. (a) Except as set forth herein, Holdings shall not, and shall not permit any Subsidiary, after the original issuance of the Securities, directly or indirectly, to incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment of (collectively "incur") any indebtedness. For purposes of the Discount Note Indenture, Indebtedness incurred by any person that is not a Subsidiary, which Indebtedness is outstanding at the time such person becomes, or is merged into or consolidated with, a Subsidiary, shall be deemed to have been incurred or issued, as the case may be, at the time such person becomes, or is merged into or consolidated with, a Subsidiary. (b) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Indebtedness if (i) no Default with respect to payment of principal of, or interest on, the Securities or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of such Indebtedness and (ii) on the date of the incurrence of such Indebtedness, the Operating Coverage Ratio of Holdings would be greater than 1.75 to 1.0 if such date is prior to June 15, 1994; greater than 2.0 to 1.0 if such date is on or after June 15, 1994 and prior to June 15, 1996; and greater than 2.25 to 1.0 thereafter. (c) Notwithstanding the foregoing, (i) in addition to Indebtedness permitted under clauses (ii) and (iii) hereof, any Subsidiary may incur (A) Indebtedness under the Term Facility (as defined in the Credit Agreement) under or pursuant to the Loan Documents (and Holdings and each Subsidiary may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $165 million (plus obligations for related payments for early termination, interest, fees, expenses and indemnities and other amounts payable thereunder or in connection therewith) less the aggregate amount of all future principal payments made with respect to the Term Advances (as defined in the Credit Agreement) or any other term advances thereunder and (B) Indebtedness under Supplementary Documents (and each Subsidiary may guarantee such Indebtedness), (ii) in addition to Indebtedness permitted under clauses (i) and (iii) hereof, any Subsidiary may incur Indebtedness under the Loan Documents pursuant to Subsidiary Letter of Credit Obligations (and Holdings and any Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $55 million (plus obligations for related payments for early termination, interest, fees, expenses, indemnities and other amounts payable thereunder or in connection therewith) and (iii) in addition to Indebtedness permitted under clauses (i) and (ii) hereof, any Subsidiary may incur (A) additional Indebtedness under the Revolving Facility (as defined in the Credit Agreement) under the Loan Documents, including pursuant to Subsidiary Letter of Credit Obligations (and Holdings and any Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $70 million (plus obligations for related payments for early termination, interest, fees, expenses, indemnities and other amounts payable thereunder or in connection therewith) and (B) Indebtedness under the Supplementary Documents (and Holdings or any Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness). (d) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Indebtedness evidenced by the Securities or the Secondary Securities. (e) Notwithstanding the foregoing, Holdings may incur Indebtedness to any Subsidiary, and any Subsidiary may incur Indebtedness to Holdings or to another Subsidiary. (f) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Indebtedness in connection with the purchase or improvement of property (real or personal) or equipment or other capital expenditures in the ordinary course of business (including, if in the ordinary course, for the purchase of assets or stock of any retail grocery store or business) or consisting of Capitalized Lease Obligations; provided that the aggregate principal amount incurred pursuant to this paragraph (f) in any Yearly Period shall not exceed $25 million (provided that any unused amounts may be carried over to the next (but not any subsequent) Yearly Period). A-3 180 (g) Notwithstanding the foregoing, Holdings or any Subsidiary may (i) incur Indebtedness under Supplementary Documents entered into with respect to Indebtedness in a notional amount not exceeding the aggregate principal amount of Indebtedness outstanding or committed under the Loan Documents on the date of such incurrence and otherwise permitted to be outstanding pursuant to this Section and (ii) incur Indebtedness under Foreign Exchange Agreements and Interest Swap Obligations entered into with respect to Indebtedness in a notional amount not exceeding (A) the aggregate principal amount of Indebtedness outstanding or committed under the Loan Documents at the date of such incurrence and otherwise permitted to be outstanding pursuant to this Section less (B) the aggregate notional amount of Indebtedness then outstanding pursuant to clause (i) above. (h) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Permitted Guarantees of Indebtedness in an aggregate principal amount not to exceed $25 million (plus obligations for related interest, fees, expenses, indemnities and other amounts) at any time outstanding in addition to the Permitted Guarantees outstanding on the Issue Date. (i) Notwithstanding the foregoing, Holdings or any Subsidiary may guarantee Indebtedness of the Company or any Subsidiary of the Company; provided that the Indebtedness of such Subsidiary was not incurred in violation of this Section. (j) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Refinancing Indebtedness; provided, however, that (x) the proceeds received from the incurrence of Refinancing Indebtedness incurred to repay Securities then outstanding shall be irrevocably deposited by Holdings with the Trustee or the Paying Agent to repay such Securities on the date fixed for repayment thereof and (y) if such Refinancing Indebtedness is incurred to repay all of the Securities then outstanding, Holdings shall redeem the Securities pursuant to the Securities on the earliest date permitted thereunder. (k) Notwithstanding the foregoing, any Subsidiary may incur Indebtedness represented by the Senior Subordinated Notes and the related guarantees thereof. (l) Notwithstanding the foregoing, any Subsidiary may incur Indebtedness represented by the Senior Notes and related guarantees thereof. (m) Notwithstanding the foregoing, Holdings may incur Indebtedness represented by the accretion of principal of the Securities and may issue additional Securities in accordance with the provisions of the Registration Rights Agreement. (n) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Indebtedness in connection with an acquisition of the La Habra Facility and Option Stores. (o) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Indebtedness represented by letters of credit for the account of Holdings or such Subsidiary in order to provide security for workers compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business. (p) Notwithstanding the foregoing, Holdings or any Subsidiary may incur Indebtedness in addition to Indebtedness incurred pursuant to paragraphs (b) through (o); provided that the aggregate principal amount of Indebtedness incurred by Holdings and any Subsidiary pursuant to this paragraph (p) shall not exceed $75 million (plus obligations for payments for early termination, interest, fees, expenses, indemnities and other amounts) at any time outstanding. (q) Notwithstanding the foregoing, Holdings shall not incur any Indebtedness pursuant to paragraphs (b), (e), (h), (i), (j) (other than in connection with the refinancing of Indebtedness incurred under (c), (d), (f), (g), (m) and (o) and (p) of this Section unless such Indebtedness is Disqualified Capital Stock or is otherwise expressly subordinate in right of payment to the Securities to the same extent that the Senior Subordinated Notes are subordinated to the Senior Notes. (r) No limitation contained in the foregoing clauses (b) through (p) shall preclude Holdings or any Subsidiary from incurring additional Indebtedness permitted to be incurred under any other of such clauses. (s) Notwithstanding the foregoing, Holdings shall not permit any Subsidiary to guarantee any Indebtedness of Holdings. LIMITATION ON LIENS. Holdings shall not create, incur, assume or suffer to exist any Liens upon any of its assets unless the Discount Notes are equally and ratably secured by the Liens covering such assets, except for (i) Permitted Liens, (ii) Liens securing Acquired Indebtedness; provided that such Liens (x) are not incurred in connection with, or in contemplation of, the acquisition of the property or assets acquired and (y) do not extend to or cover any property or assets of Holdings or any Subsidiary other than the property or assets so acquired, (iii) Liens existing on the Issue Date, (iv) Liens to secure Indebtedness that is permitted under the provisions of the Discount Note Indenture summarized under "Limitation on Incurrences of Additional Indebtedness"; provided that (A) any such Lien is created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including sales and excise taxes, installation and delivery charges and other direct costs of, and other direct expenses paid or charged in connection with, the purchase (whether through stock or asset purchase, merger or otherwise) or construction) of the property subject thereto, (B) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such costs and (C) such Lien does not extend to or cover any property other than such item of property and any improvements on such item; (v) Liens in favor of the Trustee; (vi) Liens securing Indebtedness permitted by clauses (e), (k) or (m) of the foregoing section entitled "Limitation on Incurrences of Additional Indebtedness"; provided that, in the case of Indebtedness permitted by A-4 181 clause (k) above, the principal amount of the Indebtedness secured by Liens does not exceed 100% of the purchase price of the La Habra Facility or the Option Stores, as the case may be; and (vii) any replacement, extension or renewal, in whole or in part, of any Lien described in this or the foregoing clauses (i) through (vi), including in connection with any refinancing of the Indebtedness, in whole or in part, secured by any such Lien; provided that if any such clauses limit the amount secured by or the assets subject to such Liens, no extension or renewal shall increase the amount or the assets subject to such Liens, except to the extent that the Liens associated with such additional assets are otherwise permitted hereunder. Notwithstanding the foregoing, Holdings shall not (i) create, incur, assume or suffer to exist any Liens upon any of its assets to secure Indebtedness of its Subsidiaries or (ii) cause any Subsidiary to create, incur, assume or suffer to exist any Liens upon any of its assets to secure Indebtedness of Holdings. LIMITATION ON DISPOSITION OF ASSETS. (a) Holdings will not, and will not permit any of its Subsidiaries to, make any Asset Sale unless (a) Holdings or the applicable Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of as determined in good faith by the Board of Directors of Holdings or if the aggregate fair market value of all non-cash consideration received by Holdings or such Subsidiary, as the case may be, from any such Asset Sale shall exceed $15 million, as determined by an Independent Financial Advisor; provided that no such determination by the Board of Directors of Holdings shall be required if the fair market value of the assets sold or otherwise disposed of does not exceed $5 million; and (b) the Net Cash Proceeds received by Holdings or such Subsidiary, as the case may be, from such Asset Sale are applied in accordance with this covenant; and (c) the Net Cash Proceeds received by Holdings or such Subsidiary from such Asset Sale are applied within 270 days of such Asset Sale, at Holdings' election, (i) to repay Indebtedness of Holdings or any Subsidiary (ii) in a manner that would constitute a Related Business Investment; or (iii) to the purchase of Discount Notes pursuant to a Net Proceeds Offer as set forth below, provided, however, that Holdings shall not be required to satisfy the condition specified in clause (a) above if such Asset Sale is pursuant to a foreclosure by the Lenders under the Credit Agreement and the other Loan Documents or their representative on collateral securing Indebtedness under the Loan Documents; provided, further, that if at any time any non-cash consideration received by Holdings or any Subsidiary in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash, then such cash shall constitute Net Cash Proceeds for purposes of this covenant and shall be applied in accordance with clause (c) above within 270 days of the receipt of such cash; provided, further, that Holdings has the right to exclude Asset Sales subsequent to the Issue Date, the proceeds of which in the aggregate do not exceed $10 million, from the provisions of this covenant. To the extent that the Net Cash Proceeds are not actually applied in accordance with clause (c)(i) or (ii) above, or after such application there remains a portion of the Net Cash Proceeds which, when added to any other Net Cash Proceeds remaining after such application, accumulates at least $2,500,000 subsequent to the previous time Holdings shall have accumulated at least such an amount and used it in accordance with this covenant, or if no such accumulation shall previously have occurred, subsequent to the date of the Holdings Discount Note Indenture, Holdings shall make an offer as described in the following paragraph below (the "Net Proceeds Offer") to purchase Discount Notes at a price equal to 100% of, (i) if the date of the Net Proceeds Offer is prior to December 15, 1997, the Accreted Value thereto plus the Proportionate Share, if any, with respect to the Discount Notes to the date of purchase and (ii) if the date of the Net Proceeds Offer is on or after December 15, 1997, the aggregate principal amount thereof, plus accrued interest to the date of purchase, which shall in the aggregate equal the Net Proceeds required by this covenant to be used to purchase Discount Notes in a Net Proceeds Offer; provided, however, that Holdings may credit against the principal amount of Discount Notes to be acquired the principal amount of Discount Notes acquired by Holdings through purchase, optional redemption, exchange or otherwise following consummation of the Asset Sale and surrendered for cancellation and not previously used as a credit against any other required payment pursuant to the Discount Note Indenture; provided, further, that a Net Proceeds Offer as a result of an Asset Sale made by Supermarkets or one of its subsidiaries shall not be required to be in excess of the lesser of (A) the Net Cash Proceeds of such Asset Sale less the Net Cash Proceeds actually applied in accordance with clauses (c)(i) or (ii) above and (B) the amount that Supermarkets is permitted to distribute to Holdings as a dividend pursuant to the Old F4L Senior Note Indenture, the Old F4L Subordinated Note Indenture (or pursuant to agreements governing Indebtedness the proceeds of which were used to refinance in whole or in part the Old F4L Senior Notes or the Old F4L Subordinated Notes so long as the dividend restrictions contained therein are comparable to those set forth in the Old F4L Senior Note Indenture and Old F4L Subordinated Note Indenture) and by state law. The Net Proceeds Offer shall remain open from the time of mailing until 5 days (or such shorter period as may be required under applicable law) before the Proceeds Purchase Date. (b) Notice of a Net Proceeds Offer shall be sent, by first class mail, by Holdings not less than 230 days nor more than 270 days after the relevant Asset Sale to all Holders at their last registered addresses, with a copy to the Trustee and the Credit Agent. The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Net Proceeds Offer and shall state the following terms: (1) that the Net Proceeds Offer is being made pursuant to the Discount Note Indenture and that all Securities tendered will be accepted for payment; provided, however, that if the aggregate principal amount of Securities tendered in a Net Proceeds Offer plus accrued interest at the expiration of such offer exceeds the aggregate amount of the Net Proceeds Offer, Holdings shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by Holdings so that only Securities in denominations of $1,000 or multiples thereof shall be purchased); A-5 182 (2) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law (the "Proceeds Purchase Date"); (3) that any Security not tendered will continue to accrue interest if interest is then accruing; (4) that, unless Holdings defaults in making payment therefor, any Security accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Proceeds Purchase Date; (5) that Holders electing to have a Security purchased pursuant to a Net Proceeds Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Proceeds Purchase Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than two Business Days prior to the Proceeds Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; and (7) that Holders whose Securities were purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. On or before the Proceeds Purchase Date, Holdings shall (i) accept for payment Securities or portions thereof tendered pursuant to the Net Proceeds Offer which are to be purchased in accordance with item (b)(1) above, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price of all Securities to be purchased and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by Holdings. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price. Holdings will publicly announce the results of the Net Proceeds Offer on or as soon as practicable after the Proceeds Purchase Date. For purposes of this Section, the Trustee shall act as the Paying Agent. Any amounts remaining after the purchase of Securities pursuant to a Net Proceeds Offer shall be returned by the Trustee to Holdings. LIMITATION ON TRANSACTIONS WITH AFFILIATES. Neither Holdings nor any Subsidiary shall (i) sell, lease, transfer or otherwise dispose of any of its properties or assets or securities to, (ii) purchase any property, assets or securities from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, an Affiliate or Significant Stockholder (and any Affiliate of such Significant Stockholder) of Holdings or any Subsidiary (an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under the following paragraph and (y) Affiliate Transactions (including lease transactions) in the ordinary course of business, that are fair to Holdings or such Subsidiary, as the case may be, and on terms at least as favorable as might reasonably have been obtainable at such time from an unaffiliated party, unless the Board of Directors of Holdings or such Subsidiary, as the case may be, pursuant to a Board Resolution, reasonably and in good faith determines that such Affiliate Transaction is fair to Holdings or such Subsidiary, as the case may be, and is on terms at least as favorable as might reasonably have been obtainable at such time from an unaffiliated party, provided that if an Affiliate Transaction or series of related Affiliate Transactions involves or has a value in excess of $1 million and less than or equal to $15 million, Holdings or such Subsidiary, as the case may be, shall not enter into such Affiliate Transaction or series of related Affiliate Transactions unless a majority of the disinterested members of the Board of Directors of Holdings or such Subsidiary or an Independent Financial Advisor shall reasonably and in good faith determine that such Affiliate Transaction is fair to Holdings or such Subsidiary, as the case may be, or is on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. In addition, neither Holdings nor any of Subsidiary shall enter into an Affiliate Transaction or series of related Affiliate Transactions involving or having a value of more than $15 million unless Holdings or such Subsidiary, as the case may be, has received an opinion from an Independent Financial Advisor to the effect that the financial terms of such Affiliate Transaction are fair to Holdings or such Subsidiary or are at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. The provisions of the foregoing paragraph shall not apply to (i) any Permitted Payment, (ii) any Restricted Payment that is made in compliance with the provisions of the Discount Note Indenture summarized under "Limitation on Restricted Payments," (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of Holdings or any Subsidiary, as determined by the Board of Directors of Holdings or any Subsidiary or the senior management thereof in good faith, (iv) transactions exclusively between or among Holdings, Supermarkets and any of their respective wholly-owned Subsidiaries or exclusively between or among such wholly-owned Subsidiaries, provided such transactions are not otherwise prohibited by the Discount Note Indenture, (v) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) so long as any such amendment is not disadvantageous to the Holders in any material respect, (vi) the existence of, or the performance by Holdings or any Subsidiary of its obligations under the terms of, any stockholder agreement (including any registration rights agreement or purchase agreement related thereto) A-6 183 to which it (or FFL) is a party as of the Issue Date and any similar agreements (including any registration of Discount Notes as contemplated by the Registration Rights Agreement and that certain Common Stock Registration Rights Agreement dated as of December 31, 1992) which it (or FFL) may enter into thereafter, provided, however, that the existence of, or the performance by Holdings or any Subsidiary of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders in any material respect, (vii) transactions permitted by, and complying with, the provisions of the Discount Note Indenture summarized under "Limitations on Mergers and Certain Other Transactions," or (viii) transactions with Certified Grocers of California, Inc., Affiliated Wholesale Grocers of Kansas City, Inc. or their subsidiaries or other suppliers in the ordinary course of business (including, without limitation, pursuant to joint venture agreements with such persons) and otherwise in compliance with the terms of the Indenture. LIMITATIONS ON MERGERS. Pursuant to the Discount Note Indenture, Holdings shall not in a single transaction or through a series of related transactions (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) either Holdings shall be the continuing person, or the person (if other than Holdings) formed by such consolidation or into which Holdings is merged or to which all or substantially all of the properties and assets of Holdings as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any person to which assets are transferred) (Holdings or such other person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any State thereof or the District of Columbia, and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of Holdings under the Trustee, all the obligations of Holdings under the Discount Notes and this Discount Note Indenture; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (A) the Surviving Person shall have a Net Worth equal to or greater than the Net Worth of Holdings immediately preceding the transaction and (B) the Surviving Person could incur at least $1 of Indebtedness pursuant to the covenant "Limitation on Incurrences on Additional Indebtedness" above; (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing; and (4) Holdings shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, transfer or adoption and such supplemental indenture comply with the covenant of the Discount Notes Indenture entitled "When Company May Merge, Etc." that the Surviving Person agrees to be bound hereby, and that all conditions precedent herein provided relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of Holdings shall be deemed to be the transfer of all or substantially all of the properties and assets of Holdings. Nothing contained herein shall prohibit the consolidation or merger of Holdings and FFL so long as the surviving corporation in such consolidation or merger (i) is Holdings or (ii) assumes all of the obligations of Holdings under the Discount Note Indenture; provided that FFL shall not have incurred any Indebtedness or other material liabilities, contingent or otherwise, subsequent to the Issue Date and prior to such consolidation or merger, other than liabilities resulting from registration rights relating to capital stock of FFL, tax liabilities incurred in the ordinary course of business consistent with past practice and liabilities in connection with effecting such consolidation or merger. This section shall not apply to (i) the creation, incurrence or assumption of Liens securing Indebtedness outstanding under the Credit Agreement or (ii) any sale or other disposition of assets in connection with an event of default and acceleration under the Credit Agreement. Upon any consolidation or merger, or any transfer of assets in accordance with the foregoing, the successor person formed by such consolidation or into which Holdings is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, Holdings under the Discount Note Indenture with the same effect as if such successor person had been named as Holdings herein. When a successor corporation assumes all of the obligations of Holdings hereunder and under the Discount Notes and agrees to be bound hereby and thereby, the predecessor shall be released from such obligations. DISPOSITION OF PROCEEDS OF PUBLIC OFFERING SALE. (a) Holdings will not, and will not permit any of its Subsidiaries to, participate in any Public Offering Sale or have the Net Cash Proceeds of a Public Offering Sale by FFL contributed to, invested in or otherwise accepted by Holdings or any Subsidiary unless (a) the Net Cash Proceeds of any Public Offering Sale contributed to, or received by Holdings or such Subsidiary, as the case may be, from such Public Offering Sale are applied in accordance with this covenant, (b) the Net Cash Proceeds are applied within 270 days of the Initial Public Offering Consummation Date, at the election of Holdings, (i) to repay or cause to be repaid Indebtedness of Holdings or any Subsidiary; (ii) in a manner that would constitute a Related Business Investment hereunder; or (iii) to the purchase of A-7 184 Discount Notes pursuant to a Net Proceeds Offer as set forth below; and (c) any Net Cash Proceeds of a Public Offering Sale by FFL which are contributed to Holdings shall be contributed in exchange for, or in respect of, Capital Stock of Holdings. To the extent that the Net Cash Proceeds are not actually applied in accordance with clauses (b)(i) or (ii) above, Holdings shall make an offer as described in paragraph (b) below (the "Net Proceeds Offer") to purchase Discount Notes at a price equal to 100% of, (i) if the date of the Net Proceeds Offer is prior to December 15, 1997, the Accreted Value thereof plus the Proportionate Share, if any, with respect to the Discount Notes to the date of purchase and (ii) if the date of the Net Proceeds Offer is on or after December 15, 1997, the aggregate principal amount thereof, plus accrued interest to the date of purchase pursuant to this covenant, which shall in the aggregate equal the Net Cash Proceeds required by this covenant to be used to purchase Discount Notes in a Net Proceeds Offer; provided, however, that Holdings may credit against the principal amount of Discount Notes to be acquired pursuant to this covenant the principal amount of Discount Notes acquired by Holdings through purchase, optional redemption, exchange or otherwise following the Initial Public Offering Consummation Date and surrendered for cancellation and not previously used as a credit against any other required payment pursuant to the Discount Note Indenture; provided, further, that a Net Proceeds Offer as a result of a Public Offering Sale made by Supermarkets shall not be required to be in excess of the lesser of (A) the Net Cash Proceeds of such Public Offering Sale less the Net Cash Proceeds actually applied in accordance with clauses (b)(i) or (ii) above and (B) the amount that Supermarkets is permitted to distribute to Holdings as a dividend pursuant to the Old F4L Senior Note Indenture, the Old F4L Senior Subordinated Note Indenture (or pursuant to agreements governing Indebtedness the proceeds of which were used to refinance in whole or in part the Old F4L Senior Notes or the Old F4L Senior Subordinated Notes so long as the dividend restrictions contained therein are comparable to those set forth in the Old F4L Senior Note Indenture and Old F4L Senior Subordinated Note Indenture) and by state law. The Net Proceeds Offer shall remain open from the time of mailing until 5 days (or such shorter period as may be required under applicable law) before the Proceeds Purchase Date. (b) Notice of a Net Proceeds Offer pursuant to this covenant shall be mailed, by first class mail, by Holdings not less than 230 days nor more than 270 days after the relevant Initial Public Offering Consummation Date to all Holders at their last registered addresses, with copies to the Credit Agent and the Trustee. The notice shall contain all instructions and material necessary to enable such Holders to tender Discount Notes pursuant to the Net Proceeds Offer and shall state the terms set forth in the Discount Note Indenture. RESTRICTIONS ON SALE OF STOCK OF SUBSIDIARIES. Holdings will not permit any of its Subsidiaries to issue any Preferred Stock (other than to Holdings or to a wholly-owned Subsidiary of Holdings) other than Disqualified Capital Stock permitted to be issued pursuant to the provisions of the Discount Note Indenture summarized under "Limitation on Incurrences of Additional Indebtedness" or permit any person (other than Holdings or a wholly-owned Subsidiary of Holdings) to own any Preferred Stock of any Subsidiary of Holdings (other than Disqualified Capital Stock permitted to be issued pursuant to the conditions described in the provisions of the Discount Note Indenture summarized under "Limitation on Incurrences of Additional Indebtedness. Holdings will not permit any of its Subsidiaries to issue any Capital Stock (other than Preferred Stock permitted under the foregoing paragraph and other than to Holdings or to a wholly-owned Subsidiary of Holdings) or permit any person (other than Holdings or a wholly-owned Subsidiary of Holdings) to own any Capital Stock (other than Preferred Stock as provided in the foregoing paragraph) of any Subsidiary of Holdings (other than in the case of a sale of 100% of the Capital Stock of a Subsidiary of Holdings which is not otherwise prohibited by the Discount Note Indenture); provided that this paragraph shall not apply to any Subsidiary of Supermarkets that becomes a Subsidiary of Supermarkets after the Issue Date pursuant to the making of an Investment that constituted a Restricted Payment and was permitted by the provisions of the Discount Note Indenture summarized under "Limitation on Restricted Payments" or pursuant to the making of a Related Business Investment that at the time made could have been made as a Restricted Payment in compliance with the provisions of the Discount Note Indenture summarized under "Limitation on Restricted Payments" so long as such Related Business Investment is actually treated as a Restricted Payment effective as of the date it was originally made, and the provisions of the aforementioned covenant would not have been breached at any time thereafter; provided, further, that this paragraph shall not prevent the sale of less than 100% of the Capital Stock of a Subsidiary of Holdings if (i) immediately after and giving pro forma effect to such transaction as if Holdings ceased to own any equity interest in such Subsidiary on the first day of the Reference Period (even if less than 100% of the Capital Stock of such Subsidiary is sold) and the application of proceeds therefrom, Holdings could incur at least $1 of Indebtedness pursuant to the provisions of the Discount Note Indenture summarized in the first paragraph under "Limitations on Incurrences of Additional Indebtedness" or (ii) such sale is pursuant to a foreclosure by the lenders or other secured parties under the Credit Agreement and the other Loan Documents (or by the holders of any Indebtedness secured by such Capital Stock) or their Representative on collateral securing Indebtedness under the Loan Documents; provided, however, that notwithstanding any other provision of this covenant, Holdings will permit Supermarkets to issue any Capital Stock of Supermarkets (other than Preferred Stock permitted under the first paragraph above) other than to Holdings or permit any person (other than Holdings) to own any Capital Stock (other than Preferred Stock permitted under the first paragraph above) of Supermarkets. SEC REPORTS AND OTHER INFORMATION. (a) To the extent permitted by applicable law or regulation, whether or not Holdings is subject to the requirements of Section 13 or 15(d) of the Exchange Act, Holdings shall file with the SEC all quarterly and annual reports and such other information, documents or other reports (or copies of such portions of any of A-8 185 the foregoing as the SEC may by rules and regulations prescribe) required to be filed pursuant to such provisions of the Exchange Act. Holdings shall file with the Trustee, within 5 days after it files the same with the SEC, copies of the quarterly and annual reports and the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to this Section 4.09. Holdings shall also comply with the other provisions of TIA sec. 314(a). If Holdings is not permitted by applicable law or regulations to file the aforementioned reports, Holdings (at its own expense) shall file with the Trustee and mail, or cause the Trustee to mail, to Holders at their addresses appearing in the register of Securities maintained by the Registrar at the time of such mailing within 5 days after it would have been required to file such information with the SEC, all information and financial statements, including any notes thereto and with respect to annual reports, an auditors' report by an accounting firm of established national reputation, and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," comparable to the disclosure that Holdings would have been required to include in annual and quarterly reports, information, documents or other reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K, if Holdings was subject to the requirements of such Section 13 or 15(d) of the Exchange Act. (b) At any time when Holdings is not permitted by applicable law or regulations to file the aforementioned reports, upon the request of a Holder of a Series A Note, Holdings will promptly furnish or cause to be furnished such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) to such Holder or to a prospective purchaser of such Series A Note designated by such Holder, as the case may be, in order to permit compliance by such Holder with Rule 144A under the Securities Act. EVENTS OF DEFAULT. Under the terms of the Discount Note Indenture the following events constitute "Events of Default": (1) Holdings defaults in the payment of interest on the Securities when the same becomes due and payable and the Default continues for a period of 30 days; (2) Holdings defaults in the payment of the principal of the Discount Notes when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (3) Holdings fails to comply with any of its other agreements or covenants in, or provisions of, the Discount Notes or the Discount Note Indenture and the Default continues for the period and after the notice specified below; (4) there shall be a default under any bond, debenture, or other evidence of Indebtedness of Holdings or of any Significant Subsidiary or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced any such Indebtedness, whether such Indebtedness now exists or shall hereafter be created, if both (A) such default either (i) results from the failure to pay such Indebtedness at its stated final maturity (that is, the date of the last principal installment of any installment Indebtedness under the instrument or agreement pursuant to or under which such Indebtedness was created or is evidenced) or (ii) relates to an obligation other than the obligation to pay any principal of such Indebtedness at its stated maturity and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated maturity and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness the maturity of which has been so accelerated, aggregates $25 million or more at any one time; (5) there shall be a default in payment of interest or principal (other than as set forth in clause (4) above by any Significant Subsidiary on Indebtedness under the Credit Agreement, the Old F4L Senior Note Indenture or Old F4L Senior Subordinated Note Indenture or any Refinancing Indebtedness relating thereto (the "Designated Debt") when such interest or principal becomes due and payable (a "Payment Default") and such Payment Default shall not have been cured or waived within the Cure Period as defined below after such payment was due and all applicable grace periods as in effect on the Issue Date (or in the case of Refinancing Indebtedness periods comparable to the periods in the Indebtedness being so refinanced relating to such payment) shall have lapsed (the "Designated Debt Due Date"); provided for purposes of the foregoing Cure Period shall mean the shorter of the following periods: (i) 90 days from the Designated Debt Due Date or (ii) if within the 180 day period immediately prior to the date of such Payment Default one or more Payment Defaults occurred which was or were cured or waived within the applicable Cure Period, 90 days minus the total number of days within such 180 day period for which all such prior Payment Defaults continued uncured or unwaived beyond the applicable Designated Debt Due Date; (6) Holdings or any Significant Subsidiary (A) admits in writing its inability to pay its debts generally as they become due, (B) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (C) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (D) consents to the appointment of a Custodian of it or for substantially all of its property, (E) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it, (F) makes a general assignment for the benefit of its creditors, or (G) takes any corporate action to authorize or effect any of the foregoing; (7) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of Holdings or any Significant Subsidiary in an involuntary case or proceeding under any Bankruptcy Law, which shall (A) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of Holdings or any Significant Subsidiary, (B) appoint a Custodian of Holdings or any Significant Subsidiary or for substantially all of its property or (C) order the winding-up or liquidation of its affairs; and such judgment, decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (8) any warrant of attachment is issued against any portion of the property of Holdings having a value of at least $20 million, which warrant is not released within 60 days after service of process with respect thereto, or final judgments not covered by insurance for the payment of money which in the aggregate at any one time exceeds $20 million shall be rendered against Holdings by a A-9 186 court of competent jurisdiction and shall remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days after such judgment becomes final and nonappealable. A Default under clause (3) above (other than in the case of any Defaults resulting from any Default under "Limitation on Restricted Payments," "Limitation on Change of Control," as described in the Holdings Discount Note Indenture, which Defaults shall be Events of Default with the notice specified in this paragraph but without the passage of time specified in this paragraph) is not an Event of Default until the Trustee notifies Holdings, or the Holders of at least 25% in aggregate principal amount of the outstanding Holdings Discount Notes notify Holdings and the Trustee, of the Default, and Holdings does not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." Such notice shall be given by the Trustee if so requested by the Holders of at least 25% in aggregate principal amount of the Discount Notes then outstanding. When a Default is cured, it ceases. SATISFACTION AND DISCHARGE OF INDENTURE. The Discount Note Indenture provides that Holdings may terminate its obligations under the Discount Notes and the Discount Note Indenture if (i) all Discount Notes previously authenticated and delivered have been delivered to the Trustee for cancellation and Holdings has paid all sums payable by it thereunder, or (ii) a period of 91 days has elapsed after Holdings has irrevocably deposited in trust with the Trustee under the terms of an irrevocable trust and security agreement in form and substance reasonably satisfactory to the Trustee, money or United States government obligations maturing as to principal and interest in such amounts and at such times as are sufficient without consideration of any reinvestment of such interest to pay principal of and interest on the outstanding Discount Notes on the dates on which any such payments are due and payable in accordance with the terms of the Discount Note Indenture and the Discount Notes; provided that among other things, Holdings shall have delivered to the Trustee an opinion of counsel to the effect that the holders of such Discount Notes will not recognize income, gain or loss for federal income tax purposes as a result of Holdings' deposit and the defeasance contemplated thereby and will be subject to federal income tax in the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. Certain obligations of Holdings under the Discount Note Indenture or of the Discount Notes, including the payment of interest and principal, shall remain in full force and effect until such Discount Notes are no longer outstanding. MODIFICATION OF THE DISCOUNT NOTE INDENTURE. Holdings, when authorized by a Board Resolution, and the Trustee, together, may amend or supplement the Discount Note Indenture or the Discount Notes without notice to or consent of any Holder: (1) to cure any ambiguity, defect or inconsistency; provided that such amendment or supplement does not adversely affect the rights of any Holder, (2) to comply with Article 5 of the Discount Note Indenture; (3) to provide for uncertificated Discount Notes in addition to or in place of certificated Holdings Discount Notes; (4) to make any other change that does not adversely affect the rights of any Holders; or (5) to comply with any requirements of the SEC in connection with the qualification of the Discount Note Indenture under the TIA; provided that Holdings has delivered to the Trustee an opinion of counsel stating that such amendment or supplement complies with the provisions of this Section. Subject to the "Right of Holders to Receive Payment," as described in the Discount Note Indenture, Holdings, when authorized by a Board Resolution, and the Trustee, together, with the written consent of the Holder or Holders of at least a majority in aggregate principal amount of the outstanding Discount Notes, may amend or supplement the Discount Note Indenture or the Discount Notes, without notice to any other Holders. Holders of at least a majority in aggregate principal amount of the outstanding Discount Notes may waive compliance by Holdings with any provision of the Discount Note Indenture or the Discount Notes without notice to any other Holder. Without the consent of each Holder affected, however, no amendment, supplement or waiver, including a waiver pursuant to the requirements as described in the Discount Note Indenture, may: (1) change the principal amount of the Discount Note whose Holders must consent to an amendment, supplement or waiver of any provision of this Discount Note Indenture or the Discount Notes; (2) reduce the rate or extend the time for payment of interest on any Holdings Discount Notes; (3) reduce the Accreted Value of any Discount Notes; (4) reduce the principal amount of any Discount Notes; (5) change the Maturity Date of any Discount Notes, or alter the redemption provisions contained in paragraph 6 or 7 of the Discount Notes in a manner adverse to any Holder; (6) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders of the Discount Notes or the rights of Holders to recover the principal of, interest on, or redemption payment with respect to, any Discount Note; (7) make any changes in the sections "Waiver of Past Defaults," "Rights of Holders to Receive Payment" described in the Discount Note Indenture or this third sentence of this clause; (8) make the principal of, or the interest on any Discount Note payable with anything or in any manner other than as provided for in the Discount Note Indenture and the Discount Notes as in effect on the date hereof. It shall not be necessary for the consent of the Holders under this clause to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this clause becomes effective, Holdings shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of Holdings to mail such A-10 187 notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. In connection with any amendment, supplement or waiver under Article Nine of the Discount Note Indenture, Holdings may, but shall not be obligated to, offer to any Holder who consents to such amendment, supplement or waiver, or to all Holders, consideration for such Holder's consent to such amendment, supplement or waiver. CERTAIN DEFINITIONS "ACCRETED VALUE" means, as of any date, with respect to each $1,000 principal amount of Securities, the Accreted Value set forth below for the immediately preceding Semi-Annual Accrual Date:
ACCRETED VALUE (PER $1,000 SEMIANNUAL ACCRUAL DATE PRINCIPAL AMOUNT) ---------------------------------------------- ----------------- December 31, 1992............................. $ 482.63 June 15, 1993................................. 516.16 December 15, 1993............................. 555.51 June 15, 1994................................. 597.87 December 15, 1994............................. 643.46 June 15, 1995................................. 692.52 December 15, 1995............................. 745.33 June 15, 1996................................. 802.16 December 15, 1996............................. 863.32 June 15, 1997................................. 929.15 December 15, 1997 and thereafter.............. $1,000.00
"ACQUIRED INDEBTEDNESS" means Indebtedness of person or any of its subsidiaries existing at the time such person becomes a Subsidiary or assumed in connection with the acquisition of assets from such person and not incurred by such person in connection with, or in anticipation or contemplation of, such person becoming a Subsidiary or such acquisition. "AFFILIATE" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. Notwithstanding the foregoing, except as otherwise provided by law, the term "Affiliate," with respect to Holdings and its Affiliates, shall not include (i) BT Securities Corporation, Donaldson, Lufkin & Jenrette Securities Corporation or any of their Affiliates or (ii) any other person who is not a Significant Stockholder. "ASSET SALE" means, for any person, any sale, transfer or other disposition or series of sales, transfers or other dispositions (including, without limitation, by merger or consolidation or by exchange of assets and whether by operation of law or otherwise) made by such person or any of its subsidiaries to any person other than such person or one of its wholly-owned subsidiaries (or, in the case of a sale, transfer or other disposition by a Subsidiary, to any person other than Holdings or any wholly-owned Subsidiary) of any assets of such person or any of its subsidiaries including, without limitation, assets consisting of any capital stock or other securities held by such person or any of its subsidiaries, and any capital stock issued by any subsidiary of such person, outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions, having a purchase price or transaction value, as the case may be, of $250,000 or less. "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors. "BOARD OF DIRECTORS" means, with respect to any person, the Board of Directors of such person or any committee of the Board of Directors of such person duly authorized, with respect to any particular matter, to exercise the power of the Board of Directors of such person. "BOARD RESOLUTION" means, with respect to any person, a duly adopted resolution of the Board of Directors of such person. "BUSINESS DAY" means a day that is not a Legal Holiday. "CAPITAL STOCK" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such person, including Preferred Stock. A-11 188 "CAPITALIZED LEASE OBLIGATION" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "CASH EQUIVALENTS" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc. and Standard & Poor's Corporation and maturing not more than one year from the date of creation thereof, (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500 million and maturing not more than one year from the date of creation thereof, (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any bank described in clause (iii) and (v) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Corporation. "CHANGE OF CONTROL" means (I) the acquisition after the Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) by (i) any person or entity (other than any Permitted Holder) or (ii) any group of persons or entities (excluding any Permitted Holders) who constitute a group (within the meaning of Section 13(d)(3) of the Exchange Act), in either case, of any securities of Holdings or FFL such that, as a result of such acquisition, such person, entity or group either (A) beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act) directly or indirectly, 51% or more of Holdings' then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of Holdings (but only to the extent that such beneficial ownership is not shared with any Permitted Holder who has the power to direct the vote thereof) or (B) otherwise has the ability to elect, directly or indirectly, a majority of the members of Holdings' Board of Directors or (II) Holdings ceasing to own 100% of the outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of Supermarkets. "CONSOLIDATED NET INCOME," with respect to any person, for any period, means the aggregate of the net income (or loss) of such person and its subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any other person in which such person or any of its subsidiaries has an interest (which interest does not cause the net income of such other person to be consolidated with the net income of such person and its subsidiaries in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions actually paid to such person or such subsidiary by such other person in such period; (b) the net income of any subsidiary of such person that is subject to any Payment Restriction shall be excluded to the extent such Payment Restriction actually prevented the payment of an amount that otherwise could have been paid to, or received by, such person or a subsidiary of such person not subject to any Payment Restriction, provided, however, that with respect to the net income of Holdings, the net income of Supermarkets and its Subsidiaries shall not be so excluded, notwithstanding the existence of any such Payment Restriction, so long as the terms of any such consensual Payment Restriction limiting the payment of dividends are not materially more restrictive at the time of determination of Consolidated Net Income than the most restrictive Payment Restriction limiting the payment of dividends in effect on the Issue Date; and (c)(i) the net income (or loss) of any other person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale or in connection with the closure of the Long Beach Warehouse, (iii) all gains realized upon or in connection with or as a consequence of the issuance of the Capital Stock of such person or any of its subsidiaries and any gains on pension reversions received by such person or any of its subsidiaries, (iv) all gains and losses realized on the purchase or other acquisition by such person or any of its subsidiaries of any securities of such person or any of its subsidiaries, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as amended (vi) all other extraordinary gains and losses, and (vii) with respect to Holdings and its Subsidiaries, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. "CREDIT AGENT" means, at any time, the then acting Administrative Agent as defined in and under the Credit Agreement, which initially shall be Citicorp North America, Inc. Holdings shall promptly notify the Holdings Discount Note Trustee of any change in the Credit Agent. "CREDIT AGREEMENT" means the Credit Agreement, dated as of June 17, 1991, by and among Supermarkets, certain of its subsidiaries, the Lenders and Designated Issuers of the Lenders referred to therein, Bankers Trust Company, Citicorp North America, Inc., and Chemical Bank (the successor to Manufacturers Hanover Trust Company), as Co-Agents, and Citicorp North America, Inc., as Administrative Agent, together with the documents related thereto, as it may be amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness incurred to refund or refinance (including by way of placement or issuance of notes) or restructuring the entirety of the borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or such agreement. Holdings shall promptly notify the Holdings Discount Note Trustee of any such refunding or refinancing of the Credit Agreement. A-12 189 "CUSTODIAN" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "DEFAULT" means any event which is, or after notice or passage of time or both would be, an Event of Default. "DEFAULT AMOUNT" means, with respect to the Securities, (i) if the Date of Declaration (as defined below) is prior to December 15, 1997, the unpaid Accreted Value of the Securities then outstanding as of the date on which the Securities are declared to be due and payable (the "Date of Declaration") plus the Proportionate Share thereof, if any, to the Date of Declaration, and (ii) if the Date of Declaration is on or after December 15, 1997, the aggregate unpaid principal amount of the Securities then outstanding as of the Date of Declaration, plus accrued and unpaid interest thereon to the Date of Declaration. "DISQUALIFIED CAPITAL STOCK" means, (i) with respect to any person, any Capital Stock of such person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security into which it is convertible, puttable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased by such person or its subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date or any other Capital Stock of such person or its subsidiaries designated as Disqualified Capital Stock by such person at the time of issuance; provided, however, that if such Capital Stock is either (a) redeemable or repurchasable solely at the option of such person or (b) issued to employees of Holdings or its Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated; and (ii) with respect to any Subsidiary of Holdings, any Preferred Stock issued by a Subsidiary of Holdings other than Preferred Stock issued to Holdings. "EBDIT" means, with respect to any person, for any period, without duplication, the sum of the amounts for such period of (i) Consolidated Net Income of such person for such period, (ii) provisions for income taxes or similar charges recognized by such person and its consolidated subsidiaries for such period, (iii) depreciation and amortization expense of such person and its consolidated subsidiaries accrued during such period (but only to the extent not included in Fixed Charges), (iv) Fixed Charges of such person and its consolidated subsidiaries for such period, and (v) other non-cash charges reducing Consolidated Net Income and which have been customarily added back to Consolidated Net Income by such person in determining EBDIT, in each case determined in accordance with GAAP; provided that the amounts set forth in clauses (i) through (iv) shall be included only to the extent such amounts reduced Consolidated Net Income. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "FFL" means Food 4 Less, Inc., a Delaware corporation, until a successor replaces it and thereafter means such successor. "FINAL ACCRETION DATE" means December 15, 1997. "FIXED CHARGES" means, with respect to any person, for any period, the aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) in respect of all Indebtedness of such person and its consolidated subsidiaries (including, without duplication, (a) original issue discount on any Indebtedness (including, in the case of Holdings, any original issue discount on the Discount Notes) and (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, in each case to the extent attributable to such period) and (ii) dividend requirements on Capital Stock of such person and its consolidated subsidiaries (whether in cash or otherwise (except dividends payable in shares of Qualified Capital Stock)) paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) and excluding items eliminated in consolidation. For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Board of Directors of such person (as evidenced by a Board Resolution) to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest of such Indebtedness in effect on the date Fixed Charges are being calculated, (c) interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as Holdings or any Subsidiary may designate, and (d) Fixed Charges shall be increased or reduced by the net cost (including amortization of discount) or benefit associated with Interest Swap Obligations attributable to such period. For purposes of clause (ii) above, dividend requirements shall be increased to an amount representing the pre-tax earnings that would be required to cover such dividend requirements; accordingly the increased amount shall be equal to a fraction, the numerator of which is such dividend requirements and the denominator of which is 1 minus the applicable actual combined federal, state, local and foreign income tax rate of such person and its subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Fixed Charges. A-13 190 "FOREIGN EXCHANGE AGREEMENT" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. "FORWARD PERIOD" shall have the meaning set forth in the definition of Operating Coverage Ratio contained in this Section 1.01. "HOLDINGS" means Food 4 Less Holdings, Inc., a California corporation, until a successor replaces it and thereafter means such successor. "INDEBTEDNESS" means with respect to any person, without duplication, (i) all liabilities, contingent or otherwise, of such person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such person in the ordinary course of business of such person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such person or, if there is no such maximum fixed repurchase price, the liquidation preference of such Disqualified Capital Stock, plus accrued but unpaid dividends; (iii) reimbursement obligations of such person with respect to letters of credit; (iv) obligations of such person with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such person are subject, whether or not the obligations secured thereby shall have been assumed by such person or shall otherwise be such person's legal liability (provided that if the obligations so secured have not been assumed by such person or are not otherwise such person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution. For purposes hereof, Indebtedness incurred by any person that is a general partnership (other than non-recourse Indebtedness) shall be deemed to have been incurred by the general partners of such partnership pro rata in accordance with their respective interests in the liabilities of such partnership unless any such general partner shall, in the reasonable determination of the Board of Directors of Holdings, be unable to satisfy its pro rata share of the liabilities of the partnership, in which case the pro rata share of any Indebtedness attributable to such partner shall be deemed to be incurred at such time by the remaining general partners on a pro rata basis in accordance with their interests. "INDEPENDENT FINANCIAL ADVISOR" means a reputable accounting, appraisal or a nationally recognized investment banking firm that is, in the reasonable judgment of the Board of Directors of Holdings, qualified to perform the task for which such firm has been engaged hereunder and disinterested and independent with respect to Holdings and its Affiliates. "INITIAL PUBLIC OFFERING" means an underwritten primary public offering of common stock of FFL, Holdings or the Company at a time when neither FFL, Holdings nor the Company has previously issued or sold any equity securities in an underwritten transaction pursuant to a registration statement filed pursuant to the Securities Act. "INTEREST SWAP OBLIGATION" means any obligation of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such person calculated by applying a fixed or floating rate of interest on the same notional amount; provided that the term "Interest Swap Obligation" shall also include interest rate exchange, collar, cap, swap option or similar agreements providing interest rate protection. "INVESTMENT" by any person in any other person means any investment by such person in such other person, whether by a purchase of assets, in any transaction or series of related transactions, individually or in the aggregate, in an amount greater than $5 million, share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances, or to permit the purchase of Qualified Capital Stock of FFL, Holdings or any Subsidiary and other similar customary expenses incurred, in each case in the ordinary course of business consistent with past practice) or similar credit extension constituting Indebtedness of such other person, and any guarantee of Indebtedness of any other person. A-14 191 "ISSUE DATE" means the date of first issuance of the Securities under this Indenture. "LIEN" means any mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance against real or personal property, or a security interest of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell which is intended to constitute or create a security interest, mortgage, pledge or lien, and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction); provided that in no event shall an operating lease be deemed to constitute a Lien hereunder. "LOAN DOCUMENTS" means the Credit Agreement and all promissory notes, guarantees, security agreements, pledge agreements, deeds of trust, mortgages, letters of credit and other instruments, agreements and documents executed pursuant thereto or in connection therewith, including all amendments, supplements, extensions, renewals, restatements, replacements or refinancings thereof, or other modifications (in whole or in part, and without limitation as to amount, terms, conditions, covenants or other provisions) thereof from time to time. "MATURITY DATE" means December 15, 2004. "NET CASH PROCEEDS" means Net Proceeds of (i) the sale of Qualified Capital Stock of FFL, Holdings or the Company or (ii) any Asset Sale in the form of cash or Cash Equivalents. "NET PROCEEDS" means (a) in the case of any issuance and sale by any person of Qualified Capital Stock, the aggregate net proceeds received by such person after payment of expenses, taxes, commissions and the like incurred in connection therewith, whether such proceeds are in cash or in property (valued at the fair market value thereof at the time of receipt as determined in good faith by the Board of Directors of Holdings or, if the aggregate fair market value of all non-cash consideration received shall exceed $15 million, as determined by an Independent Financial Advisor) and (b) in the case of any conversion or exchange of any outstanding Indebtedness or Disqualified Capital Stock of such person for or into shares of Qualified Capital Stock of Holdings, the sum of (i) the fair market value of the proceeds received by Holdings in connection with the issuance of such Indebtedness or Disqualified Capital Stock on the date of such issuance and (ii) any additional amount paid by the holder to Holdings upon such conversion or exchange. "NET WORTH" as of any date means, with respect to any person, the amount of the equity of the holders of Capital Stock of such person that would appear on the balance sheet of such person as of such date, determined in accordance with GAAP, adjusted to include the amount of any minority interest attributed to Capital Stock held by management of Holdings or any Subsidiary reflected on such balance sheet as of the Issue Date and to exclude (to the extent included in such equity), (a) the amount of equity attributable to Disqualified Capital Stock (but only to the extent that any such equity would constitute Disqualified Capital Stock pursuant to clause (i) of the definition thereof) and (b) with respect to Holdings, the effect of (i) all non-cash charges reducing such equity amount and attributable to the early extinguishment of, or acceleration of costs of, the financing of the Alpha Beta Acquisition (other than amortization of original issue discount), (ii) prepayment penalties or other charges incurred in connection with the retirement of certain Indebtedness of a Subsidiary of Holdings existing immediately prior to the date of the Alpha Beta Acquisition and (iii) the recognition of deferred losses, in an amount not to exceed $3 million, on the Long Beach Warehouse. "OPERATING COVERAGE RATIO" means, with respect to any person, the ratio of (1) EBDIT of such person for the period (the "Pro Forma Period") consisting of the most recent four full fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Operating Coverage Ratio (the "Transaction Date") to (2) the aggregate Fixed Charges of such person for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter (the "Forward Period") reasonably anticipated by the Board of Directors of such person to become due from time to time during such period. In addition to, but without duplication of, the foregoing, for purposes of this definition, "EBDIT" shall be calculated after giving effect (without duplication), on a pro forma basis for the Pro Forma Period (but no longer), to (a) any Investment, during the period commencing on the first day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other person that, as a result of such Investment, becomes a subsidiary of such person, (b) the acquisition, during the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, which acquisition is not prohibited by this Indenture, and (c) any sales or other dispositions of assets (other than sales of inventory in the ordinary course of business) occurring during the Reference Period, in each case as if such incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, "Fixed Charges" shall be calculated after giving effect (without duplication), on a pro forma basis for the Forward Period, to any Indebtedness incurred or repaid on or after the first day of the Forward Period and prior to the Transaction Date. "PAYMENT RESTRICTION" means, with respect to a Subsidiary of any person, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) such subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to such person or any other subsidiary of such person, (b) make loans or advances to such person or any other subsidiary of such person, or A-15 192 (c) transfer any of its properties or assets to such person or any other subsidiary of such person, or (ii) such person or any such (a) dividends, distributions or payments, (b) loans or advances, or (c) transfer of properties or assets. "PERMITTED GUARANTEES" means (i) guarantees in effect on the Issue Date and (ii) guarantees incurred in the ordinary course of business, by Holdings or any Subsidiary, of Indebtedness of any other person. "PERMITTED HOLDER" means (i) Food 4 Less Equity Partners, L.P., The Yucaipa Companies or any entity controlled thereby, (ii) an employee benefit plan of Holdings, or any participant therein or any of Subsidiary, (iii) a trustee or other fiduciary holding securities under an employee benefit plan of Holdings or any Subsidiary or (v) any Permitted Transferee of any of the foregoing persons. "PERMITTED INVESTMENT" by any person means (i) any Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale or any other disposition of assets not constituting an Asset Sale by reason of the $250,000 threshold contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with the "Limitation on Restricted Payments" covenant and the "Limitation on Transactions with Affiliates" covenant and (vi) Investments by any Subsidiary in other Subsidiaries. "PERMITTED LIENS" shall mean (i) Liens for taxes, assessments, and governmental charges to the extent not required to be paid under "Payment of Taxes and Other Claims"; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen, or other like Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate process of law, and for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (iii) pledges or deposits in the ordinary course of business to secure lease obligations or nondelinquent obligations under workers' compensation, unemployment insurance or similar legislation; (iv) Liens to secure the performance of public statutory obligations that are not delinquent, appeal bonds, performance bonds or other obligations of a like nature (other than for borrowed money); (v) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of Holdings or any Subsidiary incurred in the ordinary course of business; (vi) purchase money Liens upon or in any real or personal property (including fixtures and other equipment) acquired or held by Holdings or any Subsidiary in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred solely for the purpose of financing or refinancing the acquisition or improvement of such property, or Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition) provided that (x) no such Lien shall extend to or cover any property other than the property being acquired or improved and (y) any such Indebtedness would be permitted to be incurred pursuant to the covenant entitled "Limitation on Additional Indebtedness." "PERMITTED PAYMENTS" means any payment by Holdings or any Subsidiary (i) to The Yucaipa Companies or the principals thereof for consulting, investment banking or similar services during such period pursuant to that certain Amended and Restated Consulting Agreement, dated as of June 17, 1991, among Supermarkets, Yucaipa Management Company and The Yucaipa Companies, as such amounts would be calculated under such Consulting Agreement as in effect on the Issue Date, (ii) pursuant to the Transfer and Assumption Agreement, dated as of June 23, 1989, between Supermarkets and FFL, as in effect on the Issue Date, and (iii) (a) in connection with repurchases of outstanding shares of Supermarkets', Holdings' and FFL's common stock following the death, disability or termination of employment of management stockholders, and (b) of amounts required to be paid by FFL, Holdings, Supermarkets or any Subsidiaries to participants in employee benefit plans upon any termination of employment by such participants, as provided in the documents related thereto, in an aggregate amount (for both clauses (a) and (b)) not to exceed $10 million in any Yearly Period (provided that any unused amounts may be carried over to any subsequent Yearly Period subject to a maximum amount of $20 million in any Yearly Period). "PERMITTED TRANSFEREES" means, with respect to any person, (i) any Affiliate of such person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such person, and (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such person or his or her spouse or lineal descendants, in each case to whom such person has transferred the beneficial ownership of any securities of FFL, Holdings or the Company. "PLAN OF LIQUIDATION" means, with respect to any person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such person to holders of Capital Stock of such person. "PREFERRED STOCK" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of such person's preferred or preference stock, whether outstanding on the date hereof or issued after the date of this Indenture, and including, without limitation, all classes and series of preferred or preference stock of such person. A-16 193 "PRO FORMA" means, with respect to any calculation made or required to be made pursuant to the terms of this Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as interpreted by Holdings' Board of Directors in consultation with its independent certified public accountants. "PRO FORMA PERIOD" shall have the meaning set forth in the definition of Operating Coverage Ratio. "PROPORTIONATE SHARE" means, as of any date, an amount equal to the product of (i) the Accreted Value for the immediately following Semi-Annual Accrual Date less the Accreted Value for the immediately preceding Semi-Annual Accrual Date times (ii) a fraction, the numerator of which is the actual number of days elapsed from the immediately preceding Semi-Annual Accrual Date to the date for which the Proportionate Share is being determined, and the denominator of which is the total number of days in the period between the immediately preceding Semi-Annual Accrual Date and the immediately following Semi-Annual Accrual Date. "PUBLIC OFFERING SALE" means any sale or issuance of common stock of FFL, Holdings or the Company pursuant to an Initial Public Offering. "QUALIFIED CAPITAL STOCK" means, with respect to any person, any Capital Stock of such person that is not Disqualified Capital Stock. "REFINANCING INDEBTEDNESS" means Indebtedness of Holdings or any Subsidiary (i) issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of Holdings or any Subsidiary (and any penalties, fees and expenses actually incurred by Holdings or such Subsidiary in connection with the repayment or amendment thereof) existing immediately after the original issuance of the Securities or incurred pursuant to paragraphs (b), (c), (d), (f), (g), (h), (i), (j), (k), (l), (m), (n), (o) or (p) of the covenant entitled "Limitation on Incurrences of Additional Indebtedness" in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (1) the principal amount of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (2) unpaid accrued interest on such Indebtedness plus (3) penalties, fees and expenses actually incurred by Holdings or such Subsidiary, as the case may be, in connection with the repayment or amendment thereof; or (ii) in an amount permitted to be incurred at the time of such incurrence by Holdings or such Subsidiary, as the case may be, under the Credit Agreement pursuant to the covenant entitled "Limitation on Incurrences of Additional Indebtedness." "RELATED BUSINESS INVESTMENT" means (i) any Investment by a person in any other person a majority of whose revenues are derived from the operation of one or more retail grocery stores or supermarkets or any other line of business engaged in by Holdings or any Subsidiary as of the Issue Date; (ii) any Investment by such person in any cooperative or other supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of Holdings and any Subsidiary as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment (without regard to the $5 million threshold in the definition thereof), in each case reasonably related to the business of Holdings and any Subsidiary as it is conducted as of the Issue Date and as such business may thereafter evolve or change. "RESTRICTED PAYMENT" means any (i) Stock Payment or (ii) Investment (other than a Permitted Investment). "REVOLVING CREDIT FACILITY" means the revolving credit facility under the Credit Agreement. "SEMI-ANNUAL ACCRUAL DATE" means each June 15 and December 15 in each year commencing on the Issue Date and ending on the Final Accretion Date. "SENIOR NOTE INDENTURE" means the Indenture dated as of April 15, 1992, among the Company, the subsidiary guarantors named therein and Norwest Bank Minnesota, N.A., as trustee, as amended or supplemented from time to time or an indenture pursuant to which the Senior Notes are issued which is identical in all material respects to the Senior Note Indenture, as amended or supplemented from time to time. "SENIOR NOTES" means the Company's 10.45% Senior Notes due 2000, as amended or supplemented from time to time, issued pursuant to the Senior Note Indenture dated as of April 15, 1992 among the Company, the subsidiary guarantors named therein and Norwest Bank Minnesota, N.A., as trustee, as amended from time to time. "SENIOR SUBORDINATED NOTE INDENTURE" means the Indenture dated as of June 15, 1991, among the Company, the subsidiary guarantors named therein and United States Trust Company of New York, as trustee, as amended or supplemented from time to time or an indenture pursuant to which Senior Subordinated Notes are issued which is identical in all material respects to the Senior Subordinated Note Indenture, as amended or supplemented from time to time. A-17 194 "SENIOR SUBORDINATED NOTES" means the Company's 13 3/4% Senior Subordinated Notes due 2001, as amended or supplemented from time to time, issued pursuant to the Senior Subordinated Note Indenture or an indenture which is identical in all material respects to the Senior Subordinated Note Indenture. "SIGNIFICANT STOCKHOLDER" means, with respect to any person, any other person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such person that are entitled to vote on a regular basis for the election of directors of such person. "SIGNIFICANT SUBSIDIARY" means each subsidiary of the Company that is either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the Securities Act and the Exchange Act (as such regulation is in effect on the date hereof) or (b) material to the financial condition or results of operations of Holdings and any Subsidiary taken as a whole. "STOCK PAYMENT" means, with respect to any person, (a) the declaration or payment by such person, either in cash or in property, of any dividend on (except, in the case of Holdings, dividends payable solely in Qualified Capital Stock of Holdings), or the making by such person or any of its subsidiaries of any other distribution in respect of, such person's Qualified Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), or (b) the redemption, repurchase, retirement or other acquisition for value by such person or any of its subsidiaries, directly or indirectly, of such person's Qualified Capital Stock (and, in the case of a Subsidiary, Qualified Capital Stock of Holdings) or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), other than, in the case of Holdings, through the issuance in exchange therefor solely of Qualified Capital Stock of Holdings; PROVIDED, HOWEVER, that in the case of a Subsidiary, the term "Stock Payment" shall not include any such payment with respect to its Capital Stock or warrants, rights or options to purchase or acquire shares of any class of its Capital Stock that are owned solely by Holdings or a wholly owned Subsidiary. "SUBSIDIARY" of any person means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly, owned by such person, by one or more subsidiaries of such person or by such person and one or more subsidiaries of such person or (ii) a partnership in which such person or a subsidiary of such person is, at the date of determination, a general partner of such partnership, but only if such person or its subsidiary is entitled to receive more than 50% of the assets of such partnership upon its dissolution, or (iii) any other person (other than a corporation or a partnership) in which such person, a subsidiary of such person or such person and one or more subsidiaries of such person, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such person. "SUBSIDIARY" means any subsidiary of Holdings. "SUBSIDIARY LETTER OF CREDIT OBLIGATIONS" means Indebtedness of the Subsidiaries with respect to letters of credit issued pursuant to the Credit Agreement, and for purposes of the provisions of the Holdings Discount Note Indenture summarized under the heading "Limitations on Incurrences of Additional Indebtedness" the aggregate principal amount of Indebtedness outstanding at any time with respect thereto, shall be deemed to consist of (a) the aggregate maximum amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "SUPPLEMENTARY DOCUMENTS" shall have the meaning provided in Section 1.01 of the Credit Agreement as in effect on the Issue Date. "TERM LOAN" means the term loan facility under the Credit Agreement. "THE YUCAIPA COMPANIES" means The Yucaipa Companies, a California general partnership. "TRANSACTION DATE" shall have the meaning provided in the definition of "Operating Coverage Ratio." "WHOLLY-OWNED SUBSIDIARY" means any Subsidiary all of the shares of Capital Stock of which (other than Permitted Preferred Stock and directors' qualifying shares) are at the time directly or indirectly owned by Holdings. "YEARLY PERIOD" means each fiscal year of Holdings; provided that the first Yearly Period shall begin on the Issue Date and shall end on June 26, 1993. A-18 195 The Depositary is: BANKERS TRUST COMPANY Facsimile Transmission Number: (212) 250-6275 (212) 250-3290 By Mail: (For Eligible Institutions Only) By Hand/Overnight Delivery: Bankers Trust Company Bankers Trust Company Corporate Trust and Agency Group Confirm by Telephone: Corporate Trust and Agency Group Reorganization Dept. (212) 250-6270 Receipt & Delivery Window P.O. Box 1458 123 Washington Street, 1st Floor Church Street Station New York, New York 10006 New York, New York 10008-1458
Any questions or requests for assistance or additional copies of this Offer to Purchase and Solicitation Statement, the Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Information Agent or one of the Dealer Managers at their respective telephone numbers and locations set forth below. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer to Purchase and the Solicitation. The Information Agent is: D.F. KING & CO., INC. Call Toll Free: (800) 669-5550 77 Water Street New York, NY 10005 (212) 269-5550 (collect) The Dealer Managers are: BT SECURITIES CS FIRST BOSTON DONALDSON, LUFKIN CORPORATION 55 East 52nd Street & JENRETTE One Bankers Trust Plaza New York, New York 10055 SECURITIES CORPORATION 130 Liberty Street (212) 909-2873 140 Broadway New York, New York 10006 New York, New York 10005 (212) 775-2166 (212) 504-4753
196 EDGAR APPENDIX This EDGAR Appendix is filed in compliance with Item 304 of Regulation S-T regarding graphic and image information. It describes material appearing on pages 7 and 8 of the Offer to Purchase and Solicitation Statement. PAGE 7 The chart consists of two columns which graphically illustrate the respective corporate structures of Food 4 Less and Ralphs before the Merger. Food 4 Less' corporate structure illustrates that Food 4 Less, Inc. ("FFL") owns Food 4 Less Holdings, Inc. ("Holdings"), which, in turn, owns Food 4 Less Supermarkets, Inc. ("Food 4 Less") which, in turn, owns several other Food 4 Less subsidiaries. The Ralphs' corporate structure illustrates that Ralphs Supermarkets, Inc. ("RSI"), owns Ralphs Grocery Company ("RGC") which, in turn, owns Crawford Stores, Inc. A dotted arrow has been drawn from the box representing Food 4 Less to the box representing RSI to simulate the RSI Merger. A dotted arrow has been drawn from the box representing RGC to the box representing RSI to simulate the RGC Merger. A dotted arrow has been drawn to the box representing Holdings from the box representing FFL to simulate the FFL Merger. PAGE 8 The chart illustrates the corporate structure of the Company after the Merger and the FFL Merger. The corporate structure illustrates that New Holdings owns the Company which, in turn, is the parent of all other subsidiaries of the Company. The anticipated debt obligations of New Holdings are placed in order of ranking next to the box representing New Holdings and the anticipated debt obligations of the Company are placed in order of ranking next to the box representing the Company. 197 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Holdings is a California corporation and its Certificate of Incorporation and Bylaws provide for indemnification of its officers and directors to the fullest extent permitted by law. Section 204(10) of the California General Corporation Law (the "CGCL") eliminates the liability of a corporation's directors for monetary damages to the fullest extent permissible under California law. Pursuant to Section 204(11) of the CGCL, a California corporation may indemnify Agents (as defined in Section 317 of the CGCL), subject only to the applicable limits set forth in Section 204 of the CGCL with respect to actions for breach of duty to the corporation and its shareholders. As permitted by Section 317 of the CGCL, indemnification may be provided by a California corporation of its Agents (as defined in Section 317 of the CGCL), to the maximum extent permitted by the CGCL, in connection with any proceeding arising by reason of the fact that such person is or was such a director or officer, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in any such proceeding. New Holdings is a Delaware corporation and its Certificate of Incorporation and Bylaws provide for indemnification of its officers and directors to the fullest extent permitted by law. Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL") eliminates the liability of a corporation's directors to a corporation or its stockholders, except for liabilities related to breach of duly of loyalty, actions not in good faith, and certain other liabilities. Section 145 of the DGCL provides for the indemnification by a Delaware corporation of its directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against liabilities and expenses incurred in any such action, suit or proceeding. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits A list of exhibits filed with this Registration Statement on Form S-4 is set forth in the Index to Exhibits on page E-1, and is incorporated herein by reference. (b) Financial Statement Schedules (i) Ralphs Schedule II -- Valuation and Qualifying Accounts (ii) Holdings Schedule I -- Condensed Financial Information of Registrant Schedule II -- Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled II-1 198 by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (d) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus ant facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-2 199 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-effective Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on April 27, 1995. FOOD 4 LESS HOLDINGS, INC., a California corporation By: /s/ MARK A. RESNIK ------------------------------------ Mark A. Resnik Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, this Post-effective Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Chief Executive Officer and April 27, 1995 - --------------------------------------------- Director (Principal Executive Ronald W. Burkle Officer) * Executive Vice President -- April 27, 1995 - --------------------------------------------- Finance/Administration and Greg Mays Chief Financial Officer (Principal Financial and Accounting Officer) * Director April 27, 1995 - --------------------------------------------- Joe S. Burkle /s/ MARK A. RESNIK Director April 27, 1995 - --------------------------------------------- Mark A. Resnik * Director April 27, 1995 - --------------------------------------------- George G. Golleher * Power of Attorney by /s/ MARK A. RESNIK - --------------------------------------------- Mark A. Resnik Vice President and Secretary
II-3 200 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-effective Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on April 27, 1995. FOOD 4 LESS HOLDINGS, INC., a Delaware corporation By: /s/ MARK A. RESNIK ------------------------------------- Mark A. Resnik Vice President and Secretary POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Ronald W. Burkle, George G. Golleher and Mark A. Resnik, his true and lawful attorney and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney and agent, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney and agent, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Post-effective Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD W. BURKLE President and Director April 27, 1995 - --------------------------------------------- (Principal Executive Officer) Ronald W. Burkle /s/ GREG MAYS Executive Vice President April 27, 1995 - --------------------------------------------- (Principal Financial and Greg Mays Accounting Officer) /s/ JOE S. BURKLE Director April 27, 1995 - --------------------------------------------- Joe S. Burkle /s/ MARK A. RESNIK Secretary and Director April 27, 1995 - --------------------------------------------- Mark A. Resnik /s/ GEORGE G. GOLLEHER Director April 27, 1995 - --------------------------------------------- George G. Golleher /s/ PATRICK L. GRAHAM Director April 27, 1995 - --------------------------------------------- Patrick L. Graham
II-4 201 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULES Board of Directors and Stockholders Ralphs Supermarkets, Inc.: The audits referred to in our report dated March 9, 1995 included the related financial statement schedule as of January 30, 1994 and January 29, 1995, and for each of the fiscal years in the three-year period ended January 29, 1995, included in the registration statement. This financial statement schedule is the responsibility of Ralphs management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the headings "Summary Historical Financial Data of Ralphs," "Selected Historical Financial Data of Ralphs" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Los Angeles, California April 25, 1995 S-1 202 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS 52 WEEKS ENDED JANUARY 29, 1995, 52 WEEKS ENDED JANUARY 30, 1994 AND 52 WEEKS ENDED JANUARY 31, 1993 (IN THOUSANDS)
BALANCE CHARGED TO BALANCE BEGINNING COSTS AND CHARGED TO DEDUCTIONS AT END OF PERIOD EXPENSES OTHER ACCOUNTS(b) (PAYMENTS) OF PERIOD --------- ---------- ----------------- ---------- --------- JANUARY 29, 1995: Self-Insurance Reserves(a)............. $80,010 $14,003 $ 5,976 $(27,483) $72,506 Store Closure Reserves................. $ 9,514 $ -- $ -- $ (764) $ 8,750 JANUARY 30, 1994: Self-Insurance Reserves(a)............. $72,979 $30,323 $ 5,953 $(29,245) $80,010 Store Closure Reserves................. $10,277 $ -- $ -- $ (763) $ 9,514 JANUARY 31, 1993: Self-Insurance Reserves(a)............. $64,523 $25,950 $10,902 $(28,396) $72,979 Store Closure Reserves................. $14,244 $ 1,838 $ -- $ (5,805) $10,277
- --------------- (a) Includes short-term portion. (b) Amortization of discount on self-insurance reserves to interest expense. S-2 203 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Food 4 Less Holdings, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Food 4 Less Holdings, Inc. (a California corporation) and subsidiaries as of June 26, 1993 and June 25, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, and the 52 weeks ended June 25, 1994 and have issued our report thereon dated July 29, 1994 (except with respect to the matter discussed in Note 13, as to which the date is October 14, 1994, and with respect to the matter discussed in Note 14, as to which the date is April 13, 1995). Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules on pages S-4 through S-7 are the responsibility of Holdings' management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Los Angeles, California July 29, 1994 (except with respect to the matter discussed in Note 13, as to which the date is October 14, 1994, and with respect to the matter discussed in Note 14, as to which the date is April 13, 1995) S-3 204 FOOD 4 LESS HOLDINGS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT AS OF, AND FOR, THE 52 WEEKS ENDED JUNE 25, 1994 (DOLLARS IN THOUSANDS) The following condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. CONDENSED BALANCE SHEET
JUNE 25, 1994 -------- ASSETS Investment in subsidiary........................................................ $ 69,021 -------- Total Assets............................................................ $ 69,021 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Senior discount notes........................................................... $ 58,997 Common stock: $0.01 par value, 1,600,000 shares authorized and 1,381,782 outstanding.................................................................. 14 Additional paid-in capital...................................................... 34,413 Retained deficit................................................................ (24,403) -------- Total Liabilities and Shareholders' Equity.............................. $ 69,021 ========
CONDENSED STATEMENT OF LOSS
52 WEEKS ENDED JUNE 25, 1994 -------- Net loss of subsidiary............................................................ $ (2,700) Interest expense.................................................................. (8,767) -------- Total loss.............................................................. $(11,467) ========
S-4 205 FOOD 4 LESS HOLDINGS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT AS OF, AND FOR, THE 52 WEEKS ENDED JUNE 25, 1994 (DOLLARS IN THOUSANDS) CONDENSED STATEMENT OF CASH FLOWS RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Net loss........................................................ $(11,467) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Net loss of subsidiary....................................... 2,700 Accretion of Holdings Discount Notes......................... 8,767 -------- NET CASH USED BY OPERATING ACTIVITIES............................. -- NET INCREASE IN CASH AND CASH EQUIVALENTS......................... -- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................. -- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ -- ========
S-5 206 FOOD 4 LESS HOLDINGS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Food 4 Less Holdings, Inc. (the "Company") is a non-operating holding company. The above financial statements have been prepared on a parent company stand-alone basis. They do not contain all disclosures necessary to be in conformity with generally accepted accounting principles. They should be read in conjunction with the consolidated financial statements of Food 4 Less Holdings, Inc. contained elsewhere in this report. 2. The debt agreements of the Company's subsidiary, Food 4 Less Supermarkets, Inc. ("Supermarkets"), among other things, require Supermarkets to maintain minimum levels of net worth (as defined), to maintain minimum levels of earnings (as defined), to maintain a hedge agreement to provide interest rate protection, and to comply with certain ratios related to interest expense (as defined), fixed charges (as defined), working capital and indebtedness. In addition, the debt agreements limit, among other things, additional borrowings, dividends on, and redemption of, capital stock, capital expenditures, incurrence of lease obligations, and the acquisition and disposition of assets. At June 25, 1994, dividends and certain other payments are restricted based on terms of the debt agreements. S-6 207 FOOD 4 LESS HOLDINGS, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS 52 WEEKS ENDED JUNE 25, 1994, 52 WEEKS ENDED JUNE 26, 1993, AND 52 WEEKS ENDED JUNE 27, 1992 (DOLLARS IN THOUSANDS)
BALANCE AT PROVISIONS CHARGED TO BALANCE AT BEGINNING CHARGED TO INTEREST OTHER END OF OF PERIOD EXPENSE EXPENSE(b) PAYMENTS CHANGES PERIOD ----------- ----------- ----------- --------- -------- ---------- SELF-INSURANCE LIABILITIES: 52 weeks ended June 25, 1994...... $85,494 $19,880 $5,836 $29,506 $ -- $81,704 ======= ======= ====== ======= ====== ======= 52 weeks ended June 26, 1993...... $82,559 $38,040 $5,865 $40,970 $ -- $85,494 ======= ======= ====== ======= ====== ======= 52 weeks ended June 27, 1992...... $59,525 $46,140 $4,960 $36,066 $8,000(a) $82,559 ======= ======= ====== ======= ====== =======
- --------------- (a) Reflects self-insurance reserve related to Alpha Beta resulting from the acquisition of Alpha Beta. (b) Amortization of discount on self-insurance reserves charged to interest expense. S-7 208 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 1.1 Form of Dealer Manager Agreement among Food 4 Less Supermarkets, Inc., Food 4 Less Holdings, Inc., the subsidiary guarantors named therein, BT Securities Corporation, CS First Boston Corporation and Donaldson, Lufkin & Jenrette Securities Corporation dated as of January , 1995 (incorporated herein by reference to Exhibit 1.1 to Amendment No. 2 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)........ 1.1.1 Form of Amendment No. 1 to Dealer Manager Agreement among Food 4 Less Supermarkets, Inc., Food 4 Less Holdings, Inc., the subsidiary guarantors named therein, BT Securities Corporation, CS First Boston Corporation and Donaldson, Lufkin & Jenrette Securities Corporation dated as of April , 1995............................................ 2.1 Agreement and Plan of Merger by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less Supermarkets, Inc., Ralphs Supermarkets, Inc. and the Stockholders of Ralphs Supermarkets, Inc. (incorporated herein by reference to Exhibit 99 to Food 4 Less Holdings, Inc.'s Form 8-K dated September 14, 1994)................... 2.1.1 Amendment No. 1 dated as of January 12, 1995, to Agreement and Plan of Merger by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less Holdings, Inc. (a Delaware corporation), Food 4 Less, Ralphs Supermarkets, Inc. and the stockholders of Ralphs Supermarkets, Inc. (incorporated herein by reference to Exhibit 2.1.1 to Amendment No. 2 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)............................................................. 2.1.2 Amendment No. 2 dated as of February 24, 1995, to the Agreement and Plan of Merger by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less Holdings, Inc. (a Delaware corporation), Food 4 Less, Ralphs Supermarkets, Inc. and the stockholders of Ralphs Supermarkets, Inc..................................................... 2.1.3 Amendment No. 3 dated as of April 26, 1995, to the Agreement and Plan of Merger by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less Holdings, Inc. (a Delaware corporation), Food 4 Less, Ralphs Supermarkets, Inc. and the stockholders of Ralphs Supermarkets, Inc................................................................... 3.1 Articles of Incorporation of Food 4 Less Holdings, Inc. (incorporated herein by reference to Exhibit 3.1 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)..................... 3.2 Bylaws of Food 4 Less Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)............................................ 3.3 Certificate of Incorporation of Food 4 Less Holdings, Inc. (a Delaware corporation) (incorporated herein by reference to Exhibit 3.3 to New Holdings' Registration Statement on Form S-4, No. 33-88894)........... 3.4 Bylaws of Food 4 Less Holdings, Inc. (a Delaware corporation) (incorporated herein by reference to Exhibit 3.4 to New Holdings' Registration Statement on Form S-4, No. 33-88894)..................... 3.4.1 Amended and Restated Bylaws of Food 4 Less Holdings, Inc. (a Delaware corporation).......................................................... 4.1 Form of Senior Note Indenture dated as of , 1995 by and among Ralphs Grocery Company (as successor by merger to Food 4 Less), the subsidiary guarantors identified therein and Norwest Bank Minnesota, N.A., as trustee, with respect to its Senior Notes due 2004 (incorporated herein by reference to Exhibit 4.1 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)........
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EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 4.2 Form of Senior Subordinated Note Indenture dated as of , 1995 by and among Ralphs Grocery Company (as successor by merger to Food 4 Less), the subsidiary guarantors identified therein and United States Trust Company of New York, as trustee, with respect to its 13.75% Senior Subordinated Notes due 2005 (incorporated herein by reference to Exhibit 4.2 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)........ 4.3 Form of Senior Subordinated Note Indenture dated as of , 1995 by and among Ralphs Grocery Company (as successor by merger to Food 4 Less), the subsidiary guarantors identified therein and United States Trust Company of New York, as trustee, with respect to its Senior Subordinated Notes due 2005 (incorporated herein by reference to Exhibit 4.3 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56445)........ 4.4.1 Form of First Supplemental Indenture dated as of , 1995 by and between Ralphs Grocery Company and United States Trust Company of New York, as trustee, with respect to its 10 1/4% Senior Subordinated Notes due 2002 (incorporated herein by reference to Exhibit 4.4.1 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56445).................................. 4.4.2 Form of Second Supplemental Indenture dated as of , 1995 by and between Ralphs Grocery Company (as successor by merger to Food 4 Less) and United States Trust Company of New York, as trustee, with respect to its 10 1/4% Senior Subordinated Notes due 2002 (incorporated herein by reference to Exhibit 4.4.2 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56445)..... 4.5.1 Form of Second Supplemental Indenture dated as of , 1995 by and between Ralphs Grocery Company (as successor by merger to Food 4 Less) and United States Trust Company of New York, as trustee, with respect to the 9% Senior Subordinated Notes due 2003 (incorporated herein by reference to Exhibit 4.5.1 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56445)..... 4.5.2 Form of Third Supplemental Indenture dated as of , 1995 by and between Ralphs Grocery Company (as successor by merger to Food 4 Less) and United States Trust Company of New York, as trustee, with respect to its 9% Senior Subordinated Notes due 2003 (incorporated herein by reference to Exhibit 4.5.2 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56445)............... 4.6.1 Holdings Discount Note Indenture dated as of December 15, 1992 by and among Food 4 Less Holdings, Inc. and United States Trust Company of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)......................................................... 4.6.2 Form of First Supplemental Indenture dated as of , 1995 by and among Food 4 Less Holdings, Inc. and United States Trust Company of New York, as trustee....................................... 4.6.3 Form of Second Supplemental Indenture dated as of , 1995 by and among Food 4 Less Holdings, Inc. (a Delaware corporation) and United States Trust Company of New York, as trustee................... 4.7 Senior Note Indenture dated as of April 15, 1992 by and among Food 4 Less Supermarkets, Inc., the subsidiary guarantors identified therein and Norwest Bank Minnesota, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to Food 4 Less Supermarkets, Inc.'s Registration Statement on Form S-1, No. 33-46750).....................
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EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 4.7.1 First Supplemental Indenture dated as of July 24, 1992 by and among Food 4 Less Supermarkets, Inc., Bay Area Warehouse Stores, Inc., and Norwest Bank Minnesota, N.A., as trustee (incorporated herein by reference to Exhibit 4.1.1 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 27, 1992).......... 4.7.2 Form of Second Supplemental Indenture dated as of , 1995 by and among Food 4 Less Supermarkets, Inc., the subsidiary guarantors identified therein and Norwest Bank Minnesota, N.A., as trustee (incorporated herein by reference to Exhibit 4.6.2 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)......................................................... 4.7.3 Form of Third Supplemental Indenture dated as of , 1995 by and among Ralphs Grocery Company (as successor by merger to Food 4 Less) the subsidiary guarantors identified therein and Norwest Bank Minnesota, N.A., as trustee (incorporated herein by reference to Exhibit 4.6.3 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451).................................. 4.8 Senior Subordinated Note Indenture dated as of June 15, 1991 by and among Food 4 Less Supermarkets, Inc., the subsidiary guarantors identified therein and United States Trust Company of New York as trustee (incorporated herein by reference to Exhibit 4.1 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 29, 1991)............................................. 4.8.1 First Supplemental Indenture dated as of April 8, 1992 by and among Food 4 Less Supermarkets, Inc., Food 4 Less GM, Inc. and United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.2.1 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 27, 1992).......... 4.8.2 Second Supplemental Indenture dated as of May 18, 1992 by and among Food 4 Less Supermarkets, Inc., the subsidiary guarantors named therein and United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.2.2 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 27, 1992).................................................. 4.8.3 Third Supplemental Indenture dated as of July 24, 1992 by and among Food 4 Less Supermarkets, Inc., Bay Area Warehouse Stores, Inc. and United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.2.3 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 27, 1992)................................................................. 4.8.4 Form of Fourth Supplemental Indenture dated as of , 1995, by and among Food 4 Less Supermarkets, Inc., the subsidiary guarantors identified therein and United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.7.4 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)......................................................... 4.8.5 Form of Fifth Supplemental Indenture dated as of , 1995 by and among Ralphs Grocery Company (as successor by merger to Food 4 Less), the subsidiary guarantors identified therein and the United States Trust Company of New York, as trustee (incorporated herein by reference to Exhibit 4.7.5 to Amendment No. 1 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)..................... 4.9 Credit Agreement dated as of June 17, 1991 by and among Food 4 Less and the subsidiaries named therein, as borrowers; Citicorp North America, Inc., Bankers Trust Company and Manufacturers Hanover Trust Company, as Co-Agents, Citicorp North America, Inc. as Administrative Agent and the Initial Lenders and the Designated Issuers, all as identified therein (incorporated herein by reference to Exhibit 4.4 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 29, 1991).............................................................
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EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 4.9.1 First Modification Agreement dated as of January 24, 1992 by and among Food 4 Less and the subsidiaries named therein, as borrowers; Citicorp North America, Inc., Bankers Trust Company and Manufacturers Hanover Trust Company, as Co-Agents, Citicorp North America, Inc. as Administrative Agent and the Required Lenders and the other Loan Parties, all as identified therein (incorporated herein by reference to Exhibit 4.5.1 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992)...................................... 4.9.2 Second Modification Agreement dated as of April 13, 1992 by and among Food 4 Less, and the subsidiaries named therein, as borrowers; Citicorp North America, Inc., Bankers Trust Company and Manufacturers Hanover Trust Company as Co-Agents, Citicorp North America, Inc. as Administrative Agent and the Required Lenders and the other Loan Parties, all as identified therein (incorporated herein by reference to Exhibit 4.5.2 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992)...................................... 4.9.3 Third Modification Agreement dated as of September 15, 1992 by and among Food 4 Less, Alpha Beta Company, Cala Foods, Inc., Falley's, Inc. and Food 4 Less Merchandising, Inc., as borrowers; Citicorp North America, Inc., Bankers Trust Company and Manufacturers Hanover Trust Company, as Co-Agents, Citicorp North America, Inc. as Administrative Agent and the Required Lenders and the other Loan Parties, all as identified therein (incorporated herein by reference to Exhibit 4.5.3 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992)........................................................ 4.9.4 Fourth Modification Agreement dated as of October 9, 1992 by and among Food 4 Less, Alpha Beta Company, Cala Foods, Inc., Falley's, Inc. and Food 4 Less Merchandising, Inc., as borrowers; Citicorp North America, Inc., Bankers Trust Company and Manufacturers Hanover Trust Company, as Co-Agents, Citicorp North America, Inc. as Administrative Agent and the Required Lenders and the other Loan Parties, all as identified therein (incorporated herein by reference to Exhibit 4.5.4 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 27, 1992)................................................................. 4.9.5 Fifth Modification Agreement dated as of December 21, 1992 by and among Food 4 Less, Alpha Beta Company, Cala Foods, Inc., Falley's, Inc. and Food 4 Less Merchandising, Inc., as borrowers; Citicorp North America, Inc., Bankers Trust Company and Chemical Bank (as successor in interest to Manufacturers Hanover Trust Company), as Co-Agents, Citicorp North America, Inc. as Administrative Agent and the Required Lenders and the other Loan Parties, all as identified therein (incorporated herein by reference to Exhibit 19.1 to Food 4 Less' Quarterly Report on Form 10-Q for the quarter ended April 3, 1993).... 4.9.6 Sixth Modification Agreement dated as of November 22, 1994 by and among Food 4 Less, the subsidiaries named therein, as borrowers, and Bankers Trust Company, Citicorp North America, Inc. and Chemical Bank as Co-Agents, Citicorp North America, Inc., as Administrative Agent and the Required Lenders and the other Loan Parties, all as identified therein (incorporated herein by reference to Exhibit 4.8.6 to Amendment No. 2 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)......................................................... 4.9.7 Seventh Modification Agreement dated as of January 23, 1995 by and among Food 4 Less, the subsidiaries named therein, as borrowers, and Bankers Trust Company, Citicorp North America, Inc. and Chemical Bank as Co-Agents, Citicorp North America, Inc., as Administrative Agent and the Required Lenders and the other Loan Parties, all as identified therein (incorporated herein by reference to Exhibit 4.8.7 to Amendment No. 2 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451).........................................................
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EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 4.10.1 Bank commitment letter by and among Food 4 Less Supermarkets, Inc., the guarantors named therein and Bankers Trust Company, as agent, and the financial institutions identified therein (incorporated herein by reference to Exhibit 4.9 to Amendment No. 2 to Food 4 Less' Registration Statement on Form S-4, No. 33-56451)..................... 4.10.2 Form of Amendment No. 1 to bank commitment letter dated as of April , 1995 by and among Food 4 Less Supermarkets, Inc., the guarantors named therein and Bankers Trust Company, as agent, and the financial institutions identified therein....................................... 5.1 Form of Opinion of Latham & Watkins regarding the legality of the Discount Notes, including consent+.................................... 8.1 Form of Opinion of Latham & Watkins regarding certain tax matters with respect to the Discount Notes, including consent+..................... 9 Stockholder Voting Agreement and Proxy dated as of December 31, 1992 by and among Ronald W. Burkle, George G. Golleher, Yucaipa Capital Advisors, Inc. and the Management Shareholders of Food 4 Less Holdings, Inc. (incorporated herein by reference to Exhibit 9 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)............................................................. 10.1 Common Stock Registration Rights Agreement dated as of December 31, 1992 by and among Food 4 Less Holdings, Inc. and the purchasers named therein (incorporated herein by reference to Exhibit 10.1 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)............................................................. 10.2 Warrant Agreement dated as of December 31, 1992 by and among Food 4 Less Holdings, Inc. and the purchasers named therein (incorporated herein by reference to Exhibit 10.2 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)..................... 10.3 Warrantholders Agreement dated as of December 31, 1992 by and among Food 4 Less Holdings, Inc., Food 4 Less, Inc. and the purchasers named therein (incorporated herein by reference to Exhibit 10.3 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)............................................................. 10.4 Lease dated as of June 17, 1991 by and between Food 4 Less Supermarkets, Inc. and American Food and Drug, Inc. relating to La Habra, California property (incorporated herein by reference to Exhibit 10.4 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 29, 1991)......................... 10.5 Stockholders Agreement dated as of June 23, 1989 by and among Food 4 Less Supermarkets, Inc., Food 4 Less, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.16 to Food 4 Less' Registration Statement on Form S-1, No. 33-31152)..................... 10.5.1 Amendment dated as of May 4, 1990 to Stockholders Agreement by and among Food 4 Less Supermarkets, Inc., Food 4 Less, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.58 to Food 4 Less Supermarkets, Inc.'s Registration Statement on Form S-1, No. 33-31152)............................................................. 10.5.2 Letter Agreement dated as of June 27, 1990 by and among Peter J. Sodini, The Boys Markets, Inc., and certain affiliates, officers, directors and employees of Food 4 Less Supermarkets, Inc. (incorporated herein by reference to Exhibit 10.39.1 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 30, 1990).................................................. 10.5.3 Assignment and Assumption Agreement dated as of August 22, 1990 by and between Peter J. Sodini and Ronald W. Burkle with respect to Stockholders Agreement by and among Food 4 Less, Food 4 Less, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.16.2 to Food 4 Less' Annual Report on Form 10-K for the fiscal year ended June 30, 1990)........................................................
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EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 10.5.4 Amendment dated as of December 31, 1992 by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less Supermarkets, Inc. and Ronald W. Burkle to Stockholders Agreement by and among Food 4 Less, Food 4 Less Supermarkets, Inc. and Peter J. Sodini (incorporated herein by reference to Exhibit 10.6.2 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214)..................... 10.6 Stockholders Agreement dated as of June 23, 1989 by and among Food 4 Less Supermarkets, Inc., Food 4 Less, Inc. and George G. Golleher (incorporated herein by reference to Exhibit 10.17 to Food 4 Less Supermarkets, Inc.'s Registration Statement on Form S-1, No. 33-31152)............................................................. 10.6.1 Amendment dated as of May 4, 1990 to Stockholders Agreement by and among Food 4 Less, Food 4 Less, Inc. and George G. Golleher (incorporated herein by reference to Exhibit 10.59 to Food 4 Less' Registration Statement on Form S-1, No. 33-31152)..................... 10.6.2 Amendment dated as of December 31, 1992 by and among Food 4 Less Holdings, Inc., Food 4 Less Supermarkets, Inc., Food 4 Less, Inc. and George G. Golleher to Stockholders Agreement by and among Food 4 Less Supermarkets, Inc., Food 4 Less, Inc. and George G. Golleher (incorporated herein by reference to Exhibit 10.8.2 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214).... 10.7 Letter Agreement dated as of September 14, 1994 by and among FFL Partners, Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less Supermarkets, Inc. and Falley's Inc. relating to certain obligations arising under the Falley's, Inc. Stock Ownership Plan and Trust, as amended (incorporated herein by reference to Exhibit 10.4 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 25, 1994)............................................. 10.8 Consulting Agreement dated as of June 27, 1988 by and between Falley's, Inc. and Joe S. Burkle (incorporated herein by reference to Exhibit 10.38 to Food 4 Less Supermarkets, Inc.'s Registration Statement on Form S-1, No. 33-31152).................................. 10.8.1 Letter Agreement dated as of December 10, 1990 amending Consulting Agreement by and between Falley's, Inc. and Joe S. Burkle (incorporated herein by reference to Exhibit 10.17.1 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 29, 1991).................................................. 10.9 Employment Agreement dated as of July 1, 1994 between Food 4 Less Supermarkets, Inc. and Harley DeLano (incorporated herein by reference to Exhibit 10.9 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K dated June 25, 1994)........................................ 10.10 Employment Agreement dated as of July 1, 1994 between Food 4 Less Supermarkets, Inc. and Greg Mays (incorporated herein by reference to Exhibit 10.10 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K dated June 25, 1994)........................................ 10.11 Amended and Restated Tax Sharing Agreement dated as of June 17, 1991 by and among Food 4 Less, Inc., Food 4 Less Supermarkets, Inc. and the subsidiaries of Food 4 Less Supermarkets, Inc. (incorporated herein by reference to Exhibit 10.20 to Food 4 Less Supermarkets, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 29, 1991).......... 10.12 Stockholders Agreement dated as of December 31, 1992 by and between Food 4 Less Holdings, Inc. and each Management Stockholder (incorporated herein by reference to Exhibit 10.9 to Food 4 Less Holdings, Inc.'s Registration Statement on Form S-4, No. 33-59214).... 12.1 Statements regarding computations of ratios of earnings to fixed charges............................................................... 21.1 Subsidiaries of Food 4 Less Holdings, Inc. (incorporated herein by reference to Exhibit 21 to Food 4 Less Holdings, Inc.'s Annual Report on Form 10-K dated June 25, 1994).....................................
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EXHIBIT NUMBER DESCRIPTION PAGE ------- ---------------------------------------------------------------------- ---- 23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants........................................................... 23.2 Consent of Arthur Andersen LLP, independent public accountants........ 23.3 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5 to the Registration Statement)+..................................... 24 Power of Attorney of directors and officers of Food 4 Less Holdings, Inc. (included in the signature pages in Part II of the Registration Statement)+........................................................... 24.1 Power of Attorney of directors and officers of Food 4 Less Holdings, Inc. (a Delaware corporation) (included in the signature pages in Part II of the Registration Statement)..................................... 99.1 Letter of Transmittal and Consent with respect to the Offer to Purchase and the Solicitation......................................... 99.2 Notice of Guaranteed Delivery with respect to the Offer to Purchase and the Solicitation.................................................. 99.3 Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees with respect to the Offer to Purchase and the Solicitation.......................................................... 99.4 Letter to Clients with respect to the Offer to Purchase and the Solicitation.......................................................... 99.5 Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9...................................................
- --------------- + Previously filed. E-7 EX-1.1.1 2 DEALER MANAGER AGREEMENT, FORM OF AMENDMENT NO.1 1 EXHIBIT 1.1.1 Amendment No. 1 to Dealer Manager Agreement This AMENDMENT NO. 1 dated as of April __, 1995 (this "Amendment") to the Dealer Manager Agreement, dated as of January 25, 1995 (the "Dealer Manager Agreement"), among each of Food 4 Less, Inc., Food 4 Less Holdings, Inc., Food 4 Less Supermarkets, Inc., Alpha Beta Company, Bay Area Warehouse Stores, Inc., Bell Markets, Inc., Cala Co., Cala Foods, Inc., Falley's, Inc., Food 4 Less of California, Inc., Food 4 Less Merchandising, Inc., Food 4 Less of Southern California, Inc., Food 4 Less GM, Inc. and Ralphs Supermarkets, Inc., on the one hand, and BT Securities Corporation ("BTSC"), CS First Boston Corporation, and Donald, Lufkin & Jenrette Securities Corporation (collectively, the "Dealer Managers") on the other hand. Unless otherwise specifically defined herein, each term used herein that is defined in the Dealer Manager Agreement shall have the meaning assigned to such term in the Dealer Manager Agreement. SECTION 1. The recitals to the Dealer Manager Agreement are hereby amended and restated in their entirety so that it reads as follows: "Food 4 Less Supermarkets, Inc., a Delaware corporation ("Food 4 Less"), intends to merge (the "Merger") with and into Ralphs Supermarkets, Inc., a Delaware corporation ("RSI"), with RSI surviving the Merger (as such surviving company, the "Surviving Company"), pursuant to an Agreement and Plan of Merger dated as of September 14, 1994 (as amended through the date hereof, the "Merger Agreement"), by and among Food 4 Less, Food 4 Less, Inc. ("F4L"), Food 4 Less Holdings, Inc. ("Holdings"), RSI and the stockholders of RSI. Upon consummation of the Merger, it is anticipated that the Surviving Company will merge with its wholly owned subsidiary, Ralphs Grocery Company, a Delaware corporation ("RGC"), with the Surviving Company surviving such merger (the "Subsequent Merger", and together with the Merger, the "Mergers"). Upon consummation of the Mergers, the Surviving Company will change its name to "Ralphs Grocery Company" ("Ralphs"). Prior to the Merger, (i) F4L intends to merge with Holdings, with Holdings surviving such merger (the "F4L Merger") and (ii) immediately following the F4L Merger, Holdings will merge with and into its newly formed wholly-owned subsidiary incorporated in Delaware ("New Holdings"), with New Holdings surviving such Merger (the "Delaware Merger" and together with the F4L Merger, the "Equity Merger"). 2 "In connection with the Mergers, Food 4 Less proposes to offer (collectively, the "F4L Exchange Offers") (i) to holders of its 10.45% Senior Notes due 2000 (the "Old F4L 10.45% Notes") and its 13.75% Senior Subordinated Notes due 2001 (the "Old F4L 13.75% Notes", and together with the Old 10.45% Notes, the "Old F4L Notes") upon the terms and subject to the conditions set forth in the Prospectus and Solicitation Statement dated April __, 1995 (the "F4L Prospectus"), to exchange (a) for each $1,000 principal amount of Old 10.45% Notes, $1,000 principal amount of new Senior Notes due 2004 of the Surviving Company (the "New Senior Notes") and a cash payment and (b) for each $1,000 principal amount of Old 13.75% Notes, $1,000 principal amount of new Senior Subordinated Notes due 2005 of the Surviving Company (the "New F4L Senior Subordinated Notes", and together with the New Senior Notes, the "New F4L Notes") and a cash payment and (ii) to holders of the 9% Senior Subordinated Notes due 2003 of RGC (the "9% RGC Notes") and the 10 1/4% Senior Subordinated Notes due 2002 of RGC (the "10 1/4% RGC Notes", and together with the 9% RGC Notes, the "Old RGC Notes", and together with the Old F4L Notes, the "Old Notes") upon the terms and subject to the conditions set forth in the Prospectus and Solicitation Statement dated April ___, 1995 (the "RGC Prospectus"), (a) to exchange for each $1,000 principal amount of Old RGC Notes, $1,000 principal amount of new Senior Subordinated Notes due 2005 of the Surviving Company (the "New RGC Notes" and collectively with New F4L Notes, the "New Notes") and a cash payment and (b) to purchase for cash any or all of the Old RGC Notes. The New F4L Senior Subordinated Notes will be issued pursuant to an Indenture (the "F4L Senior Subordinated Note Indenture") to be entered into by the Surviving Company, as issuer, each of Alpha Beta Company, Bay Area Warehouse Stores, Inc., Bell Markets, Inc., Cala Co., Cala Foods, Inc., Falley's Inc., Food 4 Less of California, Inc., Food 4 Less Merchandising, Inc., Food 4 Less of Southern California, Inc. and Food 4 Less GM, Inc., as guarantors, (collectively, the "Subsidiary Guarantors") and United States Trust Company of New York, as trustee (the "F4L Senior Subordinated Note Trustee"). The New Senior Notes will be issued pursuant to an Indenture (the "Senior Note Indenture") to be entered into by the Surviving Company, as issuer, the Subsidiary Guarantors, as guarantors, and Norwest Bank Minnesota N.A., as trustee (the "Senior Note Trustee). The New RGC Notes will be issued pursuant to an Indenture (the "RGC Note Indenture" and collectively with the F4L Senior Note Indenture and the F4L Senior Subordinated Note Indenture, the "Indentures") to be entered into by the Surviving Company, as issuer, the Subsidiary Guarantors, and United States Trust Company of New York, as trustee (the "RGC Note Trustee" and collectively with the Senior Note Trustee and the F4L Senior Subordinated Note Trustee). The New F4L Notes and the New RGC Notes will be unconditionally guaranteed (the "Guarantees"), on a joint and several basis, by each of 3 the Subsidiary Guarantors pursuant to the terms of the applicable indenture. As used in this Agreement, the term "Issuers" shall refer collectively to Food 4 Less (or after giving effect to the Mergers, the Surviving Company) and the Subsidiary Guarantors. "Concurrently with the F4L Exchange Offers, Holdings proposes to offer (the "Holdings Offer") to the holders of its 15 1/4% Senior Discount Notes due 2004 (the "Holdings Notes") upon the terms and subject the conditions set forth in the Prospectus and Solicitation Statement dated April __, 1995 (the "Holdings Prospectus") to purchase for cash any and all of the Holdings Notes. As used in this Agreement, the term "Registrants" shall refer collectively to Holdings (or after giving effect to the consummation of the Equity Merger, New Holdings) and the Issuers. "Concurrently with the F4L Exchange Offers and the Holdings Offer, (i) Food 4 Less is soliciting consents (collectively, the "F4L Consent Solicitations") (a) from the holders of the Old F4L Notes to amendments (the "Proposed F4L Amendments") to certain of the provisions in the respective indentures governing the Old F4L Notes (the "Old F4L Indentures"), all as described in the F4L Prospectus and (b) from the holders of the Old RGC Notes to amendments (the "Proposed RGC Amendments") to certain of the provisions in the respective indentures governing the Old RGC Notes (the "Old RGC Indentures"), all as described in the RGC Prospectus and (ii) Holdings is soliciting consents (the "Holdings Consent Solicitations" and, together with the F4L Consent Solicitations, the "Consent Solicitations") from the holders of the Holdings Notes to amendments (the "Proposed Holdings Amendments" and, collectively with the Proposed F4L Amendments and the Proposed RGC Amendments, the "Proposed Amendments") to certain of the provisions in the indenture governing the Holdings Notes (the "Old Holdings Indenture" and, collectively with the Old RGC Indentures and the Old F4L Indentures, the "Old Indentures"), all as described in the Holdings Prospectus. Upon receipt of the Requisite Consents (as defined in the applicable prospectus) with respect to an issue of Old Notes or the Holdings Notes, the Issuers (in the case of the Old F4L Notes), RGC (in the case of the Old RGC Notes) or Holdings (in the case of the Holding Notes) will enter into an indenture supplemental to the Old Indenture under which such Old Notes or the Holdings Notes were issued (each, a "Consent Supplemental Indenture") with the trustee under such Old Indenture, which will give effect to the applicable Proposed Amendments. The F4L Exchange Offer, the Holdings Offer and the Consent Solicitations shall be referred to collectively herein as the "Exchange Offers". "Upon consummation of the Mergers, the Surviving Company and the Subsidiary Guarantors will enter into an indenture supplemental to each of the Indentures and the Old F4L Indentures (the "Guarantor Supplemental 4 Indentures" and, together with the Consent Supplemental Indentures the "Supplemental Indentures") with the trustees thereunder and Crawford Stores, Inc., an indirect wholly-owned subsidiary of RSI, pursuant to which such subsidiary (the "Additional Guarantor") will guarantee the New Notes and the Old F4L Notes, pursuant to and in accordance with the applicable Indenture or Old F4L Indenture as the case may be. As used herein with respect to periods subsequent to the consummation of the Merger, the term "Subsidiary Guarantor" will include the Additional Guarantor." SECTION 2. Section 2(e)(i) of the Dealer Manager Agreement is hereby amended and restated in its entirety so that it reads as follows: "(i) At the Closing the Registrants shall pay to the Dealer Managers a fee equal to the sum of (x) 1.0% of the aggregate principal amount of Old Notes accepted for exchange in the Exchange Offers, (y) 0.5% of the aggregate accreted value of Holdings Notes accepted for purchase in the Exchange Offers and (z) 0.5% of (i) the aggregate principal amount of Old Notes and (ii) the aggregate accreted value of Holdings Notes, in each case, in respect of which a consent is accepted pursuant to the Exchange Offers (other than any such Old Notes or Holdings Notes accepted for exchange or purchase in the Exchange Offers)." SECTION 3. Section 3(e) of the Dealer Manager Agreement is hereby amended and restated in its entirety so that it reads as follows: "(e) The Registrants will notify you, not less than two hours prior thereto, of the time when they propose to commence the Exchange Offers or, after commencement, to extend the Exchange Offers and, immediately upon the commencement of the Exchange Offers, the Registrants shall advise or cause the Information Agent or the Depositary to advise you upon your reasonable request from time to time during the period of, and promptly after the expiration of, the Exchange Offers, as to all names and addresses of the holders of the Old Notes and Holdings Notes which have been tendered for exchange or purchase, the aggregate principal amount of Old Notes and Holdings Notes tendered for exchange or purchase, the aggregate principal amount of Old Notes and Holdings Notes tendered for exchange or purchase by each holder, during the immediately preceding day, indicating the aggregate principal amount of Old Notes or Holdings Notes, as the case may be, verified to be in proper form for tender or consent, as the case may be, rejected for tender or consent, as the case may be, and being processed; and will notify you promptly following expiration of the Exchange Offers on the Expiration Date (as defined in the Offering Materials), of the aggregate principal amount of Old Notes and Holdings 5 Notes so deposited, indicating the aggregate principal amount of Old Notes and Holdings Notes verified to be in proper form for tender or consent, as the case may be, rejected for tender or consent, as the case may be, and being processed. The Registrants shall promptly give you notice of changes in Expiration Dates with respect to the Exchange Offers. Food 4 Less will not (x) accept Old Notes for exchange or purchase or (y) accept consents in respect of Old Notes, and Holdings will not (x) accept Holdings Notes for purchase or (y) accept consents in respect of Holdings Notes, unless the conditions to the obligations of the Dealer Managers set forth in Section 6 hereof have been satisfied." SECTION 4. Clause (ii) of Section 5(a) of the Dealer Manager Agreement is hereby amended by amending and restating the second sentence of such Clause so that it reads as follows: "Each of Food 4 Less, the Subsidiary Guarantors and Holdings has, and after giving effect to the Mergers and the Equity Merger, the Surviving Company, New Holdings and the Subsidiary Guarantors will have, taken all necessary corporate action to authorize the Exchange Offers and upon consummation of the Mergers the Registrants will have taken all necessary corporate action to authorize the exchange or purchase of Old Notes and Holdings Notes pursuant to the Exchange Offers." SECTION 5. Clause (x) of Section 5(a) of the Dealer Manager Agreement is hereby amended and restated in its entirety so that it reads as follows: "(x) (x) Immediately after the consummation of the Mergers and the other transactions contemplated by the Offering Materials, the fair value and present fair saleable value of the assets of New Holdings, the Surviving Company and each Subsidiary Guarantor will exceed the sum of its stated liabilities and identified contingent liabilities; and (y) after giving effect to the execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby and by the Offering Materials, none of the Registrants is, nor, upon consummation of the Mergers, will New Holdings, the Surviving Company or any Subsidiary Guarantor be, (a) left with unreasonably small capital with which to carry on its business as it is proposed to be conducted, (b) unable to pay its debts (contingent or otherwise) as they mature or (c) insolvent." SECTION 6. Each of subparagraphs (2), (4) and (5) of Section 6(u) of the Dealer Manager Agreement is hereby amended and restated in its entirety so that it reads as follows: "(2) The New Credit Facility (as defined in the Offering Materials) with aggregate commitments thereunder of not less than 6 $1,075,000,000 shall be in full force and effect, no event shall have occurred and no event shall have failed to occur, which would relieve the lenders under the New Credit Facility (the "Lenders") of their obligation to advance funds, or preclude them from advancing funds to Food 4 Less thereunder, and concurrently with the Closing the Lenders shall have advanced funds under the New Credit Facility in an amount sufficient to fund the Mergers and related transactions and there shall be a sufficient amount available to be borrowed under the term loan facilities for a period of at least ninety days following the Closing Date to fund the Change of Control Offers (as defined in the Offering Materials); "(4) New Holdings shall have received at least $140,000,000 in cash from institutional investors as consideration for the issuance and sale by New Holdings of shares of capital stock of New Holdings on the terms and conditions described in the Offering Materials (the "New Equity Investment"); New Holdings shall have purchased at least 48% of the outstanding common stock of RSI with $100,000,000 of the proceeds of such issuance, $131,500,000 aggregate principal amount of its 13 5/8% Senior Subordinated Pay in Kind Debentures due 2005 (the "Seller Debentures") and $18,500,000 principal amount of its 13 5/8% Senior Discount Debentures due 2005 (the "New Discount Debentures"), all as described in the Offering Materials. New Holdings shall have contributed such common stock of RSI together with $12.1 million of the proceeds of the New Equity Investment to the capital of Food 4 Less. New Holdings shall have received at least $59,000,000 in cash consideration from institutional investors for the issuance and sale by New Holdings to such institutional investors of $59,000,000 aggregate principal amount of New Discount Debentures, all as described in the Offering Materials. New Holdings shall have issued (i) $15,000,000 principal amount of New Discount Debentures to The Yucaipa Companies and $5,000,000 principal amount of New Discount Debentures to BTSC in satisfaction of certain fees payable by the Company to The Yucaipa Companies and BTSC in connection with the Mergers and the Financing and (ii) $2.5 million principal amount of New Discount Debentures to Apollo Advisors, L.P. in consideration of certain fees payable by New Holdings to Apollo Advisors, L.P. in connection with the Mergers, all as set forth in the Offering Materials. New Holdings and Food 4 Less shall have the issued, authorized and outstanding capitalization set forth in the Offering Materials; 7 "(5) Simultaneously with the Closing, the Issuers shall have consummated the issuance and sale of (i) $295,000,000 aggregate principal amount of New Senior Notes and (ii) $200,000,000 aggregate principal amount of New RGC Notes, all pursuant to the Public Offering (as defined in the Offering Materials) for gross cash proceeds of not less than $495,000,000 on terms and conditions satisfactory in form and substance to the Dealer Managers, and Cahill Gordon & Reindel, counsel to the Managers; and" SECTION 7. Section 7 of the Dealer Manager Agreement is hereby amended by (i) adding in the twenty-fourth line of such Section the phrase ",Holdings Notes" immediately after the phrase "Old Notes" contained in such line of such Section and (ii) amending and restating clause (i) of the third paragraph of such Section so that it reads in its entirety as follows: "(i) the aggregate principal amount of Old Notes and Holdings Notes solicited for exchange, purchase or consent pursuant to the Exchange Offers bears to" SECTION 8. Exhibit D to the Dealer Manager Agreement is hereby replaced in its entirety by Exhibit A hereto and all references in the Dealer Manager Agreement to Exhibit D thereto shall be deemed to be references to Exhibit A to this Amendment. SECTION 9. Each of F4L, the Registrants and RSI hereby represents and warrants that each of the representations and warranties made by such person in the Dealer Manager Agreement as of the Commencement Date are true and correct as of the date hereof (except as expressly provided therein). SECTION 10. All terms, provisions, covenants, representations, warranties, agreements and conditions contained in the Dealer Manager Agreement shall remain in full force and effect except as expressly contemplated herein and shall not otherwise be deemed waived, modified or amended hereby. SECTION 11. This amendment shall be governed by, and construed in accordance with, the internal laws of the state of New York without reference to its principles of conflict of laws. SECTION 12. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together, shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this Amendment 8 shall constitute a binding agreement among F4L, each Registrant, RSI and the Dealer Managers. Very truly yours, FOOD 4 LESS, INC. By: Name: Mark A. Resnik Title: Secretary FOOD 4 LESS HOLDINGS, INC. By: Name: Mark A. Resnik Title: Secretary FOOD 4 LESS SUPERMARKETS, INC. By: Name: Mark A. Resnik Title: Secretary ALPHA BETA COMPANY, as a Guarantor By: Name: Mark A. Resnik Title: Secretary BAY AREA WAREHOUSE STORES, INC. By: Name: Mark A. Resnik Title: Secretary BELL MARKETS, INC., as a Guarantor By: Name: Mark A. Resnik Title: Secretary CALA CO., as a Guarantor By: Name: Mark A. Resnik Title: Secretary 9 CALA FOODS, INC., as a Guarantor By: Name: Mark A. Resnik Title: Secretary FALLEY'S, INC. as a Guarantor By: Name: Mark A. Resnik Title: Secretary FOOD 4 LESS OF CALIFORNIA, INC., as a Guarantor By: Name: Mark A. Resnik Title: Secretary FOOD 4 LESS OF MERCHANDISING, INC., as a Guarantor By: Name: Mark A. Resnik Title: Secretary FOOD 4 LESS OF SOUTHERN CALIFORNIA, INC., as a Guarantor By: Name: Mark A. Resnik Title: Secretary FOOD 4 LESS GM, INC. as a Guarantor By: Name: Mark A. Resnik Title: Secretary RALPHS SUPERMARKETS, INC., By: Name: Jan Charles Gray Title: Senior Vice President, General Counsel and Secretary 10 This Amendment is hereby confirmed and accepted as of the date first above written BT SECURITIES CORPORATION By: Name: Lori Finkel Title: Managing Director CS FIRST BOSTON CORPORATION By: Name: Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: Name: Title: 11 Exhibit A to Amendment No. 1 to Dealer Manager Agreement FORM OF OPINION OF LATHAM & WATKINS 1. Each of New Holdings, the Surviving Company (immediately after the consummation of the Mergers) and the Subsidiary Guarantors other than Falley's (collectively, the "Corporations") has been duly incorporated and is validly existing and in good standing under the laws of its state of incorporation with corporate power and authority to own or lease its properties and to conduct its business as now conducted as described in each Prospectus. 2. Immediately following the consummation of the Mergers, each of the Surviving Company, Cala Co. and Food 4 Less of Southern California, Inc. is duly qualified to do business as a foreign corporation in California and is in good standing in California. 3. Immediately following the consummation of the Mergers, the Surviving Company or a subsidiary or subsidiaries of the Surviving Company own of record in the aggregate 100% of the capital stock of each corporation that is a Subsidiary Guarantor and all such capital stock has been duly authorized and validly issued and is fully paid and nonassessable. 4. Upon consummation of the Mergers, (i) the Surviving Company will have full corporate power and authority to execute, deliver and perform its obligations under the Indentures, the New Notes, and the supplemental indentures pursuant to which the Surviving Company will assume the obligations of Food 4 Less and RGC under the Consent Supplemental Indentures relating to the Old Notes (the "Assumption Supplemental Indentures"), and will have full corporate power and authority to issue the New Notes and (ii) each of the Subsidiary Guarantors other than Falley's will have full corporate power and authority to issue the Guarantees and perform its obligations under the Guarantees. New Holdings has full corporate power and authority to perform its obligations under the supplemental indenture pursuant to which New Holdings will assume the obligations of Holdings under the Holdings Notes (the "Holdings Assumption Indenture") and the Holdings Supplemental Indenture. 5. To the best of our knowledge, there is no action, suit, proceeding or investigation pending or threatened against or affecting any of the Registrants or any of their respective properties or assets in any court or before any governmental authority or arbitration board or tribunal that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the Exchange Offers or the issuance, sale and delivery of the New Notes or the Guarantees or any of the other transactions contemplated by the Registration Statements. 6. Each of the Indentures and the Assumption Supplemental Indentures has been duly authorized, executed and delivered by the Surviving Company and the Subsidiary Guarantors other than Falley's and 12 (assuming due authorization, execution and delivery by the applicable Trustee) is the legally valid and binding agreement of each of them, enforceable against each of them in accordance with its terms. 7. The Holdings Supplemental Indenture and the Holdings Assumption Indenture have been duly authorized, executed and delivered by New Holdings and (assuming due authorization, execution and delivery by applicable trustee) are the legally valid and binding agreements of New Holdings, enforceable against New Holdings in accordance with their terms. 8. Each of the Consent Supplemental Indentures relating to the Old F4L Notes has been duly authorized, executed and delivered by Food 4 Less and the Subsidiary Guarantors other than Falley's and (assuming due authorization, execution and delivery by the applicable trustee under the Old F4L Indentures) is the legally valid and binding agreement of each of Food 4 Less and the Subsidiary Guarantors other than Falley's, enforceable against each of them in accordance with its terms. 9. Upon consummation of the Mergers, the New Notes will have been duly authorized by the Surviving Company for issuance and, when executed and authenticated in accordance with the terms of the applicable Indenture and delivered to exchanging holders of Old Notes in accordance with the terms of the Registration Statements, will be legally valid and binding obligations of the Surviving Company, enforceable against the Surviving Company in accordance with their terms. 10. The Guarantees have been duly authorized by the Subsidiary Guarantors and, when executed in accordance with the terms of the applicable Indenture and upon due execution, authentication and delivery of the New Notes, will be legally valid and binding obligations of the Subsidiary Guarantors, enforceable against the Subsidiary Guarantors in accordance with their terms. 11. Upon the consummation of the Mergers, the execution and delivery of the Indentures, the New Notes, the Guarantees, the Assumption Supplemental Indenture and the Holdings Assumption Indenture by New Holdings, the Surviving Company and the Subsidiary Guarantors other than Falley's, to the extent each is a party thereto, the issuance and sale of the New Notes in exchange for Old Notes, the purchase of Old RGC Notes and Holdings Notes and the making of the Guarantees pursuant to the Indentures will not result in the violation by New Holdings, the Surviving Company or the Subsidiary Guarantors other than Falley's of its certificate or articles of incorporation and bylaws or any federal, New York, California, or Delaware General Corporation Law statute, rule or regulation known to us to be applicable to New Holdings, the Surviving Company or any Subsidiary Guarantor other than Falley's (other than state securities laws as to which we express no opinion, or federal securities laws, as specifically addressed elsewhere herein) or in the breach of or a default by New Holdings, the Surviving Company or any Subsidiary Guarantor other than Falley's under any of the material agreements or court orders specifically directed to New Holdings, the Surviving Company or any Subsidiary Guarantor other than Falley's (which material agreements have been identified to us by an officer of such person as material to such person), which violation, 13 breach or default would have a material adverse effect on New Holdings, the Surviving Company and the Subsidiary Guarantors, taken as a whole. 12. The execution and delivery of the Consent Supplemental Indentures by Holdings, Food 4 Less and the Subsidiary Guarantors other than Falley's (to the extent each is a party thereto) will not result in the violation by Holdings, Food 4 Less or any Subsidiary Guarantor other than Falley's of its certificate or articles of incorporation and bylaws or any federal, New York, California or Delaware General Corporation Law statute, rule or regulation known to us to be applicable to Holdings, Food 4 Less and the Subsidiary Guarantors other than Falley's (other than state securities laws as to which we express no opinion, or federal securities laws, as specifically addressed elsewhere herein), or in the breach of or a default by Holdings Food 4 Less and the Subsidiary Guarantors other than Falleys's under any of the material agreements or court orders specifically directed to Holdings, Food 4 Less and the Subsidiary Guarantors other than Falley's (which material agreements have been identified to us by an officer of such person as material to such person), which violation, breach or default would have a material adverse effect on Holdings, Food 4 Less and the Subsidiary Guarantors, taken as a whole. 13. To the best of our knowledge, no consent, approval, authorization or order of, or filing with, any federal, New York, California, or Delaware court or governmental agency or body is required for the issuance of the New Notes in exchange for the Old Notes, the purchase of Old RGC Notes, the purchase of Holdings Notes or the Consent Solicitations, except (i) such as have been obtained or made under the Act or the Trust Indenture Act or otherwise, and (ii)such as may be required under state securities laws in connection with the issuance of such New Notes and Guarantees by the Surviving Company and the Subsidiary Guarantors. 14. We call your attention to the fact that the New Indentures, the New Notes, the Guarantees, the Assumption Supplemental Indentures, the Consent Supplemental Indentures and the Holdings Assumption Indenture select the internal laws of the State of New York as the governing law. It is our opinion that a New York State court or a federal court sitting in New York will honor the parties' choice of the internal laws of the State of New York as the law applicable to such documents. 15. It is our opinion that the material federal income tax consequences to holders whose Old Notes or Holdings Notes, as the case may be, are tendered and exchanged in the Exchange Offers are accurately set forth under the heading "Certain Federal Income Tax Considerations" in the applicable Prospectus. 16. Each of the Indentures, the New Notes, the Guarantees and the Consent Supplemental Indentures conforms to the description thereof in the Registration Statements in all material respects. 17. Each Indenture is, and each old F4L Indenture and the Holdings Indenture has been, and is, duly qualified under the Trust Indenture Act. 14 18. Each Registration Statement has become effective under the Act and, to the best of our knowledge, no stop order suspending the effectiveness of any Registration Statement has been issued under the Act and no proceedings therefor have been initiated by the Commission and any required filing of any Prospectus pursuant to Rule 424(b) under the Act has been made in accordance with Rules 424(b) and 430A under the Act. 19. Each Registration Statement and each Prospectus comply as to form in all material respects with the applicable requirements for registration statements on Form S-4 under the Act, and comply as to form in all material respects with the applicable requirements of the Trust Indenture Act and the Exchange Act; it being understood, however, that we express no opinion with respect to the financial statements, schedules and other financial and statistical data included in any Registration Statement, Prospectus or in the exhibits to any Registration Statement or with respect to any Form T-1. In passing upon the compliance as to form of each Registration Statement and each Prospectus, we have assumed that the statements made therein are correct and complete. 20. The consummation of the Exchange Offers on the terms set forth in the Registration Statements complies with the applicable requirements of Sections 13 and 14 of the Exchange Act and the rules and regulations promulgated thereunder. 21. To the best of our knowledge, there are no contracts or documents of a character required to be described in any Registration Statement or Prospectus or to be filed as exhibits to any Registration Statement that are not described and filed as required. In addition, we have participated in conferences with officers and other representatives of F4L, the Registrants and RSI, representatives of the independent public accountants for F4L, the Registrants, and RSI, and your representatives, at which the contents of the Registration Statements and each Prospectus and related matters were discussed and, although we are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statements or any Prospectus and have not made any independent check or verification thereof, during the course of such participation (relying as to materiality to a large extent upon the statements of officers and other representatives of F4L, Registrants and RSI), no facts came to our attention that caused us to believe that any Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that any Prospectus, as of its date, contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; it being understood that we express no belief with respect to the financial statements, schedules and other financial and statistical data included in any Registration Statement or Prospectus or with respect to any Form T-1. EX-2.1.2 3 AGREEMENT AND PLAN OF MERGER, AMENDMENT NO. 2 1 EXHIBIT 2.1.2 AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF MERGER This Amendment No. 2 (this "Amendment"), dated as of February 24, 1995, to the Agreement and Plan of Merger dated as of September 14, 1994, as amended by Amendment No. 1 dated as of January 12, 1995 (collectively, the "Merger Agreement"), is by and among Food 4 Less, Inc., a Delaware corporation ("F4L"), Food 4 Less Holdings, Inc., a California corporation ("F4L Holdings"), Food 4 Less Holdings, Inc., a Delaware corporation ("F4L Holdings Delaware"), Food 4 Less Supermarkets, Inc., a Delaware corporation ("F4L Supermarkets"), Ralphs Supermarkets, Inc., a Delaware corporation ("Ralphs Supermarkets"), and The Edward J. DeBartolo Corporation ("EJDC") and the other stockholders of Ralphs Supermarkets (each a "Selling Stockholder"). Capitalized terms not otherwise defined herein have the meanings given to them in the Merger Agreement. WHEREAS, F4L, F4L Holdings, F4L Holdings Delaware, F4L Supermarkets, Ralphs Supermarkets and the Selling Stockholders previously have entered into the Merger Agreement, by which the parties agreed to merge F4L Supermarkets with and into Ralphs Supermarkets in accordance with the terms and conditions of the Merger Agreement and Section 251 of the General Corporation Law of the State of Delaware; WHEREAS, the parties desire to amend certain provisions of the Merger Agreement as more fully set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows: 1. Amendment of Defined Terms. (a) The definition of "Closing Date" in Section 1.1 of the Merger Agreement is hereby amended to delete the date "March 15, 1995" and to substitute in its place the date "April 14, 1995." (b) The definition of "Debentures" in Section 1.1 of the Merger Agreement is hereby amended to read as follows: "Debentures" shall mean the 13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 to be issued by F4L Holdings Delaware pursuant to the Indenture. (c) The definition of "Indenture" in Section 1.1 of the Merger Agreement is hereby amended to delete "F4L Holdings" and to substitute in its place "F4L Holdings Delaware." 2. Amendment of Section 2.1(a). Section 2.1(a) of the Merger Agreement is hereby amended (i) to delete "$12.31060748 in cash" appearing in the third line thereof and to substitute in its place "$8.20710248 in cash" and (ii) to delete "$8.2074 principal amount of Debentures" appearing in the third line thereof and to substitute in its place "$12.310905 principal amount of Debentures." 2 3. Amendment of Section 9.6. Section 9.6 of the Merger Agreement is hereby amended to delete "F4L Holdings" and to substitute in its place "F4L Holdings Delaware." 4. Amendment of Section 11.1(b). Section 11.1(b) of the Merger Agreement is hereby amended to delete the date "March 31, 1995" appearing in the second line thereof and to substitute in its place the date "April 14, 1995." 5. Schedules. (a) Schedule 2.1 of the Merger Agreement is hereby deleted and the attached Schedule 2.1 is hereby substituted in its place and incorporated herein by reference. (b) Schedule 9.9 of the Merger Agreement is hereby amended to delete "$150 million" appearing in clause (1) thereof and to substitute in its place "$140 million." 6. Exhibit A. Exhibit A (Form of Indenture) of the Merger Agreement is hereby deleted and the attached Exhibit A (Form of Indenture) is hereby substituted in its place and incorporated herein by reference. 7. Exhibit D. Exhibit D (Form of Opinion of Counsel to F4L, F4L Holdings and F4L Supermarkets) of the Merger Agreement is hereby amended as more fully described below. (a) All references in Paragraph 7 to the "Consulting Agreement" are hereby amended to substitute in its place the "Put Agreement." (b) Paragraph 7 is hereby amended to delete the phrase "and in good standing" appearing in the first and second lines thereof. 8. Exhibit E. Exhibit E (Form of Put Agreement) of the Merger Agreement is hereby amended to delete "$60,346,000 aggregate principal amount of 13% Senior Subordinated Pay-in-Kind Debentures due 2006 (the "Debentures") issued by F4L Holdings" appearing in the second recital and to substitute in its place "$90,517,000 aggregate principal amount of 13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 (the "Debentures") issued by Food 4 Less Holdings, Inc., a Delaware corporation." 9. Exhibit G. Exhibit G (Form of Registration Rights Agreement) of the Merger Agreement is hereby amended as more fully described below. (a) F4L Holdings Delaware shall replace F4L Holdings as a party to such Registration Rights Agreement and all references to the "Company" therein shall mean F4L Holdings Delaware. (b) The definition of "Debentures" in Section 1 is hereby amended to (i) delete "13% Senior Subordinated Pay-in-Kind Debentures due 2006" appearing in the first line and to substitute in its place "13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007," and (ii) delete "$100,000,000" appearing in the third line and to substitute in its place "$150,000,000." 10. Terms and Conditions. Except as specifically modified herein, all other terms and conditions of the Merger Agreement shall remain in full force and effect. 2 3 IN WITNESS WHEREOF, this Amendment has been signed by or on behalf of each of the parties as of the day first above written. "F4L": FOOD 4 LESS, INC. By: _________________________ Name: Title: "F4L HOLDINGS": FOOD 4 LESS HOLDINGS, INC. By: _________________________ Name: Title: "F4L HOLDINGS DELAWARE": FOOD 4 LESS HOLDINGS, INC. By: _________________________ Name: Title: "F4L SUPERMARKETS": FOOD 4 LESS SUPERMARKETS, INC. By: _________________________ Name: Title: "RALPHS SUPERMARKETS": RALPHS SUPERMARKETS, INC. By: _________________________ Name: Title: "SELLING STOCKHOLDERS": THE EDWARD J. DEBARTOLO CORPORATION By: _________________________ Name: Title: S-1 4 CAMDEV PROPERTIES INC. By: _________________________ Name: Title: BANK OF MONTREAL By: _________________________ Name: Title: BANQUE PARIBAS By: _________________________ Name: Title: FEDERATED DEPARTMENT STORES, INC. By: _________________________ Name: Title: S-2 5 EXHIBIT A FOOD 4 LESS HOLDINGS, INC. AND NORWEST BANK MINNESOTA, N.A. AS TRUSTEE INDENTURE Dated as of ___________ __, 1995 $150,000,000 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 6 CROSS-REFERENCE TABLE
TIA INDENTURE Section Section - ------- --------- 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8; 7.10; 13.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6; 13.2 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10; 13.2 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2; 13.4 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2; 13.4 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(b) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5; 13.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 - -----------------------
N.A. means Not Applicable NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. 7 TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2. Incorporation by Reference of TIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 1.3. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE II THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.1. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.2. Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.3. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 2.4. Paying Agent To Hold Assets in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 2.5. Securityholder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.6. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.7. Replacement Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.8. Outstanding Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.9. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.10. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 2.13. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE III REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.1. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.2. Selection of Securities To Be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.3. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 3.4. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 3.5. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 3.6. Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE IV COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.1. Payment of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.2. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.3. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.4. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.5. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.6. Maintenance of Properties and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 4.7. Compliance Certificate; Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 4.8. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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Page ---- Section 4.9. SEC Reports and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 4.10. Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 4.11. Limitation on Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 4.12. Limitation on Incurrences of Additional Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 4.13. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 4.14. Limitation on Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 4.15. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 4.16. Limitation on Senior Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 4.17. Limitation on Preferred Stock of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 4.18. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . . . 38 ARTICLE V SUCCESSOR CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 5.1. When Holdings May Merge, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 5.2. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE VI DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 6.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 6.2. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 6.3. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 6.4. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 6.5. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 6.6. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 6.7. Rights of Holders To Receive Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 6.8. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 6.9. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE VII TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 7.1. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 7.2. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.3. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.4. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 7.5. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 7.6. Reports By Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 7.7. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 7.8. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 7.9. Successor Trustee by Merger, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
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Page ---- Section 7.11. Preferential Collection of Claims Against Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE VIII LEGAL DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 8.1. Option to Effect Legal Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . 50 Section 8.2. Legal Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 8.3. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 8.4. Conditions to Legal or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 8.5. Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions. . 53 Section 8.6. Repayment to Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 8.7. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 9.1. Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 9.2. With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 9.3. Compliance with TIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.4. Revocation and Effect of Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 9.5. Notation on or Exchange of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 9.6. Trustee To Sign Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ARTICLE X MEETINGS OF SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 10.1. Purposes for Which Meetings May Be Called . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 10.2. Manner of Calling Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 10.3. Call of Meetings by Holdings or Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 10.4. Who May Attend and Vote at Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 10.5. Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment . . . . . . . . 59 Section 10.6. Voting at the Meeting and Record To Be Kept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 10.7. Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting . . . . . . 60 ARTICLE XI SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 11.1. Securities Subordinated to Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 11.2. No Payment on Securities in Certain Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 11.3. Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization of Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 11.4. Holders to Be Subrogated to Rights of Holders of Senior Indebtedness . . . . . . . . . . . . . . . . . 64 Section 11.5. Obligations of Holdings Unconditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 11.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice . . . . . . . . . . . . . . . 65
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---- Section 11.7. Application by Trustee of Assets Deposited with It. . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 11.8. Subordination Rights Not Impaired by Acts or Omissions of Holdings or Holders of Senior Indebtedness . 66 Section 11.9. Holders Authorize Trustee to Effectuate Subordination of Securities . . . . . . . . . . . . . . . . . 66 Section 11.10. Right of Trustee to Hold Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 11.11. Article Eleven Not to Prevent Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 11.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness . . . . . . . . . . . . . . . . . . . . 67 ARTICLE XII SATISFACTION AND DISCHARGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 12.1. Satisfaction and Discharge of the Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 12.2. Conditions to Satisfaction and Discharge of the Indenture . . . . . . . . . . . . . . . . . . . . . . 68 ARTICLE XIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 13.1. TIA Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 13.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 13.3. Communications by Holders with Other Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 13.4. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 13.5. Statements Required in Certificate or Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 13.6. Rules by Trustee, Paying Agent, Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 13.7. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 13.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.9. No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.10. No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.11. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.12. Duplicate Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.13. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
iv 11 INDENTURE dated as of ________ __, 1995, between FOOD 4 LESS HOLDINGS, INC., a Delaware corporation ("Holdings"), and Norwest Bank Minnesota, N.A., a National Banking Association, as Trustee. Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007: ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1. Definitions. "Acquired Indebtedness" means Indebtedness of a person or any of its subsidiaries existing at the time such person becomes a Subsidiary or assumed in connection with the acquisition of assets from such person and not incurred by such person in connection with, or in anticipation or contemplation of, such person becoming a Subsidiary or such acquisition. "Affiliate" means, with respect to any person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of this Indenture, neither BT Securities Corporation nor any of its Affiliates shall be deemed to be an Affiliate of Holdings or any of its Subsidiaries. "Affiliate Obligation" means any contractual obligation (not constituting Indebtedness) between Holdings and any Affiliate, other than obligations relating to the purchase or sale of goods in the ordinary course of business made in compliance with Section 4.11 hereof. "Affiliate Transaction" shall have the meaning provided in Section 4.11. "Agent" means any Registrar, Paying Agent or co-Registrar. "Asset Sale" means, with respect to any person, any sale, transfer or other disposition or series of sales, transfers or other dispositions (including, without limitation, by merger or consolidation or by exchange of assets and whether by operation of law or otherwise), made by such person or any of its subsidiaries to any person other than such person or one of its wholly-owned subsidiaries (or, in the case of a sale, transfer or other disposition by a Subsidiary, to any person other than Holdings or a directly or indirectly wholly-owned Subsidiary) of any assets of such person or any of its subsidiaries including, without limitation, assets consisting of any Capital Stock or other securities held by such person or any of its subsidiaries, and any Capital Stock issued by any subsidiary of such person, in each case, 1 12 outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions, (i) involving only Excluded Assets, (ii) resulting in Net Proceeds to Holdings or any Subsidiary of $500,000 or less or (iii) pursuant to any foreclosure of assets or other remedy provided by applicable law to a creditor of Holdings or any Subsidiary with a Lien on such assets, which Lien is permitted under this Indenture, provided that such foreclosure or other remedy is conducted in a commercially reasonable manner or in accordance with any Bankruptcy Law. "Average Life" means, as of any date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principal payments of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or foreign law for the relief of debtors. "Board of Directors" means, with respect to any person, the Board of Directors of such person or any committee of the Board of Directors of such person duly authorized, with respect to any particular matter, to exercise the power of the Board of Directors of such person. "Board Resolution" means, with respect to any person, a duly adopted resolution of the Board of Directors of such person. "Business Day" means a day that is not a Legal Holiday. "Capital Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such person, including Preferred Stock. "Capitalized Lease Obligation" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Equivalents" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group and maturing not more than one year from the date of creation thereof, (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500 million and maturing not more than one year from the date of creation thereof, (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any bank described in clause (iii) and (v) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two 2 13 highest rating categories obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group. "Change of Control" means (I) the acquisition after the Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) by (i) any person or entity (other than any Permitted Holder) or (ii) any group of persons or entities (excluding any Permitted Holders) who constitute a group (within the meaning of Section 13(d)(3) of the Exchange Act), in either case, of any securities of Holdings such that, as a result of such acquisition, such person, entity or group beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, 40% or more of the then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of Holdings (but only to the extent that such beneficial ownership is not shared with any Permitted Holder who has the power to direct the vote thereof); provided, however, that no such Change of Control shall be deemed to have occurred if (A) the Permitted Holders beneficially own, in the aggregate, at such time, a greater percentage of such voting securities than such other person, entity or group or (B) at the time of such acquisition, the Permitted Holders (or any of them) possess the ability (by contract or otherwise) to elect, or cause the election, of a majority of the members of Holdings' Board of Directors or (II) Holdings ceasing to own 100% of the outstanding voting securities entitled to vote on a regular basis to elect a majority of the Board of Directors of the Company. "Change of Control Date" shall have the meaning provided in Section 4.14. "Change of Control Offer" shall have the meaning provided in Section 4.14. "Change of Control Payment Date" shall have the meaning provided in Section 4.14. "Company" means Food 4 Less Supermarkets, Inc., a Delaware corporation, and its successors, including, without limitation, Ralphs Supermarkets (to be renamed Ralphs Grocery Company) following the Merger. "Consolidated Net Income" means, with respect to any person, for any period, the aggregate of the net income (or loss) of such person and its subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any other person in which such person or any of its subsidiaries has an interest (which interest does not cause the net income of such other person to be consolidated with the net income of such person and its subsidiaries in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions actually paid to such person or such subsidiary by such other person in such period; (b) the net income of any subsidiary of such person that is subject to any Payment Restriction shall be excluded to the extent such Payment Restriction actually prevented the payment of an amount that otherwise could have been paid to, or received by, such person or a subsidiary of such person not subject to any Payment Restriction, provided, however, that with respect to the net income of Holdings, the net income of the Company and its subsidiaries shall not be so excluded, notwithstanding the existence of any such Payment Restriction, so long as the terms of any such consensual Payment Restriction limiting the 3 14 payment of dividends are not materially more restrictive at the time of determination of Consolidated Net Income than the most restrictive Payment Restriction limiting the payment of dividends in effect on the Issue Date; and (c)(i) the net income (or loss) of any other person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all gains realized upon or in connection with or as a consequence of the issuance of the Capital Stock of such person or any of its subsidiaries and any gains on pension reversions received by such person or any of its subsidiaries, (iv) all gains and losses realized on the purchase or other acquisition by such person or any of its subsidiaries of any securities of such person or any of its subsidiaries, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as amended, (vi) all other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) up to $10 million of severance costs and (C) any other restructuring reserves or charges (provided, however, that any cash payments actually made with respect to the liabilities for which such restructuring reserves or charges were created shall be deducted from Consolidated Net Income in the period when made), in each case, incurred by Holdings or any of its Subsidiaries in connection with the Merger, including, without limitation, the divestiture of the Excluded Assets, (viii) losses incurred by Holdings and its Subsidiaries resulting from earthquakes and (ix) with respect to Holdings and its Subsidiaries, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. "Consolidated Net Worth" means, with respect to any person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such person and its subsidiaries determined on a consolidated basis in accordance with GAAP. "Consulting Agreement" means that certain Consulting Agreement, dated as of the Issue Date, between Holdings, the Company and The Yucaipa Companies, as such Consulting Agreement may be amended or replaced, so long as any amounts paid under any amended or replacement agreement do not exceed the amounts payable under such Consulting Agreement as in effect on the Issue Date. "Covenant Defeasance" shall have the meaning provided in Section 8.3. "Credit Agent" means, at any time, the then-acting Administrative Agent as defined in and under the Credit Agreement, which initially shall be ____________________. Holdings shall promptly notify the Trustee of any change in the Credit Agent. "Credit Agreement" means the Credit Agreement, dated as of the Issue Date, by and among the Company, certain of its subsidiaries, the Lenders referred to therein and Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding any such Credit Agreement or any such prior agreement as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and 4 15 without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all related or ancillary documents, including, without limitation, any guarantee agreements and security documents. Holdings shall promptly notify the Trustee of any such refunding or refinancing of the Credit Agreement. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Capital Stock" means, (i) with respect to any person, any Capital Stock of such person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security into which it is convertible, puttable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased by such person or its subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date or any other Capital Stock of such person or its subsidiaries designated as Disqualified Capital Stock by such person at the time of issuance; provided, however, that if such Capital Stock is either (a) redeemable or repurchasable solely at the option of such person or (b) issued to employees of Holdings or its Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated; and (ii) with respect to any Subsidiary of Holdings, any Preferred Stock issued by a Subsidiary of Holdings other than Preferred Stock issued to Holdings. "EBDIT" means, with respect to any person, for any period, the Consolidated Net Income of such person for such period, plus, in each case to the extent deducted in computing Consolidated Net Income of such person for such period (without duplication) (i) provisions for income taxes or similar charges recognized by such person and its consolidated subsidiaries accrued during such period, (ii) depreciation and amortization expense of such person and its consolidated subsidiaries accrued during such period (but only to the extent not included in Fixed Charges), (iii) Fixed Charges of such person and its consolidated subsidiaries for such period, (iv) LIFO charges (credit) of such person and its consolidated subsidiaries for such period, (v) the amount of any restructuring reserve or charge recorded during such period in accordance with GAAP, including any such reserve or charge related to the Merger, and (vi) any other non-cash charges reducing Consolidated Net Income for such period (excluding any such charge which requires an accrual of or a cash reserve for cash charges for any future period), less, without duplication, (i) non-cash items increasing Consolidated Net Income of such person for such period in each case determined in accordance with GAAP and (ii) the amount of all cash payments made by such person or its subsidiaries during such period to the extent that such cash payment has been provided for in a restructuring reserve or charge referred to in clause (v) above (and was not otherwise deducted in the computation of Consolidated Net Income of such person for such period). "EJDC" means The Edward J. DeBartolo Corporation, an Ohio corporation. 5 16 "Event of Default" shall have the meaning provided in Section 6.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "Excluded Assets" means assets of Holdings or any Subsidiary required to be disposed of by applicable regulatory authorities in connection with the Merger. "Fixed Charges" means, with respect to any person, for any period, the aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) in respect of all Indebtedness of such person and its consolidated subsidiaries (including (a) original issue discount on any Indebtedness (including (without duplication), in the case of Holdings, any original issue discount on the Senior Discount Notes and the Securities but excluding amortization of debt issuance costs and (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, in each case to the extent attributable to such period, but excluding the amortization of debt issuance costs) and (ii) dividend requirements on Capital Stock of such person and its consolidated subsidiaries (whether in cash or otherwise (except dividends payable in shares of Qualified Capital Stock)) declared or paid, or required to be declared or paid or accrued during such period (except to the extent accrued in a prior period) and excluding items eliminated in consolidation. For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Board of Directors of such person (as evidenced by a Board Resolution) to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest of such Indebtedness in effect on the date Fixed Charges are being calculated, (c) interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as Holdings may designate, and (d) Fixed Charges shall be increased or reduced by the net cost (including amortization of discount) or benefit associated with Interest Swap Obligations attributable to such period. For purposes of clause (ii) above, dividend requirements shall be increased to an amount representing the pretax earnings that would be required to cover such dividend requirements; accordingly, the increased amount shall be equal to a fraction, the numerator of which is the amount of such dividend requirements and the denominator of which is one (1) minus the applicable actual combined federal, state, local and foreign income tax rate of such person and its subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Fixed Charges. "Foreign Exchange Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. 6 17 "Forward Period" shall have the meaning set forth in the definition of Operating Coverage Ratio contained in this Section 1.1. "GAAP" means generally accepted accounting principles as in effect in the United States of America as of the date of this Indenture. "Holder" means the person in whose name a Security is registered on the Registrar's books. "Holdings" means the party named as such above, until a successor replaces it in accordance with the terms of this Indenture, and thereafter means such successor. "incur" shall have the meaning set forth in Section 4.12. "Indebtedness" means with respect to any person, without duplication, (i) all liabilities, contingent or otherwise, of such person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such person in the ordinary course of business of such person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such person or, if there is no such maximum fixed repurchase price, the liquidation preference of such Disqualified Capital Stock, plus accrued but unpaid dividends; (iii) reimbursement obligations of such person with respect to letters of credit; (iv) obligations of such person with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such person are subject, whether or not the obligations secured thereby shall have been assumed by such person or shall otherwise be such person's legal liability (provided that if the obligations so secured have not been assumed by such person or are not otherwise such person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock 7 18 (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution. For purposes hereof, Indebtedness incurred by any person that is a general partnership (other than non-recourse Indebtedness) shall be deemed to have been incurred by the general partners of such partnership pro rata in accordance with their respective interests in the liabilities of such partnership unless any such general partner shall, in the reasonable determination of the Board of Directors of Holdings, be unable to satisfy its pro rata share of the liabilities of the partnership, in which case the pro rata share of any Indebtedness attributable to such partner shall be deemed to be incurred at such time by the remaining general partners on a pro rata basis in accordance with their interests. "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof. "Independent Financial Advisor" means a reputable accounting, appraisal or a nationally recognized investment banking firm that is, in the reasonable judgment of the Board of Directors of Holdings, qualified to perform the task for which such firm has been engaged hereunder and disinterested and independent with respect to Holdings and its Affiliates. "Initial Public Offering" means an underwritten primary public offering of common stock of Holdings at a time when Holdings has not previously issued or sold any equity securities in an underwritten transaction pursuant to a registration statement filed pursuant to the Securities Act. "Initial Public Offering Consummation Date" means the first date on which Holdings or the Company receives any proceeds from an Initial Public Offering. "Interest Payment Date" means the stated maturity of an installment of interest on the Securities. "Interest Swap Obligation" means any obligation of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such person calculated by applying a fixed or floating rate of interest on the same notional amount; provided that the term "Interest Swap Obligation" shall also include interest rate exchange, collar, cap, swap option or similar agreements providing interest rate protection. "Investment" by any person in any other person means any investment by such person in such other person, whether by a purchase of assets, in any transaction or series of related transactions, individually or in the aggregate, in an amount greater than $5 million, share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances, or to permit the purchase of Qualified Capital Stock of Holdings or any Subsidiary and other similar customary expenses incurred, in each case in the ordinary course of business consistent with past practice) or similar 8 19 credit extension constituting Indebtedness of such other person, and any guarantee of Indebtedness of any other person. "Issue Date" means the date of first issuance of the Securities under this Indenture. "Legal Defeasance" shall have the meaning provided in Section 8.2. "Legal Holiday" shall have the meaning provided in Section 13.7. "Letter of Credit Obligations" means Indebtedness of Subsidiaries with respect to letters of credit issued pursuant to the Credit Agreement, and for purposes of Section 4.12, the aggregate principal amount of Indebtedness outstanding at any time with respect thereto, shall be deemed to consist of (a) the aggregate maximum amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance against real or personal property, or a security interest of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell which is intended to constitute or create a security interest, mortgage, pledge or lien, any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction); provided that in no event shall an operating lease be deemed to constitute a Lien hereunder. "Maturity Date" means ________ __, 2007. "Merger" means (i) the merger of the Company into Ralphs Supermarkets (with Ralphs Supermarkets surviving such merger) pursuant to the Merger Agreement and (ii) immediately following the merger described in clause (i) of this definition, the merger of RGC into Ralphs Supermarkets (with Ralphs Supermarkets surviving such merger and changing its name to "Ralphs Grocery Company" in connection with such merger). "Merger Agreement" means the Agreement and Plan of Merger, dated as of September 14, 1994, by and among Food 4 Less, Inc., a Delaware corporation, Holdings, Food 4 Less Holdings, Inc., a California corporation, Ralphs Supermarkets, the Company and the stockholders of Ralphs Supermarkets, as such agreement is in effect on the Issue Date. "Net Cash Proceeds" means Net Proceeds of (i) the sale of Qualified Capital Stock of Holdings or (ii) any Asset Sale, in each case, in the form of cash or Cash Equivalents. 9 20 "Net Proceeds" means (a) in the case of any Asset Sale or any issuance and sale by any person of Qualified Capital Stock, the aggregate net proceeds received by such person after payment of expenses, taxes, commissions and the like incurred in connection therewith, (and, in the case of any Asset Sale, net of the amount of cash applied to repay Indebtedness secured by the asset involved in such Asset Sale) whether such proceeds are in cash or in property (valued at the fair market value thereof at the time of receipt as determined with respect to any Asset Sale resulting in Net Proceeds in excess of $5 million in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution) and (b) in the case of any conversion or exchange of any outstanding Indebtedness or Disqualified Capital Stock of such person for or into shares of Qualified Capital Stock of Holdings, the sum of (i) the fair market value of the proceeds received by Holdings in connection with the issuance of such Indebtedness or Disqualified Capital Stock on the date of such issuance and (ii) any additional amount paid by the holder to Holdings upon such conversion or exchange. "New F4L Senior Notes" means the ___% Senior Notes due 2004 of the Company, issued pursuant to an indenture dated as of the Issue Date, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancings are permitted to be incurred under this Indenture. "New F4L Subordinated Notes" means the 13.75% Senior Subordinated Notes due 2005 of the Company, issued pursuant to an indenture dated as of the Issue Date, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancings are permitted to be incurred under this Indenture. "New F4L Senior Note Indenture" means the indenture pursuant to which the New F4L Senior Notes were issued, as amended or supplemented from time to time in accordance with the terms thereof. "New F4L Subordinated Note Indenture" means the indenture pursuant to which the New F4L Subordinated Notes were issued, as amended or supplemented from time to time in accordance with the terms thereof. "New Notes" means the ___% Senior Subordinated Notes due 2005 of the Company, issued pursuant to an indenture dated as of the Issue Date, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancings are permitted to be incurred under this Indenture. "New Note Indenture" means the indenture pursuant to which the New Notes were issued, as amended or supplemented from time to time in accordance with the terms thereof. "Officer" means, with respect to any person, the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Controller, or the Secretary of such person. 10 21 "Officers' Certificate" means, with respect to any person, a certificate signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of such person and otherwise complying with the requirements of Sections 13.4 and 13.5. "Operating Coverage Ratio" means with respect to any person, the ratio of (1) EBDIT of such person for the period (the "Pro Forma Period") consisting of the most recent four full fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Operating Coverage Ratio (the "Transaction Date") to (2) the aggregate Fixed Charges of such person for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter (the "Forward Period") reasonably anticipated by the Board of Directors of such person to become due from time to time during such period. For purposes of this definition, if the Transaction Date occurs prior to the first anniversary of the Merger, "EBDIT" for the Pro Forma Period shall be calculated, in the case of Holdings, after giving effect on a pro forma basis to the Merger as if it had occurred on the first day of the Pro Forma Period. In addition to, but without duplication of, the foregoing, for purposes of this definition, "EBDIT" shall be calculated after giving effect (without duplication), on a pro forma basis for the Pro Forma Period (but no longer), to (a) any Investment, during the period commencing on the first day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other person that, as a result of such Investment, becomes a subsidiary of such person, (b) the acquisition, during the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, which acquisition is not prohibited by this Indenture, and (c) any sales or other dispositions of assets (other than sales of inventory in the ordinary course of business) occurring during the Reference Period, in each case as if such incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, "Fixed Charges" shall be calculated after giving effect (without duplication), on a pro forma basis for the Forward Period, to any Indebtedness incurred or repaid on or after the first day of the Forward Period and prior to the Transaction Date. If such person or any of its subsidiaries directly or indirectly guarantees any Indebtedness of a third person, the Operating Coverage Ratio shall give effect to the incurrence of such Indebtedness as if such person or subsidiary had directly incurred such guaranteed Indebtedness. "operating lease" means any lease the obligations under which do not constitute Capitalized Lease Obligations. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee complying with the requirements of Sections 13.4 and 13.5. Unless otherwise required by the Trustee, the legal counsel may be an employee of or counsel to Holdings or the Trustee. "Other Obligations" has the meaning set forth in Section 11.1 hereof. "Pari Passu Indebtedness" means, with respect to Holdings, Indebtedness that ranks pari passu in right of payment to the Securities (whether or not secured by any Lien). 11 22 "Paying Agent" shall have the meaning provided in Section 2.3, except that, for the purposes of Articles Three and Eight and Section 4.14, the Paying Agent shall not be Holdings or any Subsidiary. "Payment Restriction" means, with respect to a Subsidiary of any person, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) such subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to such person or any other subsidiary of such person, (b) make loans or advances to such person or any other subsidiary of such person, or (c) transfer any of its properties or assets to such person or any other subsidiary of such person, or (ii) such person or any other subsidiary of such person to receive or retain any such (a) dividends, distributions or payments, (b) loans or advances, or (c) transfer of properties or assets. "Permitted Holder" means (i) Food 4 Less Equity Partners, L.P., The Yucaipa Companies or any entity controlled thereby or any of the partners thereof, (ii) Apollo Advisors, L.P., Lion Advisors, L.P., or any entity controlled thereby or any of the partners thereof, (iii) an employee benefit plan of Holdings or any Subsidiary, or any participant therein, (iv) a trustee or other fiduciary holding securities under an employee benefit plan of Holdings or any Subsidiary or (v) any Permitted Transferee of any of the foregoing persons. "Permitted Indebtedness" means (a) Indebtedness of the Company and its subsidiaries pursuant to (i) the term loans under the Credit Agreement in an aggregate principal amount at any time outstanding not to exceed $750 million, less the aggregate amount of all principal repayments thereunder pursuant to and in accordance with the provisions of Section 4.15 subsequent to the Issue Date, (ii) the revolving credit facility under the Credit Agreement (and the Company and each Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $325 million, less all permanent reductions thereunder pursuant to and in accordance with the provisions of Section 4.15, and (iii) any guarantee by Holdings of the Indebtedness referred to in the foregoing clauses (i) and (ii); (b) Indebtedness of Holdings or a Subsidiary owed to and held by Holdings or a Subsidiary; (c) Indebtedness incurred by Holdings or any Subsidiary in connection with the purchase or improvement of property (real or personal) or equipment or other capital expenditures in the ordinary course of business (including for the purchase of assets or stock of any retail grocery store or business) or consisting of Capitalized Lease Obligations, provided that (i) at the time of the incurrence thereof, such Indebtedness, together with any other Indebtedness incurred during the most recently completed four fiscal quarter period in reliance upon this clause (c) does not exceed, in the aggregate, 3% of net sales of Holdings and its Subsidiaries during the most recently completed four fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the first anniversary of the Merger) and (ii) such Indebtedness, together with all then outstanding Indebtedness incurred in reliance upon this clause (c) does not exceed, in the aggregate, 3% of the aggregate net sales of Holdings and its Subsidiaries during the most recently completed twelve fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the third anniversary of the Merger); (d) Indebtedness incurred by Holdings or any Subsidiary in 12 23 connection with capital expenditures in an aggregate principal amount not exceeding $150 million, provided that such capital expenditures relate solely to the integration of the operations of Ralphs Supermarkets, the Company, and their respective subsidiaries as described in that certain Registration Statement of Holdings dated ______, 1995; (e) Indebtedness of Holdings or any Subsidiary incurred under Foreign Exchange Agreements and Interest Swap Obligations; (f) guarantees incurred in the ordinary course of business, by Holdings or a Subsidiary, of Indebtedness of any other person in aggregate not to exceed $25 million at any time outstanding; (g) guarantees by Holdings or a Subsidiary of Indebtedness incurred by a wholly-owned Subsidiary so long as the incurrence of such Indebtedness incurred by such wholly-owned Subsidiary is permitted under the terms of this Indenture; (h) Refinancing Indebtedness; (i) Indebtedness for letters of credit relating to workers' compensation claims and self-insurance or similar requirements in the ordinary course of business; (j) other Indebtedness outstanding on the Issue Date (after giving effect to the Merger); (k) Indebtedness arising from guarantees of Indebtedness of Holdings or any Subsidiary or other agreements of Holdings or a Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Subsidiary, other than guarantees of Indebtedness incurred by any person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by Holdings and its Subsidiaries in connection with such disposition; (l) obligations in respect of performance bonds and completion guarantees provided by Holdings or any Subsidiary in the ordinary course of business; (m) Indebtedness of Holdings with respect to the Senior Discount Notes and the Securities as in effect on the Issue Date (including the accretion of the Senior Discount Notes and the issuance of Secondary Securities in lieu of cash interest payments pursuant to the terms of this Indenture as in effect on the Issue Date); and (n) additional Indebtedness of Holdings or any Subsidiary in an amount not to exceed $200 million at any time outstanding. "Permitted Investment" by any person means (i) any Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale or any other disposition of assets not constituting an Asset Sale by reason of the $500,000 threshold contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with Sections 4.3 and 4.11, (vi) Investments in any Subsidiary or by any Subsidiary in Holdings or any other Subsidiary in other Subsidiaries, and (vii) additional Investments in an aggregate amount not exceeding $5 million. "Permitted Payments" means any (i) payment by Holdings or any Subsidiary to The Yucaipa Companies or the principals or any Affiliates thereof for consulting, management, investment banking or similar services during such period pursuant to the Consulting Agreement (including payments for the repurchase of equity securities pursuant to the terms of such Consulting Agreement), (ii) payment by Holdings or any Subsidiary to Apollo Advisors, L.P. or the principals or any Affiliates thereof in an aggregate amount not to exceed $5 million as a commitment fee in connection with the purchase of equity securities of Holdings on the Issue Date, and (iii) any payment by Holdings or any Subsidiary, (a) in connection with repurchases of outstanding shares of Holdings' common stock following the death, disability or termination of employment of management stockholders, and (b) of amounts required to be paid by Holdings or any Subsidiaries to participants in employee benefit plans upon any termination of employment by such participants, as provided in the documents 13 24 related thereto, in an aggregate amount (for both clauses (a) and (b)) not to exceed $10 million in any Yearly Period (provided that any unused amounts may be carried over to any subsequent Yearly Period subject to a maximum amount of $20 million in any Yearly Period). "Permitted Transferees" means, with respect to any person, (i) any Affiliate of such person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such person, (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such person or his or her spouse or lineal descendants, in each case to whom such person has transferred the beneficial ownership of any securities of Holdings, (iv) any investment account whose investment managers and investment advisors consist solely of such person and/or Permitted Transferees of such person, and (v) any investment fund or investment entity that is a subsidiary of such person or a permitted transferee of such person. "Person" or "person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such person to holders of Capital Stock of such person. "Preferred Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of such person's preferred or preference stock, whether outstanding on the date hereof or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "principal" of any Indebtedness (including the Securities) means the principal of such Indebtedness plus the premium, if any, on such Indebtedness. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms of this Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act, as interpreted by Holdings' chief financial officer or Board of Directors in consultation with its independent certified public accountants. "Pro Forma Period" shall have the meaning set forth in the definition of Operating Coverage Ratio contained in this Section 1.1. "Qualified Capital Stock" means, with respect to any person, any Capital Stock of such person that is not Disqualified Capital Stock. 14 25 "Ralphs Supermarkets" means Ralphs Supermarkets, Inc., a Delaware corporation, until a successor replaces it and thereafter means such successor. "Record Date" means the Record Dates specified in the Securities; provided that if any such date is a Legal Holiday, the Record Date shall be the first day immediately preceding such specified day that is not a Legal Holiday. "Redemption Date," when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to this Indenture and the Securities. "Redemption Price," when used with respect to any Security to be redeemed, means the price fixed for such redemption pursuant to this Indenture and the Securities. "Reference Period" shall have the meaning provided in the definition of "Operating Coverage Ratio" contained in this Section 1.1. "Refinancing Indebtedness" means, with respect to any person, Indebtedness of such person issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of such person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to clauses (c), (d), (h), (j) and (m) of the definition thereof) incurred in accordance with this Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date and (y) shall contain subordination and default provisions no less favorable in any material respect to Holders than those contained in such repaid or amended Subordinated Indebtedness. "Registrar" shall have the meaning provided in Section 2.3. "Registration Rights Agreement" means the registration rights agreement dated as of the Issue Date by and among Holdings, the Company and the stockholders of Ralphs Supermarkets with respect to the Securities. 15 26 "Related Business Investment" means (i) any Investment by a person in any other person a majority of whose revenues are derived from the operation of one or more retail grocery stores or supermarkets or any other line of business engaged in by Holdings or any Subsidiary as of the Issue Date; (ii) any Investment by such person in any cooperative or other supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of Holdings and any Subsidiary as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment (without regard to the $5 million threshold in the definition thereof), in each case reasonably related to the business of Holdings and any Subsidiary as it is conducted as of the Issue Date and as such business may thereafter evolve or change. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Indebtedness. "Restricted Debt Prepayment" means the purchase, redemption, acquisition or retirement for value by Holdings, prior to the scheduled maturity or prior to any scheduled repayment of principal or any sinking fund payment in respect of any Subordinated Indebtedness. "Restricted Payment" means any (i) Stock Payment or (ii) Investment (other than a Permitted Investment) or (iii) Restricted Debt Prepayment. "RGC" means Ralphs Grocery Company, a Delaware corporation, until a successor replaces it and thereafter means such successor. "SEC" means the Securities and Exchange Commission. "Secondary Securities" has the meaning set forth in Section 2.2. "Securities" means the 13% Senior Subordinated Pay-in-Kind Debentures due 2007 of Holdings, including any Secondary Securities issued in respect thereof, as amended or supplemented from time to time in accordance with the terms hereof, that are issued pursuant to this Indenture. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Senior Discount Notes" means the 15.25% Senior Discount Notes due 2004 of Food 4 Less Holdings, Inc., issued pursuant to an indenture dated as of December 15, 1992, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancing indebtedness is permitted to be incurred under this Indenture. "Senior Discount Note Indenture" means the indenture pursuant to which the Senior Discount Notes were issued, as amended or supplemented from time to time in accordance with the terms thereof. 16 27 "Senior Indebtedness" means the principal of, premium, if any, and interest on (such Senior Indebtedness being deemed to include for all purposes of Article XI of this Indenture the amount required to fully secure in cash undrawn Letter of Credit Obligations under the Credit Agreement and such interest on Senior Indebtedness being deemed to include for all purposes of Article XI interest accruing after the filing of a petition initiating any proceeding pursuant to any Bankruptcy Law in accordance with and at the rate (including any rate applicable upon any default, to the extent lawful) specified in any document evidencing the Senior Indebtedness, whether or not the claim for such interest is allowed as a claim after such filing in any proceeding under such Bankruptcy Law) any Indebtedness of Holdings (and, in the case of the Credit Agreement, all obligations of Holdings for fees, expenses, indemnities and other amounts payable thereunder or in connection therewith), whether outstanding on the Issue Date or thereafter created, incurred, assumed or guaranteed or in effect guaranteed by Holdings (including, without limitation, Indebtedness under the Credit Agreement), unless, in the case of any particular Indebtedness, the instrument creating or evidencing such Indebtedness expressly provides that such Indebtedness shall not be senior in right of payment to the Securities. Without limiting the generality of the foregoing, "Senior Indebtedness" shall include the principal of, premium, if any, and interest on all obligations of every nature of Holdings from time to time owed or guaranteed by Holdings with respect to the Credit Agreement and the Senior Discount Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) any Pari Passu Indebtedness or any Subordinated Indebtedness, (ii) any Indebtedness constituting Disqualified Capital Stock, (iii) Indebtedness of Holdings to any Subsidiary, (iv) that portion of any Indebtedness which is incurred in violation of Section 4.12 of this Indenture, (v) Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer or employee of Holdings or of any Subsidiary (including, without limitation, amounts owed for compensation), (vi) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, and (vii) any liability for federal, state, local or other taxes owed or owing by Holdings. "Significant Stockholder" means, with respect to any person, any other person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such person that are entitled to vote on a regular basis for the election of directors of such person. "Significant Subsidiary" means each Subsidiary that is either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the Securities Act and the Exchange Act (as such regulation is in effect on the date hereof) or (b) material to the financial condition or results of operations of Holdings and its Subsidiaries taken as a whole. "Stock Payment" means, with respect to any person, (a) the declaration or payment by such person, either in cash or in property, of any dividend on (except, in the case of Holdings, dividends payable solely in Qualified Capital Stock of Holdings), or the making by such person or any of its subsidiaries of any other distribution in respect of, such person's Qualified Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), or (b) the redemption, repurchase, retirement or other acquisition for value by such person or any of its subsidiaries, directly or indirectly, of such person's Qualified Capital Stock (and, in 17 28 the case of a Subsidiary, Qualified Capital Stock of Holdings) or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), other than, in the case of Holdings, through the issuance in exchange therefor solely of Qualified Capital Stock of Holdings; provided, however, that in the case of a Subsidiary, the term "Stock Payment" shall not include any such payment with respect to its Capital Stock or warrants, rights or options to purchase or acquire shares of any class of its Capital Stock that are owned solely by Holdings or a wholly-owned Subsidiary. "Subordinated Indebtedness" means Indebtedness of Holdings that is subordinated in right of payment to the Securities. "subsidiary" of any person means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly, owned by such person, by one or more subsidiaries of such person or by such person and one or more subsidiaries of such person or (ii) a partnership in which such person or a subsidiary of such person is, at the date of determination, a general partner of such partnership, but only if such person or its subsidiary is entitled to receive more than 50% of the assets of such partnership upon its dissolution, or (iii) any other person (other than a corporation or a partnership) in which such person, a subsidiary of such person or such person and one or more subsidiaries of such person, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such person. "Subsidiary" means any subsidiary of Holdings. "The Yucaipa Companies" means The Yucaipa Companies, a California general partnership. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb), as amended, as in effect on the date on which this Indenture is qualified under the TIA, except as otherwise provided in Section 9.3. "Transaction Date" shall have the meaning provided in the definition of "Operating Coverage Ratio" contained in this Section 1.1. "Trustee" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "Trust Officer" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "U.S. Government Obligations" shall have the meaning provided in Section 8.4. "U.S. Legal Tender" means such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. 18 29 "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (y) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding principal amount of such Indebtedness. "wholly-owned Subsidiary" means any Subsidiary all of the shares of Capital Stock of which (other than permitted Preferred Stock and directors' qualifying shares) are at the time directly or indirectly owned by Holdings. "Yearly Period" means each fiscal year of Holdings; provided that the first Yearly Period shall begin on the Issue Date and shall end on January 28, 1996. Section 1.2. Incorporation by Reference of TIA. Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means Holdings or any other obligor on the Securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule and not otherwise defined herein have the meanings assigned to them therein. Section 1.3. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; 19 30 (3) "or" is not exclusive; (4) words in the singular include the plural, and words in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. ARTICLE II THE SECURITIES Section 2.1. Form and Dating. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage or as required by the Registration Rights Agreement. Holdings and the Trustee shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, Holdings and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Section 2.2. Execution and Authentication. An Officer or an Assistant Secretary, shall sign (either of whom shall, in each case, have been duly authorized by all requisite corporate actions) the Securities for Holdings by manual or facsimile signature. If an Officer whose signature is on a Security was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities, excluding Secondary Securities, for original issue in the aggregate principal amount of up to $150,000,000 upon a written order of Holdings in the form of an Officers' Certificate. The Officers' Certificate shall specify the amount of Securities to be authenticated and the date on which the Securities are to be 20 31 authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed $150,000,000, except for any Securities that may be issued pursuant to the immediately following paragraph and except as provided in Section 2.7 and 2.8. Upon the written order of Holdings in the form of an Officers' Certificate, the Trustee shall authenticate Securities in substitution of Securities originally issued to reflect any name change of Holdings. Holdings may, on each Interest Payment Date prior to (and including) [the Interest Payment Date five years after the Issue Date], at its option and in its sole discretion, pay interest in additional Securities ("Secondary Securities") in lieu of the payment in whole or in part of interest in cash on the Securities as provided in paragraph 1 of the Securities. Holdings shall give written notice to the Trustee of the amount of interest to be paid in Secondary Securities not less than five Business Days prior to the relevant Interest Payment Date, and the Trustee or an authenticating agent (upon written order of Holdings signed by an Officer of Holdings given not less than five nor more than 45 days prior to such Interest Payment Date) shall authenticate for original issue (pro rata to each Holder of any Securities of such record date) Secondary Securities in an aggregate principal amount equal to the amount of cash interest not paid on such Interest Payment Date. Except as set forth in the following paragraph each issuance of Secondary Securities in lieu of the payment of interest in cash on the Securities shall be made pro rata with respect to the outstanding Securities, and Holdings shall have the right to aggregate amounts of interest payable in the form of Secondary Securities to a Holder of outstanding Securities and issue to such Holder a single Secondary Security in payment thereof. Any Secondary Securities may be denominated a separate series if Holdings deems it necessary to do so in order to comply with any law or other applicable regulation or requirement, with appropriate distinguishing designations. The Securities shall be issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof except that Secondary Securities or Securities issued upon registration of transfer of such Secondary Securities may be in denominations of other than $1,000; provided that Holdings may at its option pay cash in lieu of issuing Secondary Securities in any denominations of less than $1,000. The Trustee may appoint an authenticating agent reasonably acceptable to Holdings to authenticate Securities. Unless otherwise provided in the appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holdings and Affiliates of Holdings. Section 2.3. Registrar and Paying Agent. Holdings shall maintain an office or agency in the Borough of Manhattan, The City of New York, where (a) Securities may be presented or surrendered for registration of transfer or for exchange ("Registrar"), (b) Securities may be presented or surrendered for payment ("Paying Agent") and (c) notices and demands to or upon Holdings in respect of the Securities and this Indenture may be served. Holdings may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any 21 32 or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve Holdings of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. Holdings may act as its own Registrar or Paying Agent except that for the purposes of Articles Three and Eight and Sections 4.4 and 4.14, neither Holdings nor any Subsidiary shall act as Paying Agent. The Registrar shall keep a register of the Securities and of their transfer and exchange. Holdings, upon notice to the Trustee, may have one or more co-Registrars and one or more additional paying agents reasonably acceptable to the Trustee. The term "Paying Agent" includes any additional paying agent. Holdings initially appoints the Trustee as Registrar and Paying Agent until such time as the Trustee has resigned or a successor has been appointed. Holdings shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. Holdings shall notify the Trustee, in advance, of the name and address of any such Agent. If Holdings fails to maintain a Registrar or Paying Agent, the Trustee shall act as such. Section 2.4. Paying Agent To Hold Assets in Trust. Holdings shall require each Paying Agent other than the Trustee to agree in writing that each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets and/or Secondary Securities held by the Paying Agent for the payment of principal of, or interest on, the Securities (whether such assets have been distributed to it by Holdings or any other obligor on the Securities), and shall notify the Trustee of any Default by Holdings (or any other obligor on the Securities) in making any such payment. If Holdings or a Subsidiary acts as Paying Agent, it shall segregate such assets and/or Secondary Securities and hold them as a separate trust fund. Holdings at any time may require a Paying Agent to distribute all assets and/or Secondary Securities held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets and/or Secondary Securities held by it to the Trustee and to account for any assets so distributed. Upon distribution to the Trustee of all assets that shall have been delivered by Holdings to the Paying Agent, the Paying Agent shall have no further liability for such assets and/or Secondary Securities. Section 2.5. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, Holdings shall furnish to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, which list may be conclusively relied upon by the Trustee. 22 33 Section 2.6. Transfer and Exchange. When a Security is presented to the Registrar or a co-registrar with a request to register a transfer, the Registrar shall register the transfer as requested if the requirements of the Registrar are met. The Registrar need not transfer or exchange any Securities selected for redemption. Also, it need not transfer or exchange any Securities for a period of 30 days before a selection of Securities to be redeemed. When Securities are presented to the Registrar or a co-registrar with a request to exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall make the exchange as requested if the requirements of the Registrar are met. Holdings shall cooperate with the Registrar in meeting its requirements. To permit transfers, registration and exchanges, the Trustee shall authenticate Securities at the Registrar's request. No service charge shall be made for any transfer, registration or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, but not for any exchange pursuant to Section 2.10, 3.6 or 9.5. Section 2.7. Replacement Securities. If a mutilated Security is surrendered to the Trustee or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, Holdings shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements are met. If required by the Trustee or Holdings, such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both Holdings and the Trustee, to protect Holdings, the Trustee or any Agent from any loss which any of them may suffer if a Security is replaced. Holdings may charge such Holder for its reasonable, out-of-pocket expenses in replacing a Security, including reasonable fees and expenses of counsel. Every replacement Security shall constitute an additional obligation of Holdings. Section 2.8. Outstanding Securities. Securities outstanding at any time are all the Securities that have been authenticated by the Trustee, including the Secondary Securities, except those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because Holdings or any of its Affiliates holds the Security. If a Security is replaced pursuant to Section 2.7 (other than a mutilated Security surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. A mutilated Security ceases to be outstanding upon surrender of such Security and replacement thereof pursuant to Section 2.7. If on a Redemption Date or the Maturity Date the Paying Agent (other than Holdings or any Subsidiary) holds U.S. Legal Tender or U.S. Government Obligations sufficient to pay all of the principal and interest due on the Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue. 23 34 Section 2.9. Treasury Securities. In determining whether the Holders of the required aggregate principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by Holdings or any of its Affiliates shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that the Trustee knows or has reason to know are so owned shall be disregarded. Notwithstanding the foregoing and except as otherwise provided by the TIA, a majority of Securities not owned by Holdings or any of its Affiliates shall be sufficient to approve any such direction, waiver or consent. Section 2.10. Temporary Securities. Until definitive Securities are ready for delivery, Holdings may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that Holdings considers appropriate for temporary Securities. Without unreasonable delay, Holdings shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Section 2.11. Cancellation. Holdings at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than Holdings or any Subsidiary), and no one else, shall cancel and, at the written direction of Holdings, shall dispose of all Securities surrendered for transfer, exchange, payment or cancellation. Subject to Section 2.7, Holdings may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation. If Holdings or any Subsidiary shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11. Section 2.12. Defaulted Interest. If Holdings defaults in a payment of interest on the Securities, it shall, unless the Trustee fixes another record date pursuant to Section 6.10, pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the persons who are Holders on a subsequent special record date, which date shall be the fifteenth day next preceding the date fixed by Holdings for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. At least 15 days before the subsequent special record date, Holdings shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. 24 35 Section 2.13. CUSIP Number. Holdings in issuing the Securities may use a "CUSIP" number, and if so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. ARTICLE III REDEMPTION Section 3.1. Notices to Trustee. If Holdings elects to redeem Securities pursuant to Paragraph 5 of the Securities it shall notify the Trustee of the Redemption Date and aggregate principal amount of the Securities to be redeemed and whether it wants the Trustee to give notice of redemption to the Holders (at Holdings' expense) at least 30 days (unless a shorter notice shall be satisfactory to the Trustee) but not more than 60 days before the Redemption Date. Any notice given pursuant to this Section 3.1 may be cancelled at any time prior to notice of such redemption being mailed to any Holder and shall thereby be void and of no effect. Section 3.2. Selection of Securities To Be Redeemed. If fewer than all of the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata, by lot or by such other method as the Trustee considers to be fair and appropriate and in such manner as complies with applicable legal and stock exchange requirements, if any. Securities in denominations of less than $1,000 shall be redeemed first. Thereafter the Trustee shall make the selection from the Securities outstanding and not previously called for redemption and shall promptly notify Holdings in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the aggregate principal amount thereof to be redeemed. Securities in denominations of $1,000 or less may be redeemed only in whole. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal of Securities that have denominations larger than $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. Section 3.3. Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, Holdings shall mail a notice of redemption by first class mail to each Holder whose Securities are to be redeemed at such Holder's registered address, with a copy to the Trustee. At Holdings' request, 25 36 the Trustee shall give the notice of redemption in Holdings' name and at Holdings' expense. Each notice for redemption shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (5) that, unless Holdings defaults in making the redemption payment, interest on Securities called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Securities is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Securities redeemed; (6) if any Security is being redeemed in part, the portion of the aggregate principal amount of such Security to be redeemed and that, after the Redemption Date, and upon surrender of such Security, a new Security or Securities in aggregate principal amount equal to the unredeemed portion thereof will be issued; and (7) if fewer than all the Securities are to be redeemed, the identification of the particular Securities (or portion thereof to be redeemed), as well as the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of Securities to be outstanding after such partial redemption. Section 3.4. Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.3, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender to the Trustee or Paying Agent, such Securities called for redemption shall be paid at the Redemption Price. Section 3.5. Deposit of Redemption Price. On or before the Redemption Date, Holdings shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Redemption Price of all Securities to be redeemed on that date (other than Securities or portions thereof called for redemption on that date which have been delivered by Holdings to the Trustee for cancellation). The Paying Agent shall promptly return to Holdings any U.S. Legal Tender so deposited which is not required for that purpose upon the written request of Holdings, except with respect to monies owed as obligations to the Trustee pursuant to Article Seven. If Holdings complies with the preceding paragraph, then, unless Holdings defaults in the payment of such Redemption Price, interest on the Securities to be redeemed will cease 26 37 to accrue on and after the applicable Redemption Date, whether or not such Securities are presented for payment. If a Security is redeemed on or after a Record Date but on or prior to the related Interest Payment Date, then any accrued and unpaid interest shall be paid to the Person in whose name such Security was registered at the close of business on such Record Date. If any Security called for redemption shall not be so paid upon surrender for redemption because of the failure of Holdings to comply with the first paragraph of this Section 3.5, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the rate provided in the Securities and in Section 4.1 hereof. Section 3.6. Securities Redeemed in Part. Upon surrender of a Security that is to be redeemed in part, the Trustee shall authenticate for the Holder a new Security or Securities equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE IV COVENANTS Section 4.1. Payment of Securities. Holdings shall pay the principal amount of, premium, if any, and interest on, as the case may be, the Securities on the dates and in the manner provided in the Securities. An installment shall be considered paid on the date it is due if the Trustee or Paying Agent (other than Holdings or a Subsidiary) holds on that date U.S. Legal Tender and/or, to the extent permitted by Section 2.2, Secondary Securities designated for and sufficient to pay the installment. Holdings shall pay interest on overdue principal (including post-petition interest in any proceeding under any Bankruptcy Law, to the extent allowable as a claim in any such proceeding) at the same rate borne by the Securities and it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law, to the extent allowable as a claim in any such proceeding) on overdue installments of interest (without regard to any applicable grace period) at the same rate borne by the Securities, to the extent lawful. Section 4.2. Maintenance of Office or Agency. Holdings shall maintain in the Borough of Manhattan, The City of New York, the office or agency required under Section 2.3. Holdings shall give prior notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time Holdings shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 13.2. 27 38 Section 4.3. Limitation on Restricted Payments. Holdings shall not, and shall cause each of its Subsidiaries not to, directly or indirectly, make any Restricted Payment if, at the time of such Restricted Payment, or after giving effect thereto, (a) a Default or an Event of Default shall have occurred and be continuing, (b) Holdings or such Subsidiary could not incur at least $1 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.12, or (c) the aggregate amount expended for all Restricted Payments, including such Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment, as determined in good faith by the Board of Directors of Holdings, which determination shall be evidenced by a Board Resolution), subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such Consolidated Net Income is a loss, minus 100% of such loss) of Holdings earned subsequent to the Issue Date and on or prior to the date the Restricted Payment occurs (the "Reference Date") plus (ii) 100% of the aggregate Net Proceeds received by Holdings from any person (other than a Subsidiary) from the issuance and sale (including upon exchange or conversion for other securities of Holdings) subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from issuances and sales financed directly or indirectly using funds borrowed from Holdings or any Subsidiary, until and to the extent such borrowing is repaid) plus (iii) 100% of the aggregate net cash proceeds received by Holdings as capital contributions to Holdings after the Issue Date, plus (iv) $25,000,000. Notwithstanding the foregoing, if no Default or Event of Default shall have occurred and be continuing as a consequence thereof, the provisions set forth in the immediately preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of declaration, (2) the acquisition of any shares of Capital Stock of Holdings or the repurchase, redemption, or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of shares of Qualified Capital Stock of Holdings, (3) the repurchase, redemption or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of Subordinated Indebtedness of Holdings with an Average Life equal to or greater than the then remaining Average Life of the Subordinated Indebtedness repurchased, redeemed or repaid, and (4) Permitted Payments; provided that (x) the declaration of each dividend paid in accordance with clause (1) above, each acquisition, repurchase, redemption or other repayment made in accordance with, or of the type set forth in, clause (2) above, and each payment described in clause (ii) of the definition of "Permitted Payments" shall each be counted for purposes of computing amounts expended pursuant to subclause (c) in the immediately preceding paragraph, and (y) no amounts paid pursuant to clause (3) above or clause (i) of the definition of "Permitted Payments" shall be so counted. Prior to making any Restricted Payment under the first paragraph of this Section 4.3, Holdings shall deliver to the Trustee an Officers' Certificate setting forth the computation by which the amount available for Restricted Payments pursuant to such paragraph was determined. The Trustee shall have no duty or responsibility to determine the accuracy or 28 39 correctness of this computation and shall be fully protected in relying on such Officers' Certificate. Section 4.4. Corporate Existence. Except as otherwise permitted by Article Five, Holdings shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate or other existence of each of its Significant Subsidiaries in accordance with the respective organizational documents of each such Significant Subsidiary and the rights (charter and statutory) and franchises of Holdings and each such Significant Subsidiary; provided, however, that Holdings shall not be required to preserve, with respect to itself, any right or franchise, and with respect to any of its Significant Subsidiaries, any such existence, right or franchise, if the Board of Directors of Holdings or such Significant Subsidiary, as the case may be, shall determine that the preservation thereof is no longer desirable in the conduct of the business of Holdings or any such Significant Subsidiary. Section 4.5. Payment of Taxes and Other Claims. Holdings shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon it or any of its Subsidiaries or properties of it or any of its Subsidiaries and (ii) all lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of it or any of its Subsidiaries; provided, however, that Holdings shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim if either (a) the amount, applicability or validity thereof is being contested in good faith by appropriate proceedings and an adequate reserve has been established therefor to the extent required by GAAP or (b) the failure to make such payment or effect such discharge (together with all other such failures) would not have a material adverse effect on the financial condition or results or operations of Holdings and its Subsidiaries taken as a whole. Section 4.6. Maintenance of Properties and Insurance. (a) Holdings shall cause all properties used or useful to the conduct of its business or the business of any Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in its judgment may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times unless the failure to so maintain such properties (together with all other such failures) would not have a material adverse effect on the financial condition or results of operations of Holdings and its Subsidiaries taken as a whole; provided, however, that nothing in this Section 4.6 shall prevent Holdings or any Subsidiary from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is either (i) in the ordinary course of business, (ii) in the good faith judgment of the Board of Directors of Holdings or the Subsidiary concerned, or of the senior officers of Holdings or such Subsidiary, as the case may be, desirable in the 29 40 conduct of the business of Holdings or such Subsidiary, as the case may be, or (iii) is otherwise permitted by this Indenture. (b) Holdings shall provide or cause to be provided, for itself and each of its Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the reasonable, good faith opinion of Holdings, are adequate and appropriate for the conduct of the business of Holdings and such Subsidiaries in a prudent manner, with reputable insurers or with the government of the United States of America or an agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be either (i) consistent with past practices of Holdings or the applicable Subsidiary or (ii) customary, in the reasonable, good faith opinion of Holdings, for corporations similarly situated in the industry, unless the failure to provide such insurance (together with all other such failures) would not have a material adverse effect on the financial condition or results of operations of Holdings and its Subsidiaries, taken as a whole. Section 4.7. Compliance Certificate; Notice of Default. (a) Holdings shall deliver to the Trustee within 120 days after the end of Holdings' fiscal year an Officers' Certificate stating that a review of its activities and the activities of its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether it has kept, observed, performed and fulfilled its obligations under this Indenture and further stating, as to each such Officer signing such certificate, that to the best of his knowledge Holdings during such preceding fiscal year has kept, observed, performed and fulfilled each and every such covenant and no Default or Event of Default occurred during such year or, if such signers do know of such a Default or Event of Default, the certificate shall describe the Default or Event of Default and its status with particularity. The Officers' Certificate shall also notify the Trustee should Holdings elect to change the manner in which it fixes its fiscal year end. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, Holdings shall deliver to the Trustee within 120 days after the end of each fiscal year a written statement by Holdings' independent certified public accountants stating (A) that their audit examination has included a review of the terms of this Indenture and the Securities as they relate to accounting matters, and (B) whether, in connection with their audit examination, any Default has come to their attention and if such a Default has come to their attention, specifying the nature and period of existence thereof. (c) Holdings shall, so long as the Securities are outstanding, deliver to the Trustee, within five Business Days after any officer becomes aware of any Default or Event of Default, an Officer's Certificate specifying such Default or Event of Default and what action Holdings is taking or proposes to take with respect thereto. Section 4.8. Compliance with Laws. Holdings shall comply, and shall cause each of its Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America, 30 41 all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except such as are being contested in good faith and by appropriate proceedings and except for such noncompliances as would not in the aggregate have a material adverse effect on the financial condition or results of operations of Holdings and its Subsidiaries taken as a whole. Section 4.9. SEC Reports and Other Information. (a) To the extent permitted by applicable law or regulation, whether or not Holdings is subject to the requirements of Section 13 or 15(d) of the Exchange Act, Holdings shall file with the SEC all quarterly and annual reports and such other information, documents or other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) required to be filed pursuant to such provisions of the Exchange Act. Holdings shall file with the Trustee, within 5 days after it files the same with the SEC, copies of the quarterly and annual reports and the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to this Section 4.9. Holdings shall also comply with the other provisions of TIA Section 314(a). If Holdings is not permitted by applicable law or regulations to file the aforementioned reports, Holdings (at its own expense) shall file with the Trustee and mail, or cause the Trustee to mail, to Holders at their addresses appearing in the register of Securities maintained by the Registrar at the time of such mailing within 5 days after it would have been required to file such information with the SEC, all information and financial statements, including any notes thereto and with respect to annual reports, an auditors' report by an accounting firm of established national reputation, and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," comparable to the disclosure that Holdings would have been required to include in annual and quarterly reports, information, documents or other reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K, if Holdings was subject to the requirements of such Section 13 or 15(d) of the Exchange Act. (b) At any time when Holdings is not permitted by applicable law or regulations to file the aforementioned reports, upon the request of a Holder of Securities, Holdings will promptly furnish or cause to be furnished such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) to such Holder or to a prospective purchaser of such Securities designated by such Holder, as the case may be, in order to permit compliance by such Holder with Rule 144A under the Securities Act. Section 4.10. Waiver of Stay, Extension or Usury Laws. Holdings covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive Holdings from paying all or any portion of the principal of or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) Holdings hereby expressly waives all benefit or advantage of any such law, and covenants that 31 42 it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 4.11. Limitation on Transactions with Affiliates. (a) Neither Holdings nor any of its Subsidiaries shall (i) sell, lease, transfer or otherwise dispose of any of its properties or assets, or issue securities (other than equity securities which do not constitute Disqualified Capital Stock) to, (ii) purchase any property, assets or securities from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, an Affiliate or Significant Stockholder (or any Affiliate of such Significant Stockholder) of Holdings or any Subsidiary (an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under Section 4.11(b) and (y) Affiliate Transactions in the ordinary course of business, that are fair to Holdings or such Subsidiary, as the case may be, and on terms at least as favorable as might reasonably have been obtainable at such time from an unaffiliated party; provided, that (A) with respect to Affiliate Transactions involving aggregate payments in excess of $1 million and less than $5 million, Holdings or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the Trustee certifying that such transaction or series of transactions complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business), (B) with respect to Affiliate Transactions involving aggregate payments in excess of $5 million and less than $15 million, Holdings or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the Trustee certifying that such Affiliate Transaction complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business) and that such Affiliate Transaction has received the approval of a majority of the disinterested members of the Board of Directors of Holdings or the Subsidiary, as the case may be, or, in the absence of any such approval by the disinterested members of the Board of Directors of Holdings or the Subsidiary, as the case may be, that an Independent Financial Advisor has reasonably and in good faith determined that the financial terms of such Affiliate Transaction are fair to Holdings or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as might reasonably have been obtained at such time from an unaffiliated party and that such Independent Financial Advisor has provided written confirmation of such determination to the Board of Directors and (C) with respect to Affiliates Transactions involving aggregate payments in excess of $15 million, Holdings or such Subsidiary, as the case may be, shall have delivered to the Trustee, a written opinion from an Independent Financial Advisor to the effect that the financial terms of such Affiliate Transaction are fair to Holdings or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as those that might reasonably have been obtained at the time from an unaffiliated party. (b) The provisions of Section 4.11(a) shall not apply to (i) any Permitted Payment, (ii) any Restricted Payment that is made in compliance with the provisions of Section 4.3, (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of Holdings or any Subsidiary, as determined by the Board of Directors of Holdings or any Subsidiary or the senior management thereof in good faith, (iv) transactions exclusively between or among Holdings and any of its 32 43 wholly-owned Subsidiaries or exclusively between or among such wholly-owned Subsidiaries, provided such transactions are not otherwise prohibited by this Indenture, (v) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) so long as any such amendment is not disadvantageous to the Holders in any material respect, (vi) the existence of, or the performance by Holdings or any of its Subsidiaries of its obligations under the terms of, any stockholder agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Issue Date and any similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by Holdings or any of its Subsidiaries of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders in any material respect, (vii) transactions permitted by, and complying with, the provisions of Section 5.1, and (viii) purchases or sales of goods or services or other transactions with suppliers, in each case, in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of this Indenture which are fair to Holdings or any Subsidiary, in the reasonable determination of the Board of Directors, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. Section 4.12. Limitation on Incurrences of Additional Indebtedness.1/ Holdings will not, and will not permit any Subsidiary, directly or indirectly, to incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment of (collectively "incur") any Indebtedness other than Permitted Indebtedness; provided, however, that if no Default with respect to payment of principal of, or interest on, the Securities or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of such Indebtedness, (i) Holdings may incur Indebtedness if immediately before and immediately after giving effect to the incurrence of such Indebtedness the Operating Coverage Ratio of Holdings would be greater than 2.0 to 1.0 and (ii) the Company or any subsidiary of the Company may incur Indebtedness if immediately before and immediately after giving effect to the incurrence of such Indebtedness the Operating Coverage Ratio of the Company would be greater than 2.0 to 1.0. Section 4.13. Limitation on Liens. Holdings will not create, incur, assume or suffer to exist any Lien of any kind securing any Pari Passu Indebtedness, any Subordinated Indebtedness or any Affiliate Obligation upon any property or assets of Holdings owned on the Issue Date or acquired after the Issue Date, or any income or profits therefrom, unless the Securities are secured equally and ratably with (or prior to in the case of Subordinated Indebtedness) to the obligation or liability secured by such Lien, and except for any Lien securing Acquired Indebtedness created prior to the ____________________ 1. This Section 4.12 will conform to the covenant in the new public securities, as appropriately modified to be applicable to Holdings and its subsidiaries. 33 44 incurrence of such Indebtedness by Holdings, provided that any such Lien only extends to the assets that were subject to such Lien securing such Acquired Indebtedness prior to the related acquisition by Holdings. Section 4.14. Limitation on Change of Control. (a) Upon the occurrence of a Change of Control (the "Change of Control Date"), each Holder shall have the right to require the repurchase of such Holder's Securities pursuant to the offer described in paragraph (b), below (the "Change of Control Offer"), at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued interest, if any, to the date of purchase. Prior to the mailing of the notice to Holders provided for in paragraph (b) below, but in any event within 30 days following the Change of Control Date, Holdings shall cause the Company to either (a) repay in full and terminate all commitments under Indebtedness under the Credit Agreement to the extent the terms thereof require repayment upon a Change of Control (or offer to repay in full and terminate all commitments under all such Indebtedness under the Credit Agreement and repay the Indebtedness owed to each lender which has accepted such offer), or (b) obtain the requisite consents under the Credit Agreement, the terms of which require repayment upon a Change of Control, to permit the repurchase of the Securities as provided for in this Section 4.14. Holdings shall first comply with the covenant in the immediately preceding sentence before Holdings shall be required to repurchase Securities pursuant to this Section 4.14, and any failure to so comply shall constitute an Event of Default under this Indenture. Within 10 days after any Change of Control Date requiring Holdings to make a Change of Control Offer pursuant to this Section 4.14, Holdings shall so notify the Trustee. (b) The Change of Control Offer shall be made to all Holders and the notice to the Holders shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Change of Control Offer. Within 30 days following any Change of Control Date, Holdings shall send, by first class mail, a notice to each Holder, with copies to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state: (1) that the Change of Control Offer is being made pursuant to this Section 4.14 and that all Securities tendered will be accepted for payment; (2) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law) (the "Change of Control Payment Date"); (3) that any Security not tendered will continue to accrue interest if interest is then accruing; (4) that, unless Holdings defaults in making payment therefor, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; 34 45 (5) that Holders electing to have a Security purchased pursuant to a Change of Control Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than two Business Days prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the aggregate principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; (7) that Holders whose Securities are being purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; provided that each Holder shall tender Securities, and each Security purchased and each such new Security issued by Holdings shall be, in a principal amount of $1,000 or integral multiples thereof (except for Secondary Securities that were issued in denominations other than $1,000); and (8) the circumstances and relevant facts regarding such Change of Control, including information available to Holdings concerning the Person or Persons acquiring control and such historical or pro forma financial information as Holdings reasonably deems appropriate under the circumstances. (c) On or before the Change of Control Payment Date, Holdings shall (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price of all Securities so tendered and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by Holdings. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price; provided that each such new Security shall be in the principal amount of $1,000 or integral multiples thereof. Holdings will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 4.14, the Trustee shall act as the Paying Agent. (d) Holdings, to the extent applicable and if required by law, will comply with Rule 14e-1 under the Exchange Act and any other applicable provisions of the federal securities laws in connection with a Change of Control Offer. Section 4.15. Limitation on Asset Sales. (a) Neither Holdings nor any of its Subsidiaries will consummate an Asset Sale, unless (a) Holdings or the applicable Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold; and (b) upon consummation of an Asset Sale, Holdings or the applicable Subsidiary will, within 365 days of the receipt of the proceeds therefrom, either: (i) apply or cause its Subsidiary to apply the Net Cash Proceeds 35 46 of any Asset Sale to (1) a Related Business Investment (2) an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale, or (3) an investment in properties and assets that will be used in the business of Holdings and its Subsidiaries existing on the Issue Date or in a business reasonably related thereto; (ii) apply or cause to be applied such Net Cash Proceeds to the repayment of Senior Indebtedness or Pari Passu Indebtedness of Holdings or any Indebtedness of any Subsidiary; (iii) use such Net Cash Proceeds to secure Letter of Credit Obligations to the extent the related letters of credit have not been drawn upon or returned undrawn; or (iv) after such time as the accumulated Net Cash Proceeds equals or exceeds $20 million, apply or cause to be applied such Net Cash Proceeds to the purchase of Notes tendered to Holdings for purchase at a price equal to 100% of the aggregate principal amount thereof, plus accrued interest to the date of purchase pursuant to an offer to purchase made by Holdings as set forth below (a "Net Proceeds Offer"), provided, however, that if at any time any noncash consideration received by Holdings or any Subsidiary in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash, then such cash shall constitute Net Cash Proceeds for purposes of this Section 4.15 and shall be applied in accordance with clause (b) above within 365 days of the receipt of such cash; and provided further, however, that if at any time any security deposits or other amounts used to secure Letter of Credit Obligations pursuant to clause b(iii) above are returned to Holdings or any Subsidiary, then such security deposits or other amounts shall constitute Net Cash Proceeds for purposes of this Section 4.15 and shall be applied in accordance with clause (b) above within 365 days of the receipt of such security deposits or other amounts. A Net Proceeds Offer as a result of an Asset Sale made by the Company or one of its subsidiaries shall not be required to be in excess of the Net Cash Proceeds of such Asset Sale less the Net Cash Proceeds actually applied in accordance with clauses (b)(i), (ii) or (iii) above; provided, however, that Holdings shall have the right to exclude from the foregoing provisions Asset Sales subsequent to the Issue Date, (x) the proceeds of which are derived from the sale and substantially concurrent lease-back of a supermarket and/or related assets which are acquired or constructed by Holdings or a Subsidiary subsequent to the Issue Date, provided that such sale and substantially concurrent lease-back occurs within 180 days following such acquisition or the completion of such construction, as the case may be, and (y) the proceeds of which in the aggregate do not exceed $20 million. (b) Notice of a Net Proceeds Offer pursuant to this Section 4.15 shall be mailed, by first class mail, by Holdings not less than 305 days nor more than 335 days after the relevant Asset Sale to all Holders at their last registered addresses, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Net Proceeds Offer and shall state the following terms: (1) that the Net Proceeds Offer is being made pursuant to Section 4.15 and that all Securities tendered will be accepted for payment; provided, however, that if the aggregate principal amount of Securities tendered in a Net Proceeds Offer plus accrued interest at the expiration of such offer exceeds the aggregate amount of the Net Proceeds Offer, Holdings shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by Holdings so that only Securities in denominations of $1,000 or multiples thereof shall be purchased, except for Secondary Securities that were issued in denominations other than $1,000); 36 47 (2) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law) (the "Proceeds Purchase Date"); (3) that any Security not tendered will continue to accrue interest if interest is then accruing; (4) that, unless Holdings defaults in making payment therefor, any Security accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Proceeds Purchase Date; (5) that Holders electing to have a Security purchased pursuant to a Net Proceeds Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Proceeds Purchase Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than two Business Days prior to the Proceeds Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; and (7) that Holders whose Securities were purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. On or before the Proceeds Purchase Date, Holdings shall (i) accept for payment Securities or portions thereof tendered pursuant to the Net Proceeds Offer which are to be purchased in accordance with item (b)(l) above, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price of all Securities to be purchased and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by Holdings. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price. Holdings will publicly announce the results of the Net Proceeds Offer on or as soon as practicable after the Proceeds Purchase Date. For purposes of this Section 4.15, the Trustee shall act as the Paying Agent. (c) Holdings will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Securities pursuant to a Net Proceeds Offer. Any amounts remaining after the purchase of Securities pursuant to a Net Proceeds Offer shall be returned by the Trustee to Holdings. 37 48 Section 4.16. Limitation on Senior Subordinated Indebtedness. Holdings will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the Securities. Section 4.17. Limitation on Preferred Stock of Subsidiaries. Holdings will not permit any of its Subsidiaries to issue any Preferred Stock (other than to Holdings or a wholly-owned Subsidiary), or permit any person (other than Holdings or a wholly-owned Subsidiary) to own or hold an interest in any Preferred Stock of any such Subsidiary, unless such Subsidiary would be entitled to incur Indebtedness in accordance with the provisions of Section 4.12 in the aggregate principal amount equal to the aggregate liquidation value of such Preferred Stock. Section 4.18. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. Holdings shall not, and shall not permit any Subsidiary to, directly or indirectly, create or suffer to exist, or allow to become effective any consensual Payment Restriction with respect to any of its Subsidiaries, except for (a) any such restrictions contained in (i) the Credit Agreement as in effect on the Issue Date, as any such Payment Restriction may apply to any present or future Subsidiary, (ii) the Senior Discount Note Indenture, the New F4L Senior Note Indenture, the New F4L Subordinated Note Indenture, the New Note Indenture and any other agreement in effect at or entered into on the Issue Date, (iii) Indebtedness of a person existing at the time such person becomes a Subsidiary (provided that (x) such Indebtedness is not incurred in connection with, or in contemplation of, such person becoming a Subsidiary, (y) such restriction is not applicable to any person, or the properties or assets of any person, other than the person so acquired and (z) such Indebtedness is otherwise permitted to be incurred pursuant to Section 4.12), (iv) secured Indebtedness otherwise permitted to be incurred pursuant to Sections 4.12 and 4.13 that limit the right of the debtor to dispose of the assets securing such Indebtedness; (b) customary non-assignment provisions restricting subletting or assignment of any lease or other agreement entered into by a Subsidiary; (c) customary net worth provisions contained in leases and other agreements entered into by a Subsidiary in the ordinary course of business; (d) customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary; (e) customary provisions in joint venture agreements and other similar agreements; (f) restrictions contained in Indebtedness incurred to refinance, refund, extend or renew Indebtedness referred to in clause (a) above; provided that the restrictions contained therein are not materially more restrictive taken as a whole, than those provided for in such Indebtedness being refinanced, refunded, extended or renewed, and (g) Payment Restrictions contained in any other Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to the provisions of Section 4.12; provided that any such Payment Restrictions are ordinary and customary with respect to the type of Indebtedness being incurred (under the relevant circumstances) and, in any event, no more restrictive than the most restrictive Payment Restrictions in effect of the Issue Date. 38 49 ARTICLE V SUCCESSOR CORPORATION Section 5.1. When Holdings May Merge, Etc. (a) Holdings, in a single transaction or through a series of related transactions, shall not (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) either Holdings shall be the continuing person, or the person (if other than Holdings) formed by such consolidation or into which Holdings is merged or to which all or substantially all of the properties and assets of Holdings as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any person to which assets are transferred) (Holdings or such other person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any state thereof or the District of Columbia, and shall expressly assume, by an indenture supplement, all the obligations of Holdings under the Securities and this Indenture; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (A) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of Holdings immediately preceding the transaction and (B) the Surviving Person could incur at least $1 of Indebtedness other than Permitted Indebtedness pursuant to Section 4.12; and (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing. (b) For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of Holdings shall be deemed to be the transfer of all or substantially all of the properties and assets of Holdings. Section 5.2. Successor Corporation Substituted. Upon any consolidation or merger or any transfer of all or substantially all of the assets of Holdings or any adoption of a Plan of Liquidation by Holdings in accordance with Section 5.1, the surviving person formed by such consolidation or into which Holdings is 39 50 merged or to which such transfer is made, (or, in the case of a Plan of Liquidation, to which assets are transferred) shall succeed to, and be substituted for, and may exercise every right and power of, Holdings under this Indenture with the same effect as if such surviving person had been named as Holdings herein; provided, however, that solely for purposes of computing amounts described in subclause (c) of Section 4.3, any such surviving person shall only be deemed to have succeeded to and be substituted for Holdings with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets. When a successor corporation assumes all of the obligations of Holdings hereunder and under the Securities and agrees to be bound hereby and thereby, the predecessor shall be released from such obligations. ARTICLE VI DEFAULT AND REMEDIES Section 6.1. Events of Default. An "Event of Default" occurs if: (1) Holdings defaults in the payment of interest on the Securities when the same becomes due and payable and the default continues for a period of 30 days; (2) Holdings defaults in the payment of the principal of the Securities when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise (including the failure to repurchase Securities tendered pursuant to the requirements set forth in Sections 4.14 and 4.15), whether or not such payment shall be prohibited by the provisions of Article Eleven hereof; (3) Holdings fails to comply with any of its other agreements or covenants in, or provisions of, the Securities or this Indenture and the default continues for the period and after the notice specified below; (4) there shall be a default under any bond, debenture, or other evidence of Indebtedness of Holdings or of any Significant Subsidiary or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced any such Indebtedness, whether such Indebtedness now exists or shall hereafter be created, if both (A) such default either (i) results from the failure to pay such Indebtedness at its stated final maturity (that is, the date of the last principal installment of any installment Indebtedness under the instrument or agreement pursuant to or under which such Indebtedness was created or is evidenced) or (ii) relates to an obligation (including any obligation to pay interest, to purchase such Indebtedness or to pay the principal of such Indebtedness, other than the obligation to pay any principal of such Indebtedness at its stated final maturity) and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated final maturity) and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness the maturity of which has been so accelerated, aggregates $25 million or more at any one time; 40 51 (5) Holdings or any Significant Subsidiary (A) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (B) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (C) consents to the appointment of a Custodian of it or for substantially all of its property, (D) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it, (E) makes a general assignment for the benefit of its creditors, or (F) takes any corporate action to authorize or effect any of the foregoing; (6) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of Holdings or any Significant Subsidiary in an involuntary case or proceeding under any Bankruptcy Law, which shall (A) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of Holdings or any Significant Subsidiary, (B) appoint a Custodian of Holdings or any Significant Subsidiary or for substantially all of its property or (C) order the winding-up or liquidation of its affairs; and such judgment, decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (7) the lenders under the Credit Agreement shall commence judicial proceedings to foreclose upon any material portion of the assets of Holdings and its Subsidiaries; or (8) any final judgments or order for payment of money in excess of $25 million shall be rendered against Holdings or any Significant Subsidiary by a court of competent jurisdiction and shall remain undischarged for a period of 60 days after such judgment becomes final and nonappealable. A Default under clause (3) above (other than in the case of any Defaults resulting from any Default under Section 4.3, 4.14 or 5.1, which Defaults shall be Events of Default with the notice specified in this paragraph but without the passage of time specified in this paragraph) is not an Event of Default until the Trustee notifies Holdings, or the Holders of at least 25% in aggregate principal amount of the outstanding Securities notify Holdings and the Trustee, of the Default, and Holdings does not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." Such notice shall be given by the Trustee if so requested by the Holders of at least 25% in aggregate principal amount of the Securities then outstanding. When a Default is cured, it ceases. Section 6.2. Acceleration. (a) If an Event of Default (other than an Event of Default specified in Section 6.1(5) or (6) with respect to Holdings or any Significant Subsidiary) occurs and is continuing, the Trustee may, by notice to Holdings (and, if any Indebtedness is outstanding under the Credit Agreement or the Credit Agreement is otherwise in effect, to the Credit Agent), or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding may, by written notice to Holdings and the Trustee, and the Trustee shall (with 41 52 notice to the Credit Agent if any Indebtedness is outstanding under the Credit Agreement or the Credit Agreement is otherwise in effect), upon the request of such Holders, declare the aggregate principal amount of the Securities outstanding, together with accrued but unpaid interest thereon to the date of payment, to be due and payable and, upon any such declaration, the same shall become and be due and payable; provided, that so long as the Credit Agreement shall be in force and effect, if any such Event of Default shall have occurred and be continuing, any such acceleration shall not be effective until the earlier of (a) five Business Days following a notice of acceleration given to Holdings and the Credit Agent under the Credit Agreement and only if upon such fifth Business Day such Event of Default shall be continuing or (b) the acceleration of any Indebtedness under the Credit Agreement. If an Event of Default specified in Section 6.1(5) or (6) occurs with respect to Holdings or any Significant Subsidiary, all unpaid principal and accrued interest on the Securities then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. Upon payment of such principal amount, interest, and premium, if any, all of Holdings' obligations under the Securities and this Indenture, other than obligations under Section 7.7, shall terminate. The Holders of a majority in aggregate principal amount of the Securities then outstanding by notice to the Trustee may rescind an acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal and interest on the Securities which have become due solely by such declaration of acceleration, have been cured or waived, (ii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, and (iii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. (b) In the event of a declaration of acceleration under this Indenture because an Event of Default set forth in Section 6.1(4) has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if either (i) the holders of the Indebtedness which is the subject of such Event of Default have waived such failure to pay at maturity or have rescinded the acceleration in respect of such Indebtedness within 90 days of such maturity or declaration of acceleration, as the case may be, and no other Event of Default has occurred during such 90-day period which has not been cured or waived, or (ii) such Indebtedness shall have been discharged or the maturity thereof shall have been extended such that it is not then due and payable, or the underlying default has been cured (and any acceleration based thereon of such other Indebtedness has been rescinded), within 90 days of such maturity or declaration of acceleration, as the case may be. Section 6.3. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall 42 53 not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. Section 6.4. Waiver of Past Defaults. Subject to Sections 6.7 and 9.2, the Holders of at least a majority in aggregate principal amount of the outstanding Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of or interest on any Security as specified in clauses (1) and (2) of Section 6.1. When a Default or Event of Default is waived, it is cured and ceases. Section 6.5. Control by Majority. The Holders of at least a majority in aggregate principal amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. Subject to Section 7.1, however, the Trustee may refuse to follow any direction that conflicts with any law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of another Holder, or that may involve the Trustee in personal liability; provided that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 6.6. Limitation on Suits. A Holder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee notice of a continuing Event of Default; (2) the Holder or Holders of at least 25% in aggregate principal amount of the outstanding Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense to be incurred in compliance with such request; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holder or Holders of at least 25% in aggregate principal amount of the outstanding Securities do not give the Trustee a direction which, in the opinion of the Trustee, is inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. 43 54 Section 6.7. Rights of Holders To Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. Section 6.8. Collection Suit by Trustee. If an Event of Default in payment of principal or interest specified in clause (1) or (2) of Section 6.1 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against Holdings or any other obligor on the Securities for the whole amount of principal and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate per annum borne by the Securities and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relating to Holdings or any other obligor upon the Securities, any of their respective creditors or any of their respective property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10. Priorities. If the Trustee collects any money pursuant to this Article Six, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.7; 44 55 Second: if the Holders are forced to proceed against Holdings directly without the Trustee, to the Holders for their collection costs; Third: to the Holders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and Fourth: to Holdings. The Trustee, upon prior notice to Holdings, may fix a record date and payment date for any payment to the Holders pursuant to this Section 6.10. Section 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by a Holder or Holders of more than 10% in aggregate principal amount of the outstanding Securities. ARTICLE VII TRUSTEE The Trustee hereby accepts the trust imposed upon it by this Indenture and covenants and agrees to perform the same, as herein expressed. Section 7.1. Duties of Trustee. (a) If a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise thereof as a prudent person could exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of a Default or an Event of Default: (1) The Trustee need perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture that are adverse to the Trustee. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements 45 56 of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section 7.1. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.1. (f) The Trustee shall not be liable for interest on any assets received by it except as the Trustee may agree with Holdings. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. Section 7.2. Rights of Trustee. Subject to Section 7.1: (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may consult with counsel and may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Sections 13.4 and 13.5. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. 46 57 (d) The Trustee shall not be liable for any action that it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. Section 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with Holdings, its Subsidiaries, or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. Section 7.4. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for Holdings' use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities other than the Trustee's certificate of authentication. Section 7.5. Notice of Default. If a Default or an Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder notice of the uncured Default or Event of Default within 90 days after such Default or Event of Default occurs. Except in the case of a Default or an Event of Default in payment of principal of, premium, if any, or interest on, any Security, including the failure to make payment on the Change of Control Payment Date pursuant to a Change of Control Offer, the Trustee may withhold the notice if and so long as its board of directors, the executive committee of its board of directors or a committee of its directors and/or Trust Officers in good faith determines that withholding the notice is in the interest of the Holders. Section 7.6. Reports By Trustee to Holders. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, the Trustee shall, to the extent that any of the events described in TIA Section 313(a) occurred within the previous twelve months, but not otherwise, mail to each Holder a brief 47 58 report dated as of such May 15 that complies with TIA Section 313(a). The Trustee also shall comply with TIA Sections 313(b) and 313(c). A copy of each report at the time of its mailing to Holders shall be mailed to Holdings and filed with the SEC and each stock exchange, if any, on which the Securities are listed. Holdings shall notify the Trustee if the Securities become listed on any stock exchange. Section 7.7. Compensation and Indemnity. Holdings shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. Holdings shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it including, without limitation, any taxes imposed on the trust or on the income from the Securities. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. Holdings shall indemnify the Trustee for, and hold it harmless against, any loss or liability incurred by it except for such actions to the extent caused by any negligence or bad faith on its part, arising out of or in connection with the administration of this trust and its rights or duties hereunder. The Trustee shall notify Holdings promptly of any claim asserted against the Trustee for which it may seek indemnity. Holdings shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and Holdings shall pay the reasonable fees and expenses of such counsel; provided that Holdings will not be required to pay such fees and expenses if it assumes the Trustee's defense and there is no conflict of interest between Holdings and the Trustee in connection with such defense as reasonably determined by the Trustee. Holdings need not pay for any settlement made without its written consent. Holdings need not reimburse any expense or indemnify against any loss or liability to the extent incurred by the Trustee through its negligence, bad faith or willful misconduct. To secure Holdings' payment obligations in this Section 7.7, the Trustee shall have a lien prior to the Securities on all assets held or collected by the Trustee, in its capacity as Trustee, except assets held in trust to pay principal of, premium, if any, or interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(5) or (6) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 7.8. Replacement of Trustee. The Trustee may resign by so notifying Holdings. The Holders of a majority in aggregate principal amount of the outstanding Securities may remove the Trustee by so notifying 48 59 Holdings and the Trustee may appoint a successor Trustee with Holdings' consent. Holdings may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, Holdings shall notify each Holder of such event and shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in aggregate principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by Holdings. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to Holdings. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided in Section 7.7, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, Holdings or the Holders of at least 10% in aggregate principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, Holdings' obligations under Section 7.7 shall continue for the benefit of the retiring Trustee. Section 7.9. Successor Trustee by Merger, Etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee. Section 7.10. Eligibility; Disqualification. 49 60 This Indenture shall always have a Trustee who satisfies the requirements of TIA Sections 310(a)(1) and 310(a)(5). The Trustee shall have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of Holdings are outstanding, if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. Section 7.11. Preferential Collection of Claims Against Holdings. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. ARTICLE VIII LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.1. Option to Effect Legal Defeasance or Covenant Defeasance. Holdings may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding Securities upon compliance with the conditions set forth below in this Article Eight. Section 8.2. Legal Defeasance. Upon Holdings' exercise under Section 8.1 hereof of the option applicable to this Section 8.2, Holdings shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Securities on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that Holdings shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.5 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Securities and this Indenture (and the Trustee, on demand of and at the expense of Holdings, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Securities to receive solely from the trust fund described in Section 8.4 hereof, and as more fully set forth in such Section, payments in respect of the principal, of, premium, if any, and interest on such Securities when such payments are due, (b) Holdings' obligations with respect to such Securities under Article Two and Section 4.2 hereof and the rights, powers, trusts, duties and immunities of the Trustee and Holdings' obligations in connection therewith, and (c) this Article Eight. Subject to compliance with this Article Eight, Holdings may exercise its option under this Section 8.2 notwithstanding the prior exercise of its option under Section 8.3 hereof. 50 61 Section 8.3. Covenant Defeasance. Upon Holdings' exercise under Section 8.1 hereof of the option applicable to this Section 8.3, Holdings shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be released from its obligations under the covenants contained in Sections 4.3 and 4.6 through 4.18 and Article V hereof with respect to the outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Securities shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Securities shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Securities, Holdings may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1 hereof, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. In addition, upon Holdings' exercise under Section 8.1 hereof of the option applicable to this Section 8.3 hereof, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, Sections 6.1(3) (but only to the extent it relates to a breach of any of the covenants contained in Sections 4.3 and 4.6 through 4.18 and Article V hereof), 6.1(4) and 6.1(7) hereof shall not constitute Events of Default. Section 8.4. Conditions to Legal or Covenant Defeasance. The following shall be the conditions to the application of either Section 8.2 or 8.3 hereof to the outstanding Securities: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) Holdings must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Securities, cash in United States dollars, or direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which obligation or guarantee the full faith and credit of the United States of America is pledged ("U.S. Government Obligations"), or a combination thereof, in such amounts and at such times as will be sufficient, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges or assessments in respect thereof payable by the Trustee, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding Securities to redemption or maturity provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities on the Maturity Date or such redemption date, as the case may be; 51 62 (b) in the case of an election under Section 8.2 hereof, Holdings shall have delivered to the Trustee an Opinion of Counsel stating that (A) Holdings has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and Legal Defeasance had not occurred; (c) in the case of an election under Section 8.3 hereof, Holdings shall have delivered to the Trustee an Opinion of Counsel stating that the Holders of the outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if deposit and such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Section 6.1(5) or 6.1(6) hereof is concerned, at any time in the period ending on the 91st day after the date of deposit (it being understood that this condition shall not be deemed satisfied until after such 91st day); (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which Holdings is a party or by which Holdings is bound (and in that connection, the Trustee shall have received a certificate from the administrative agent under the Credit Agreement to that effect with respect to such Credit Agreement if then in effect); (f) Holdings shall have delivered to the Trustee an Opinion of Counsel to the effect that, assuming that no Default or Event of Default shall occur and be continuing under Section 6.1(5) or 6.1(6) during the period ending on the 91st day after the date of deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (g) Holdings shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by Holdings with the intent of preferring the Holders over the other creditors of Holdings or with the intent of defeating, hindering, delaying or defrauding creditors of Holdings, or others; and 52 63 (h) Holdings shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. Section 8.5. Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions. Subject to Section 8.6 hereof, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 8.4 hereof in respect of the outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (excluding Holdings or any Affiliate thereof) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. Holdings shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or U.S. Government Obligations deposited pursuant to Section 8.4 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Securities. Anything in this Article Eight to the contrary notwithstanding, the Trustee shall deliver or pay to Holdings from time to time upon the request of Holdings any money or non-callable U.S. Government Obligations held by it as provided in Section 8.4 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.4(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Covenant Defeasance. Section 8.6. Repayment to Holdings. Any money deposited with the Trustee or any Paying Agent in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to Holdings on its request or shall be discharged from such trust; and the Holder of such Security shall thereafter, as a creditor, look only to Holdings for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense of Holdings cause to be published once, in The New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to Holdings. 53 64 Section 8.7. Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or U.S. Government Obligations in accordance with Section 8.2 or 8.3 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then Holdings' obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.2 or 8.3 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.2 or 8.3 hereof, as the case may be; provided, however, that, if Holdings makes any payment of principal of, premium, if any, or interest on any Security following the reinstatement of its obligations, Holdings shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 9.1. Without Consent of Holders. Holdings, when authorized by a Board Resolution, and the Trustee, together, may amend or supplement this Indenture or the Securities without notice to or consent of any Holder: (1) to cure any ambiguity, defect or inconsistency; provided that such amendment or supplement does not adversely affect the rights of any Holder; (2) to comply with Article Five; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Internal Revenue Code of 1986, as from time to time amended, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Internal Revenue Code of 1986, as from time to time amended; (4) to make any other change that does not adversely affect the rights of any Holders; or (5) to comply with any requirements of the SEC in connection with the qualification of this Indenture under the TIA; provided that Holdings has delivered to the Trustee an Opinion of Counsel stating that such amendment or supplement complies with the provisions of this Section 9.1. Section 9.2. With Consent of Holders. 54 65 Subject to Section 6.7, Holdings, when authorized by a Board Resolution, and the Trustee, together, with the written consent of the Holder or Holders of at least fifty four percent in aggregate principal amount of the outstanding Securities (or at least a majority in aggregate principal amount of the outstanding Securities in the event that EJDC shall cease to beneficially own at least a majority in aggregate principal amount of the outstanding Securities), may amend or supplement this Indenture or the Securities, without notice to any other Holders. Subject to Section 6.7, the Holder or Holders of at least fifty four percent in aggregate principal amount of the outstanding Securities (or at least a majority in aggregate principal amount of the outstanding Securities in the event that EJDC shall cease to beneficially own at least a majority in aggregate principal amount of the outstanding Securities) may waive compliance by Holdings with any provision of this Indenture or the Securities without notice to any other Holder. Without the consent of each Holder affected, however, no amendment, supplement or waiver, including a waiver pursuant to Section 6.4, may: (1) change the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver of any provision of this Indenture or the Securities; (2) reduce the rate or extend the time for payment of interest on any Security; (3) reduce the principal amount of any Security; (4) change the Maturity Date of any Security, or alter the redemption provisions contained in paragraph 5 of the Securities in a manner adverse to any Holder; (5) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders or the rights of Holders to recover the principal of, interest on, or redemption payment with respect to, any Security; (6) make any changes in Section 6.4, 6.7 or this third sentence of this Section 9.2; or (7) make the principal of, or the interest on any Security payable with anything or in any manner other than as provided for in this Indenture and the Securities as in effect on the date hereof. Without the consent of the Holder or Holders of at least 66 2/3% of the aggregate principal amount of the outstanding Securities, no change may be made to the provisions of Article Eleven that adversely affects the rights of any Holder under Article Eleven. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section becomes effective, Holdings shall mail to the Holders affected thereby a notice briefly describing the amendment, 55 66 supplement or waiver. Any failure of Holdings to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. In connection with any amendment, supplement or waiver under this Article Nine, Holdings may, but shall not be obligated to, offer to any Holder who consents to such amendment, supplement or waiver, or to all Holders, consideration for such Holder's consent to such amendment, supplement or waiver. Holdings agrees that no amendment, supplement or waiver under this Article Nine may make any change that adversely affects the rights under Article Eleven of any holders of Senior Indebtedness unless the holders of such Senior Indebtedness consent to the change. Section 9.3. Compliance with TIA. Every amendment, waiver or supplement of this Indenture or the Securities shall comply with the TIA as then in effect. Section 9.4. Revocation and Effect of Consents. Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of his Security by notice to the Trustee or Holdings received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Securities have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. Holdings may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver, which record date shall be at least 30 days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (1) through (7) of Section 9.2, in which case, the amendment, supplement or waiver shall bind only each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. 56 67 Section 9.5. Notation on or Exchange of Securities. If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if Holdings or the Trustee so determines, Holdings in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Section 9.6. Trustee To Sign Amendments, Etc. The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; provided that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture. ARTICLE X MEETINGS OF SECURITYHOLDERS Section 10.1. Purposes for Which Meetings May Be Called. A meeting of Holders may be called at any time and from time to time pursuant to the provisions of this Article Ten for any of the following purposes: (a) to give any notice to Holdings or to the Trustee, or to give any directions to the Trustee, or to waive or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article Six; (b) to remove the Trustee or appoint a successor Trustee pursuant to the provisions of Article Seven; (c) to consent to an amendment, supplement or waiver pursuant to the provisions of Section 9.2; or (d) to take any other action (i) authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture, or authorized or permitted by law or (ii) which the Trustee deems necessary or appropriate in connection with the administration of this Indenture. Section 10.2. Manner of Calling Meetings. 57 68 The Trustee may at any time call a meeting of Holders to take any action specified in Section 10.1, to be held at such time and at such place in New York, New York or elsewhere as the Trustee shall determine. Notice of every meeting of Holders, setting forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed by the Trustee, first-class postage prepaid, to Holdings and to the Holders at their last addresses as they shall appear on the registration books of the Registrar not less than 10 nor more than 60 days prior to the date fixed for a meeting. Any meeting of Holders shall be valid without notice if the Holders of all Securities then outstanding are present in person or by proxy, or if notice is waived before or after the meeting by the Holders of all Securities outstanding, and if Holdings, any Subsidiary and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. Section 10.3. Call of Meetings by Holdings or Holders. In case at any time Holdings, pursuant to a Board Resolution, or the Holders of not less than 10% in aggregate principal amount of the Securities then outstanding shall have requested the Trustee to call a meeting of Holders to take any action specified in Section 10.1, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then Holdings or the Holders in the amount above specified may determine the time and place in New York, New York or elsewhere for such meeting and may call such meeting for the purpose of taking such action, by mailing or causing to be mailed notice thereof as provided in Section 10.2, or by causing notice thereof to be published at least once in each of two successive calendar weeks (on any Business Day during such week) in a newspaper or newspapers printed in the English language, customarily published at least five days a week of a general circulation in New York, New York, the first such publication to be not less than 10 nor more than 60 days prior to the date fixed for the meeting. Section 10.4. Who May Attend and Vote at Meetings. To be entitled to vote at any meeting of Holders, a person shall (a) be a registered Holder of one or more Securities, or (b) be a person appointed by an instrument in writing as proxy for the registered Holder or Holders of Securities. The only persons who shall be entitled to be present or to speak at any meeting of Holders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of Holdings and its counsel. Section 10.5. Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment. Notwithstanding any other provision of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any action by or any meeting of Holders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, and submission and examination of proxies, 58 69 certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think appropriate. Such regulations may fix a record date and time for determining the Holders of record of Securities entitled to vote at such meeting, in which case those and only those persons who are Holders of Securities at the record date and time so fixed, or their proxies, shall be entitled to vote at such meeting whether or not they shall be such Holders at the time of the meeting. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by Holdings or by Holders as provided in Section 10.3, in which case Holdings or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in aggregate principal amount of the Securities represented at the meeting and entitled to vote. At any meeting each Holder or proxy shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Securities challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman may adjourn any such meeting if he is unable to determine whether any Holder or proxy shall be entitled to vote at such meeting. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Holders. Any meeting of Holders duly called pursuant to the provisions of Section 10.2 or Section 10.3 may be adjourned from time to time by vote of the Holders of a majority in aggregate principal amount of the Securities represented at the meeting and entitled to vote, and the meeting may be held as so adjourned without further notice. Section 10.6. Voting at the Meeting and Record To Be Kept. The vote upon any resolution submitted to any meeting of Holders shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities or of their representatives by proxy and the principal amount of the Securities voted by the ballot. The permanent chairman of the meeting shall appoint two inspectors of votes, who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to such record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts, setting forth a copy of the notice of the meeting and showing that such notice was mailed as provided in Section 10.2 or published as provided in Section 10.3. The record shall be signed and verified by the affidavits of the permanent chairman and the secretary of the meeting and one of the duplicates shall be delivered to Holdings and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. 59 70 Section 10.7. Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting. Nothing contained in this Article Ten shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Holders under any of the provisions of this Indenture or of the Securities. ARTICLE XI SUBORDINATION Section 11.1. Securities Subordinated to Senior Indebtedness. Anything herein to the contrary notwithstanding, Holdings, for itself and its successors, and each Holder, by accepting a Security, agrees, that the payment of the principal of and interest on and premiums, penalties, fees and other liabilities (including, without limitation, liabilities in respect of any indemnity, reimbursement, compensation or contribution obligations, the occurrence of a Change of Control, any liquidated damage provision, any breach of representation or warranty, or any rights of redemption or rescission under this Indenture, the Merger Agreement and the Registration Rights Agreement or by law or otherwise) ("Other Obligations") with respect to the Securities is subordinated, to the extent and in the manner provided in this Article Eleven, to the prior payment in full in cash of all Senior Indebtedness. This Article Eleven shall constitute a continuing offer to all persons who become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness and such holders are made obligees hereunder and any one or more of them may enforce such provisions. Holders of Senior Indebtedness need not prove reliance on the subordination provisions hereof. Section 11.2. No Payment on Securities in Certain Circumstances. (a) No direct or indirect payment or distribution shall be made by or on behalf of Holdings (other than a payment in Secondary Securities) on account of principal of or interest on or Other Obligations with respect to the Securities or to acquire, repurchase, redeem, retire or defease any of the Securities or on account of the redemption provisions of the Securities (i) upon the maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise, unless and until all principal thereof and interest thereon shall first be paid in full in cash or (ii) upon the happening of any default in payment of any principal of or interest on any Senior Indebtedness when the same becomes due and payable (a "Payment Default"), unless and until such default shall have been cured or waived or shall have ceased to exist. (b) Without limiting the effect of Section 11.2(a), upon the happening of a default or event of default (other than a Payment Default) (including any event which, with the giving of notice or lapse of time, or both, would become an event of default and including any 60 71 default or event of default that would result upon any payment with respect to the Securities) with respect to any Senior Indebtedness, as such default or event of default is defined therein or in the instrument or agreement under which it is outstanding, and upon written notice thereof given to Holdings and the Trustee by any holders of such Senior Indebtedness or their Representative specifying an intent to effect a Payment Blockage Period hereunder ("Payment Notice"), then, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment or distribution (other than of Secondary Securities) shall be made by or on behalf of Holdings on account of principal of or interest on or Other Obligations with respect to the Securities or to acquire, repurchase, redeem, retire or defease any of the Securities or on account of the redemption provisions of the Securities; provided, however, that this paragraph (b) shall not prevent the making of any payment for a period of (a "Payment Blockage Period") of more than 179 days after a Payment Notice shall have been given (or earlier if such Payment Blockage Period is terminated (i) by written notice to the Trustee and Holdings from the Credit Agent or the Representative which gave such Payment Notice, (ii) repayment in full of such Senior Indebtedness or (iii) because the default specified in the Payment Notice is no longer continuing). Subject to the provisions contained in Section 11.2(a) above, Holdings may resume payments on the Securities after such Payment Blockage Period expires. Notwithstanding the foregoing, (i) not more than one Payment Notice shall be given within a period of 360 consecutive days, and (ii) a Payment Notice may only be given (A) if Senior Indebtedness is outstanding under the Credit Agreement at the time of such notice, by the Credit Agent and (B) if no Senior Indebtedness is outstanding under the Credit Agreement at the time of such notice, by a holder or holders (or the Representative of holders) of at least $35,000,000 principal amount of such Senior Indebtedness. For purposes of this Section, no default or event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis of the commencement of a subsequent Payment Blockage Period by the Representative of such Senior Indebtedness whether or not within a period of 360 consecutive days unless such default or event of default shall have been cured or waived for a period of not less than 90 consecutive days. (c) In furtherance of the provisions of Section 11.1, if, notwithstanding the foregoing provisions of this Section 11.2, any direct or indirect payment or distribution other than Secondary Securities on account of principal of or interest on or Other Obligations with respect to the Securities or to acquire, repurchase, redeem, retire or defease any of the Securities or on account of the redemption provisions of the Securities shall be made by or on behalf of Holdings and received by the Trustee, by any Holder or by any Paying Agent (or, if Holdings or any Subsidiary or Affiliate of Holdings is acting as Paying Agent, money for any such payment or distribution shall be segregated and held in trust), at a time when such payment or distribution was prohibited by the provisions of this Section 11.2, then, unless and until such payment or distribution is no longer prohibited by this Section 11.2, such payment or distribution (subject to the provisions of Sections 11.6 and 11.7) shall be received, segregated from other funds, and held in trust by the Trustee or such Holder or Paying Agent, as the case may be, for the benefit of, and shall be immediately paid over to, the holders of Senior Indebtedness or their Representative, ratably according to the respective amounts of Senior Indebtedness held or represented by each, to the extent necessary to make payment in full in cash of all Senior Indebtedness remaining unpaid, after giving effect to all concurrent payments and distributions 61 72 to or for the holders of Senior Indebtedness. Holdings shall give prompt notice to the Trustee of any default or event of default or any acceleration under any Senior Indebtedness or under any agreement pursuant to which Senior Indebtedness may have been issued. Failure to give such notice shall not affect the subordination of the Securities to Senior Indebtedness provided in this Article Eleven. Notwithstanding anything to the contrary contained herein, in the absence of its gross negligence or willful misconduct, the Trustee shall have no duty to collect or retrieve monies previously paid by it in good faith; provided that this sentence shall not affect the obligation of any other party receiving such payment to hold such payment for the benefit of, and to pay such payment over to, the holders of Senior Indebtedness or their Representative. Section 11.3. Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization of Holdings. Upon any payment or distribution of assets or securities of Holdings of any kind or character, whether in cash, property or securities, upon any dissolution, winding-up, total or partial liquidation or total or partial reorganization of Holdings (including, without limitation, in bankruptcy, insolvency or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of assets and liabilities of Holdings and whether voluntary or involuntary): (a) the holders of all Senior Indebtedness shall first be entitled to receive payments in full in cash of the principal thereof and interest thereon before the Holders are entitled to receive any payment on account of the principal of or interest on or Other Obligations with respect to the Securities (whether by payment, acquisition, retirement, defeasance, redemption or otherwise) or any other payment or distribution of assets or securities by or on behalf of Holdings; (b) any payment or distribution of assets or securities of Holdings of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee on behalf of the Holders would be entitled except for the provisions of this Article Eleven, including any such payment or distribution that is payable or deliverable by reason of the payment of any other Indebtedness of Holdings being subordinated to the payment of the Securities (except for any such payment or distribution (x) authorized by an order or decree giving effect, and stating in such order or decree that effect is given, to the subordination of the Securities to the Senior Indebtedness, and made by a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law, (y) of securities that (i) are unsecured, (ii) have a Weighted Average Life to Maturity and final maturity that are no shorter than the Weighted Average Life to Maturity of the Securities or any securities issued to the holders of Senior Indebtedness under the Credit Agreement pursuant to a plan of reorganization or readjustment and (iii) are subordinated, to at least the same extent as the Securities, to the payment of all Senior Indebtedness then outstanding or (z) of Capital Stock), shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Senior Indebtedness or their Representative, ratably according to the respective amounts of Senior Indebtedness held or represented by each, until all Senior Indebtedness remaining unpaid shall have been paid in full in cash, after giving 62 73 effect to all concurrent payments and distributions to or for the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets or securities of Holdings of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders or any Paying Agent (or, if Holdings or any Subsidiary or Affiliate of Holdings is acting as Paying Agent, money, assets or securities of any kind or character for any such payment or distribution shall be segregated or held in trust) on account of principal of or interest on or Other Obligations with respect to the Securities before all Senior Indebtedness is paid in full in cash, such payment or distribution (subject to the provisions of Sections 11.6 and 11.7) shall be received, segregated from other funds, and held in trust by the Trustee or such Holder or Paying Agent for the benefit of, and shall immediately be paid over to, the holders of Senior Indebtedness or their Representative, ratably according to the respective amounts of Senior Indebtedness held or represented by each, until all Senior Indebtedness remaining unpaid shall have been paid in full in cash, after giving effect to all concurrent payments and distributions to or for the holders of Senior Indebtedness. Notwithstanding anything to the contrary contained herein, in the absence of its gross negligence or wilful misconduct, the Trustee shall have no duty to collect or retrieve monies previously paid by it in good faith; provided that this sentence shall not affect the obligation of any other party receiving such payment to hold such payment for the benefit of, and to pay over such payment over to, the holders of Senior Indebtedness or their Representative. Holdings shall give prompt notice to the Trustee prior to any dissolution, winding-up, total or partial liquidation or total or partial reorganization of Holdings or assignment for the benefit of creditors by Holdings. Section 11.4. Holders to Be Subrogated to Rights of Holders of Senior Indebtedness. Subject to the payment in full in cash of all Senior Indebtedness, the Holders of Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of Holdings applicable to the Senior Indebtedness until all amounts owing on the Securities shall be paid in full in cash, and for the purpose of such subrogation no payments or distributions to the holders of Senior Indebtedness by or on behalf of Holdings, or by or on behalf of the Holders by virtue of this Article Eleven, which otherwise would have been made to the Holders, shall, as between Holdings and the Holders, be deemed to be payment by Holdings to or on account of the Senior Indebtedness, it being understood that the provisions of this Article Eleven are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Senior Indebtedness, on the other hand. If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article Eleven shall have been applied, pursuant to the provisions of this Article Eleven, to the payment of all amounts payable under the Senior Indebtedness, then the Holders shall be entitled to receive from the holders of such Senior 63 74 Indebtedness any payments or distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable under or in respect of the Senior Indebtedness in full in cash. Section 11.5. Obligations of Holdings Unconditional. Nothing contained in this Article Eleven or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between Holdings and the Holders, the obligation of Holdings, which is absolute and unconditional, to pay to the Holders the principal of and interest on and Other Obligations in respect of the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of Holdings other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Eleven, of the holders of Senior Indebtedness in respect of cash, property or securities of Holdings received upon the exercise of any such remedy. Upon any payment or distribution of assets or securities of Holdings referred to in this Article Eleven, the Trustee, subject to the provisions of Sections 7.1 and 7.2, and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee or agent or other person making any payment or distribution to the Trustee or to the Holders for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other Indebtedness of Holdings, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Eleven. Nothing in this Section 11.5 shall apply to the claims of, or payments to, the Trustee under or pursuant to Section 7.7. Section 11.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. The Trustee shall not at any time be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee unless and until the Trustee or any Paying Agent shall have received written notice thereof from Holdings or from one or more holders of Senior Indebtedness or from any Representative therefor and, prior to the receipt of any such notice, the Trustee, subject to the provisions of Sections 7.1 and 7.2, shall be entitled in all respects conclusively to assume that no such fact exists. Section 11.7. Application by Trustee of Assets Deposited with It. U.S. Legal Tender or U.S. Government Obligations deposited in trust with the Trustee pursuant to and in accordance with Section 8.4 shall be for the sole benefit of Holders and, to the extent allocated for the payment of Securities, shall not be subject to the subordination provisions of this Article Eleven. Otherwise, any deposit of assets or securities by or on behalf of Holdings with the Trustee or any Paying Agent (whether or not in trust) for the payment of principal of or interest on or Other Obligations with respect to any Securities shall be subject to the provisions of this Article Eleven; provided that if prior to the second 64 75 Business Day preceding the date on which by the terms of this Indenture any such assets may become distributable for any purpose (including, without limitation, the payment of either principal of or interest on any Security) the Trustee or such Paying Agent shall not have received with respect to such assets the notice provided for in Section 11.6, then the Trustee or such Paying Agent shall have full power and authority to receive such assets and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary received by it on or after such date. The foregoing shall not apply to the Paying Agent if Holdings or any Subsidiary or Affiliate of Holdings is acting as Paying Agent. Nothing contained in this Section 11.7 (except the first sentence of this Section 11.7) shall limit the right of the holders of Senior Indebtedness to recover payments as contemplated by this Article Eleven. Section 11.8. Subordination Rights Not Impaired by Acts or Omissions of Holdings or Holders of Senior Indebtedness. No right of any present or future holders of any Senior Indebtedness to enforce the subordination provisions contained in this Article Eleven shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of Holdings or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by Holdings with the terms of this Indenture, regardless of any knowledge thereof that any such holder may have or be otherwise charged with. The holders of Senior Indebtedness may extend, renew, restate, supplement, modify or amend the terms of the Senior Indebtedness or any security therefor and release, sell or exchange such security and otherwise deal freely with Holdings and its Subsidiaries all without affecting the liabilities and obligations of the parties to this Indenture or the Holders. No provision in any supplemental indenture that affects the subordination of the Securities or other provisions of this Article Eleven shall be effective against the holders of the Senior Indebtedness who have not consented thereto. Each Holder by accepting a Security agrees that the Representative of any Senior Indebtedness (including without limitation, the Credit Agent), in its discretion, without notice or demand and without affecting any rights of any holder of Senior Indebtedness under this Article Eleven, may foreclose any mortgage or deed of trust covering interests in real property secured thereby, by judicial or nonjudicial sale; and such Holder hereby waives any defense to the enforcement by the Representative (including without limitation, the Credit Agent) of any Senior Indebtedness or by any holder of any Senior Indebtedness against such Holder of this Article Eleven after a judicial or nonjudicial sale or other disposition of its interests in real property secured by such mortgage or deed of trust; and such Holder expressly waives any defense or benefits that may be derived from California Civil Code Sections 2808, 2809, 2810, 2819, 2845, 2849 or 2850, or California Code of Civil Procedure Sections 580a, 580d or 726, or comparable provisions of the laws of any other jurisdiction or any similar statute in effect in any other jurisdiction. Section 11.9. Holders Authorize Trustee to Effectuate Subordination of Securities. Each Holder by accepting a Security authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effect the subordination provisions contained in this Article Eleven, and appoints the Trustee his attorney-in-fact for such 65 76 purpose, including, in the event of any dissolution, winding up, liquidation or reorganization of Holdings (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of assets and liabilities of Holdings) tending towards liquidation or reorganization of the business and assets of Holdings, the immediate filing of a claim for the unpaid balance of its or his Securities and Other Obligations in the form required in said proceedings and cause said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Senior Indebtedness or their Representative is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Securities. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Senior Indebtedness or their Representative to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee or the holders of Senior Indebtedness or their Representative to vote in respect of the claim of any Holder in any such proceeding. Section 11.10. Right of Trustee to Hold Senior Indebtedness. The Trustee shall be entitled to all of the rights set forth in this Article Eleven in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. Section 11.11. Article Eleven Not to Prevent Events of Default. The failure to make a payment on account of principal of or interest on the Securities by reason of any provision of this Article Eleven shall not be construed as preventing the occurrence of a Default or an Event of Default under Section 6.1. Section 11.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be liable to any such holders (other than for its willful misconduct or gross negligence) if it shall in good faith mistakenly pay over or deliver to the Holders of Securities or Holdings or any other person, money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article Eleven or otherwise. Nothing in this Section 11.12 shall affect the obligation of any person other than the Trustee to hold such payment for the benefit of, and to pay such payment over to, the holders of Senior Indebtedness or their Representative. ARTICLE XII 66 77 SATISFACTION AND DISCHARGE Section 12.1. Satisfaction and Discharge of the Indenture. This Indenture will be discharged and will cease to be of further effect as to all outstanding Securities when: (a) all Securities theretofore authenticated and delivered (except lost, stolen or destroyed Securities which have been replaced or paid and Securities for whose payment money has theretofore been deposited in trust and thereafter repaid to Holdings) have been delivered to the Trustee for cancellation; or (b) (1) all Securities not theretofore delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise and Holdings has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on the Securities not theretofore delivered to the Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption; (2) Holdings has paid all sums payable by it under this Indenture; and (3) Holdings has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Securities at maturity or the redemption date, as the case may be. Section 12.2. Conditions to Satisfaction and Discharge of the Indenture. Holdings shall deliver an Officers' Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been complied with. ARTICLE XIII MISCELLANEOUS Section 13.1. TIA Controls. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of Section 3.18(c) of the TIA, the imposed duties shall control. Section 13.2. Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: 67 78 if to Holdings: c/o The Yucaipa Companies 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 Attention: Mark A. Resnik if to the Trustee: ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ Attention: Corporate Trust Administration Each of Holdings and the Trustee by written notice to each other such person may designate additional or different addresses for notices to such person. Any notice or communication to Holdings and the Trustee shall be deemed to have been given or made as of the date so delivered if personally delivered; when answered back, if telexed; when receipt is acknowledged, if telecopied; and five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Section 13.3. Communications by Holders with Other Holders. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities. Holdings, the Trustee, the Registrar and any other person shall have the protection of TIA Section 312(c). Section 13.4. Certificate and Opinion as to Conditions Precedent. Upon any request or application by Holdings to the Trustee to take any action under this Indenture, Holdings shall furnish to the Trustee: 68 79 (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 13.5. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officers' Certificate required by Section 4.7, shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. Section 13.6. Rules by Trustee, Paying Agent, Registrar. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. Section 13.7. Legal Holidays. A "Legal Holiday" used with respect to a particular place of payment is a Saturday, a Sunday or a day on which banking institutions in New York, New York, Los Angeles, California or at such place of payment are not required to be open. If a payment date is a Legal Holiday at such place, payment may be made at such place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 69 80 Section 13.8. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture. Section 13.9. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of any of Holdings or any Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.10. No Recourse Against Others. A director, officer, employee, stockholder or incorporator, as such, of Holdings shall not have any liability for any obligations of Holdings under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creations. Each Holder by accepting a Security waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Securities. Section 13.11. Successors. All agreements of Holdings in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor. Section 13.12. Duplicate Originals. All parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together shall represent the same agreement. Section 13.13. Severability. In case any one or more of the provisions in this Indenture or in the Securities shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. 70 81 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first written above. Dated: , 1995 ------------- [SEAL] FOOD 4 LESS HOLDINGS, INC. Attest: By: ----------------------------------- Name: Mark A. Resnik Title: Vice President - ---------------------------- Dated: , 1995 ------------- [SEAL] -------------------------------------- -------------------------------------- as Trustee Attest: By: ----------------------------------- Name: Title: - ---------------------------- 71 82 EXHIBIT A PURSUANT TO PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986 RELATING TO ORIGINAL ISSUE DISCOUNT AND TREASURY REGULATIONS PROMULGATED THEREUNDER WITH RESPECT TO DEBT INSTRUMENTS ISSUED ON OR AFTER APRIL 4, 1994, THE FOLLOWING INFORMATION IS PROVIDED: (1) THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT IN THE AMOUNT OF $____ PER FACE AMOUNT; (2) THE ISSUE PRICE OF THIS SECURITY IS $___ PER FACE AMOUNT; (3) THE ISSUE DATE OF THIS SECURITY IS ______ __, ____; AND (4) THE YIELD TO MATURITY OF THIS SECURITY IS __%. FOOD 4 LESS HOLDINGS, INC. 13 5/8% Senior Subordinated Pay-in-Kind Debentures due ________ __, 2007 No. $ Food 4 Less Holdings, Inc., a Delaware corporation ("Holdings," which term includes any successor entity), for value received promises to pay to or registered assigns, the principal sum of dollars, on ________ __, 2007. Interest payment dates: ________________ and _______________ commencing ________ __, ____. Record dates: _________ and _________. Reference is made to the further provisions of this security contained herein, which will for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, Holdings has caused this Security to be signed manually or by facsimile by its duly authorized officers. Dated: ________ __, 1995 FOOD 4 LESS HOLDINGS, INC. By: --------------------------------- Name: Title: This is one of the Securities described in the within-mentioned Indenture. Dated: ________ __, 1995 ------------------------------------- as Trustee By: --------------------------------- Title: A-1 83 FOOD 4 LESS HOLDINGS, INC. 13 5/8% Senior Subordinated Pay-in-Kind Debenture due ________ __, 2007 1. Interest. FOOD 4 LESS HOLDINGS, INC., a Delaware corporation ("Holdings"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. Holdings may, in its sole discretion, issue additional Securities ("Secondary Securities") in lieu of a cash payment of any or all of the interest due on any Interest Payment Date occurring on or prior to [the Interest Payment Date five years after the Issue Date]. If Holdings issues Secondary Securities in lieu of cash payment, in whole or in part, of interest due on any Interest Payment Date occurring on or prior to [the Interest Payment Date five years after the Issue Date], pursuant to this paragraph, it shall give notice to the Trustee not less than 5 Business Days prior to the relevant Interest Payment Date, and shall instruct the Trustee (upon written order of Holdings signed by an Officer of Holdings given not less than 5 nor more than 45 days prior to such Interest Payment Date) to authenticate a Secondary Security, dated such Interest Payment Date, in a principal amount equal to the amount of interest not paid in cash in respect of this Security on such Interest Payment Date. Each issuance of Secondary Securities in lieu of cash payments of interest on the Securities shall be made pro rata with respect to the outstanding Securities. Any such Secondary Securities shall be governed by the Indenture and shall be subject to the same terms (including the maturity date and the rate of interest from time to time payable thereon) as this Security (except, as the case may be, with respect to the title, issuance date and aggregate principal amount). The term Securities shall include the Secondary Securities that may be issued under the Indenture. Holdings will pay interest semi-annually in arrears on ___________ and _________ of each year (the "Interest Payment Date"), commencing ___________, ____. Interest on this Security will accrue from the date of issuance or from the most recent date to which interest has been paid. Interest will be computed on the basis of a 360-day year of twelve 30-day months and actual number of days elapsed. Holdings shall pay interest on overdue principal and interest on overdue installments of interest, to the extent lawful, at the rate per annum borne by the Securities. 2. Method of Payment. Holdings shall pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Securities are cancelled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Securities to a Paying Agent to collect principal payments. Holdings shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender") (or, pursuant to A-2 84 Paragraph 1 hereof, in Secondary Securities). However, Holdings may pay principal and interest by its check payable in such U.S. Legal Tender or by wire transfer of federal funds (or, pursuant to Paragraph 1 hereof, in Secondary Securities). Holdings may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. 3. Paying Agent and Registrar. Initially, Norwest Bank Minnesota, N.A. (the "Trustee"), will act as Paying Agent and Registrar. Holdings may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. Holdings or any Subsidiary may, subject to certain exceptions, act as Paying Agent, Registrar or co-Registrar. 4. Indenture. Holdings issued the Securities under an Indenture, dated as of ________ __, 1995 (the "Indenture"), between Holdings and the Trustee. This Security is one of a duly authorized issue of Securities of Holdings designated as its 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture until such time as the Indenture is qualified under the TIA, and thereafter as in effect on the date on which the Indenture is qualified under the TIA. Notwithstanding anything to the contrary herein, the Securities are subject to all such terms, and Holders of Securities are referred to the Indenture and said Act for a statement of them. The Securities are general unsecured obligations of Holdings limited in aggregate principal amount to $150,000,000, except for Secondary Securities and except as otherwise provided in the Indenture. 5. Optional Redemption. The Securities may not be redeemed at the option of Holdings prior to ________ __, 2000. Thereafter, upon at least 30 days' but not more than 60 days' notice to the Holders, Holdings may redeem all or any of the Securities at any time at redemption prices equal to the applicable percentage of the principal amount thereof set forth below, plus accrued interest, if any, to the Redemption Date (as defined in the Indenture) if redeemed during the 12-month period beginning ________ __ of the years indicated below:
Year Percentage ---- ---------- 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.8125% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.1094% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.4063% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.7031% 2004 and thereafter . . . . . . . . . . . . . . . . . . . . . 100.0000%
A-3 85 Notwithstanding the foregoing, prior to ________ __, 1998, Holdings may use the Net Proceeds (as defined in the Indenture) of an Initial Public Offering (as defined in the Indenture) of Holdings or the Company to redeem up to 35% of the Securities at a redemption price equal to 110% of the principal amount thereof plus accrued interest, if any, to the date of redemption. In order to effect the foregoing redemption, Holdings shall send the notice required by Section 3.3 of the Indenture not later than 30 days after the Initial Public Offering Consummation Date (as defined in the Indenture). 6. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at such Holder's registered address. Securities in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, from and after any Redemption Date, if monies for the redemption of the Securities called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then, unless Holdings defaults in the payment of such Redemption Price, the Securities called for redemption will cease to bear interest and the only right of the Holders of such Securities will be to receive payment of the Redemption Price. 7. Change of Control Offer. In the event of a Change of Control, upon the satisfaction of the conditions set forth in the Indenture, Holdings shall be required to offer to purchase all of the then outstanding Securities pursuant to a Change of Control Offer at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued interest, if any, to the date of purchase. Holders of Securities which are the subject of such an offer to repurchase shall receive an offer to repurchase and may elect to have such Securities repurchased in accordance with the provisions of the Indenture pursuant to and in accordance with the terms of the Indenture. 8. Limitation on Disposition of Assets. Under certain circumstances Holdings is required to apply the net proceeds from Asset Sales to the repayment of Indebtedness of Holdings or any Subsidiary, to make Related Business Investments and certain other investments or to purchase in a Net Proceeds Offer at a price equal to 100% of the aggregate principal amount thereof, plus accrued interest, if any, to the date of purchase, which shall in the aggregate equal the net proceeds required to be applied thereto. 9. Subordination. The Securities are subordinated in right of payment, in the manner and to the extent set forth in the Indenture, to the prior payment in full of Senior Indebtedness of Holdings whether outstanding on the date of the Indenture or thereafter A-4 86 created, incurred, assumed or guaranteed. Each Holder, by accepting a Security, agrees to such subordination and authorizes the Trustee to give it effect. 10. Denominations; Transfer; Exchange. The Securities are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000 (other than Secondary Securities which may be in denominations of less than $1,000). A Holder shall register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities or portions thereof selected for redemption. No service charge shall be made for any transfer, registration or exchange, but Holdings may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, but not for any exchange pursuant to Section 2.10, 3.6 or 9.5 of the Indenture. 11. Persons Deemed Owners. The registered Holder of a Security shall be treated as the owner of it for all purposes. 12. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for one year, the Trustee and the Paying Agents will pay the money back to Holdings at its request. After that, all liability of the Trustee and such Paying Agents with respect to such money shall cease. 13. Discharge Prior to Redemption or Maturity. If Holdings at any time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations sufficient to pay the principal of and interest on the Securities to redemption or maturity and complies with the other provisions of the Indenture relating thereto, Holdings will be discharged from certain provisions of the Indenture and the Securities (including the financial covenants, but excluding its obligation to pay the principal of and interest on the Securities). 14. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the written consent of the Holders of at least fifty four percent (and, in some cases, a majority) in aggregate principal amount of the Securities then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of fifty four percent (and, in some cases, a majority) in aggregate principal amount, as the case may be, of the Securities then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or A-5 87 supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Securities in addition to or in place of certificated Securities, comply with Article Five of the Indenture or comply with any requirements of the SEC in connection with the qualification of the Indenture under the TIA, or make any other change that does not adversely affect the rights of any Holder of a Security. An amendment may not make any change that adversely affects the rights under Article 11 of the Indenture of any holders of Senior Indebtedness unless the holders of Senior Indebtedness consent to the change. 15. Successors. When a successor assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor will be released from those obligations. 16. Defaults and Remedies. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of Securities then outstanding may declare all the Securities to be due and payable in the manner, at the time and with the effect provided in the Indenture. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Securities unless it has received indemnity satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Securities then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of any continuing Default or Event of Default (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. 17. Trustee Dealings with Holdings. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with Holdings, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 18. No Recourse Against Others. No stockholder, director, officer, employee or incorporator, as such, of Holdings shall have any liability for any obligation of Holdings under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 19. Authentication. This Security shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on this Security. A-6 88 20. Governing Law. The Laws of the State of New York shall govern this Security and the Indenture. 21. Abbreviations and Defined Terms. Customary abbreviations may be used in the name of a Holder of a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 22. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, Holdings will cause CUSIP numbers to be printed on the Securities immediately prior to the qualification of the Indenture under the TIA as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon. 23. Indenture. Each Holder, by accepting a Security, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time. Holdings will furnish to any Holder of a Security upon written request and without charge a copy of the Indenture. Requests may be made to: FOOD 4 LESS HOLDINGS, INC., c/o The Yucaipa Companies, 10000 Santa Monica Boulevard, Fifth Floor, Los Angeles, California 90067, Attn: Mark A. Resnik. 24. Certain Information Obligations. To the extent permitted by applicable law or regulation, whether or not Holdings is subject to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), Holdings shall file with the SEC all quarterly and annual reports and such other information, documents or other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) required to be filed pursuant to such provisions of the Exchange Act. Holdings shall file with the Trustee copies of the quarterly and annual reports and the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to the Indenture. At any time when Holdings is not permitted by applicable law or regulations to file the aforementioned reports, Holdings shall furnish the Trustee and the Holders with the information that Holdings would have had to provide to the SEC if Holdings had been subject to Section 13 or 15(d) of the Exchange Act. 25. Holdings Indebtedness. Each Holder acknowledges that Holdings is the sole obligor of the Securities and no Subsidiary of Holdings is a co-obligor or a guarantor of the Securities. A-7 89 [FORM OF ASSIGNMENT] I or we assign this Security to - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type name, address and zip code of assignee) Please insert Social Security or other identifying number of assignee - ----------------------------------------- and irrevocably appoint agent to transfer this Security ----------------------- on the books of Holdings. The agent may substitute another to act for him. Dated: Signed: ---------------------------- -------------------------------- - ------------------------------------------------------------------------------ (Sign exactly as your name appears on the front of this Security) Signature Guarantee: ---------------------------------------------------------- A-8 90 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Security purchased by Holdings pursuant to Section 4.14 or Section 4.15 of the Indenture, check the box: Section 4.14 [ ] Section 4.15 [ ] If you want to elect to have only part of this Security purchased by Holdings pursuant to Section 4.14 or Section 4.15 of the Indenture, state the amount: $ Date:_______________ Signature:____________________________ (Sign exactly as your name appears on the front of this Security) Signature Guarantee:___________________________________________________________ A-9 EX-2.1.3 4 AGREEMENT PLAN OF MERGER, AMENDMENT NO. 3 1 EXHIBIT 2.1.3. AMENDMENT NO. 3 TO AGREEMENT AND PLAN OF MERGER This Amendment No. 3 (this "Amendment"), dated as of April 26, 1995, to the Agreement and Plan of Merger dated as of September 14, 1994, as amended by Amendment No. 1 dated as of January 12, 1995 and Amendment No. 2 dated as of February 24, 1995 (collectively, the "Merger Agreement"), is by and among Food 4 Less, Inc., a Delaware corporation ("F4L"), Food 4 Less Holdings, Inc., a California corporation ("F4L Holdings"), Food 4 Less Holdings, Inc., a Delaware corporation ("F4L Holdings Delaware"), Food 4 Less Supermarkets, Inc., a Delaware corporation ("F4L Supermarkets"), Ralphs Supermarkets, Inc., a Delaware corporation ("Ralphs Supermarkets"), and The Edward J. DeBartolo Corporation ("EJDC") and the other stockholders of Ralphs Supermarkets (each a "Selling Stockholder"). Capitalized terms not otherwise defined herein have the meanings given to them in the Merger Agreement. WHEREAS, F4L, F4L Holdings, F4L Holdings Delaware, F4L Supermarkets, Ralphs Supermarkets and the Selling Stockholders previously have entered into the Merger Agreement, by which the parties agreed to merge F4L Supermarkets with and into Ralphs Supermarkets in accordance with the terms and conditions of the Merger Agreement and Section 251 of the General Corporation Law of the State of Delaware; WHEREAS, the parties desire to amend certain provisions of the Merger Agreement as more fully set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows: 1. Defined Terms. (a) Section 1.1 of the Merger Agreement is hereby amended to add the following defined terms: "Discount Debentures" shall mean the 13-5/8% Senior Discount Debentures due 2005 to be issued by F4L Holdings Delaware pursuant to the terms set forth in the Description of Discount Debentures attached hereto as Exhibit I. "Discount Debenture Indenture" shall mean the indenture governing the Discount Debentures to be entered into by F4L Holdings Delaware on the Closing Date. (b) The definition of "Closing Date" in Section 1.1 of the Merger Agreement is hereby amended to delete the date "April 14, 1995" and to substitute in its place the date "June 6, 1995." 2 2. Amendment of Section 2.1(a). Section 2.1(a) of the Merger Agreement is hereby amended to delete the first sentence thereof and to substitute in its place the following sentence: F4L Holdings Delaware will purchase 12,184,405.61789 Shares (the "Share Purchase"), pro rata from the Selling Stockholders in proportion to their respective holdings, for per Share consideration consisting of (i) $8.20698 in cash, (ii) $10.79265 principal amount of Debentures and (iii) $1.5184 initial accreted value of Discount Debentures (or the pro rata portion of such cash, Debentures and Discount Debentures, in the case of fractional shares) (collectively, and together with the cash amounts referred to in Section 2.1(b) below, the "Purchase Consideration"). 3. Amendment of Section 2.1(b). Section 2.1(b) of the Merger Agreement is hereby deleted in full and the following provision is hereby substituted in its place: Debentures and Discount Debentures will each be issued only in denominations of $1000 and integral multiples of $1000. A Selling Stockholder will not be entitled to receive Debentures or Discount Debentures in initial principal amounts less than $1000, or in initial principal amounts in excess of $1000 (or an integral multiple thereof) but less than the next highest integral multiple ("Fractional Amounts"), but instead will be entitled to receive cash in lieu of any such Fractional Amount. 4. Amendment of Section 2.1(c). Section 2.1(c) of the Merger Agreement is hereby amended to delete the share amount "12,184,418.99116" appearing therein and to substitute in its place the share amount "12,184,405.61789." 5. Amendment of Section 2.6(a). Section 2.6(a) of the Merger Agreement is hereby amended to delete the amount "$20.51800748" appearing in the third line thereof and to substitute in its place the amount "$20.51803." 6. Amendment of Section 2.6(e). Section 2.6(e) of the Merger Agreement is hereby amended to delete the parenthetical phrase "(including the principal amount of Seller Debentures)" and to substitute in its place the parenthetical phrase "(including the initial principal amount of the Debentures and the Discount Debentures)." 7. Amendment of Sections 2.7, 2.8, 3.4, 5.1, 5.10, 6.1(d), 8.9, 9.6. Sections 2.7, 2.8, 3.4, 5.1, 5.10, 6.1(d) and 8.9 of the Merger Agreement are hereby amended so that each reference therein to the Debentures shall also include the Discount Debentures and Sections 5.1 and 9.6 are hereby amended so that each reference therein to the Indenture shall also include the Discount Debenture Indenture. 8. Amendment of Section 5.6. Section 5.6 of the Merger Agreement is hereby amended to add the words "or as partly or wholly replaced by" to the eighth line thereof following the words "exchanged for." 9. Amendment of Section 11.1(b). Section 11.1(b) of the Merger Agreement is hereby amended (i) to delete the date "April 14, 1995" appearing in the second line thereof and to 2 3 substitute in its place the date "June 6, 1995" and (ii) to delete the date "April 30, 1995" appearing in the third line thereof and to substitute in its place the date "June 30, 1995." 10. Schedules. (a) Schedule 2.1 of the Merger Agreement is hereby deleted and the attached Schedule 2.1 is hereby substituted in its place and incorporated herein by reference. (b) Schedule 9.9 of the Merger Agreement is hereby amended to delete "$2.150 billion" in clause (2) thereof and to substitute in its place "$2.210 billion." 11. Exhibit A. Exhibit A (Form of Indenture) of the Merger Agreement is hereby deleted and the attached Exhibit A (Form of Indenture) is hereby substituted in its place and incorporated herein by reference. 12. Exhibit D. Exhibit D (Form of Opinion of Counsel to F4L) of the Merger Agreement is hereby amended so that (i) each reference therein to the Debentures shall also include the Discount Debentures and (ii) each reference therein to the Indenture shall also include the Discount Debenture Indenture. 13. Exhibit E. Exhibit E (Form of Put Agreement) of the Merger Agreement is hereby amended to delete the amount $90,517,000" appearing in the second recital and to substitute in its place the amount "$79,354,000." 14. Exhibit G. Exhibit G (Form of Registration Rights Agreement) of the Merger Agreement is hereby amended as more fully described below. (a) The definition of "Debentures" in Section 1 is hereby amended to delete "$150,000,000" appearing in the third line thereof and to substitute in its place "$131,500,000." (b) The following sentence is hereby added at the end of Section 2: "It is further understood that a gift of any Debentures by Federated Department Stores, Inc. to Federated Department Stores Foundation, an Ohio not-for-profit corporation, made at any time while the Shelf Registration Statement is effective shall be deemed to be a transfer pursuant to an effective Registration Statement." (c) The parenthetical phrase contained in Section 5(d) shall be deleted and the parenthetical phrase "(other than the Company's 13-5/8% Senior Discount Debentures due 2005 sold for the account of RGC Partners, L.P. and other than bank borrowings, obligations of the Company with respect to trade debt and other debt incurred by the Company in the ordinary course of business)" shall be substituted in its place. 15. Exhibit I. Exhibit I (Description of the New Discount Debentures), as attached hereto, is hereby added as an Exhibit to the Merger Agreement. 16. Partnership. Notwithstanding Section 5.14 of the Merger Agreement, the Selling Stockholders, together with certain other entities, including an affiliate of The Yucaipa Companies, will 3 4 be parties to a partnership agreement, a subscription agreement and related documents with respect to RGC Partners, L.P., a partnership to be formed for the purpose of acquiring the Discount Debentures. 17. Amendment of Article IX. Article IX of the Merger Agreement is hereby amended to add the following new Section 9.14 at the end thereof: Section 9.14 Partnership Agreement. RGC Partners, L.P. shall have been formed and funded as contemplated by the commitment to purchase partnership interests. 18. Terms and Conditions. Except as specifically modified herein, all other terms and conditions of the Merger Agreement shall remain in full force and effect. 4 5 IN WITNESS WHEREOF, this Amendment has been signed by or on behalf of each of the parties as of the day first above written. "F4L": FOOD 4 LESS, INC. By: _________________________ Name: Title: "F4L HOLDINGS": FOOD 4 LESS HOLDINGS, INC. By: _________________________ Name: Title: "F4L HOLDINGS DELAWARE": FOOD 4 LESS HOLDINGS, INC. By: _________________________ Name: Title: "F4L SUPERMARKETS": FOOD 4 LESS SUPERMARKETS, INC. By: _________________________ Name: Title: "RALPHS SUPERMARKETS": RALPHS SUPERMARKETS, INC. By: _________________________ Name: Title: "SELLING STOCKHOLDERS": THE EDWARD J. DEBARTOLO CORPORATION By: _________________________ Name: Title: S-1 6 CAMDEV PROPERTIES INC. By: _________________________ Name: Title: BANK OF MONTREAL By: _________________________ Name: Title: BANQUE PARIBAS By: _________________________ Name: Title: FEDERATED DEPARTMENT STORES, INC. By: _________________________ Name: Title: S-2 7 SCHEDULE 2.1 CONSIDERATION TO RSI SHAREHOLDERS
discount cash in lieu tot cash cash payable debentures of fract purch price in merger cash total (Section 2.1(a)) (Section 2.1(b)) (Section 2.1) (Section 2.6) (purch + mrgr) ---------------- ---------------- -------------- --------------- --------------- EJDC ................................ $11,164,000 $ 947.59 $60,344,069.62 $165,948,624.40 $226,292,694.02 Camdev Properties ................... $ 2,369,000 $ 17.36 $12,805,554.99 $ 35,216,297.78 $ 48,021,852.77 Bank of Montreal .................... $ 1,874,000 $ 248.88 $10,129,273.36 $ 27,855,663.14 $ 37,984,936.50 Banque Paribas ...................... $ 1,874,000 $ 248.88 $10,129,273.36 $ 27,855,663.14 $ 37,984,936.50 Federated Department Stores, Inc. ... $ 1,219,000 $ 839.40 $ 6,591,303.99 $ 18,124,327.94 $ 24,715,631.93 ----------- --------- -------------- --------------- --------------- Total ........................... $18,500,000 $2,302.10 $99,999,475.32 $275,000,576.40 $375,000,051.71
Per share amounts - ----------------- Purchase price (Section 2.1) -------------- cash ......................... $ 8.2069800000 debentures ................... $10.7926500000 discount debentures .......... $ 1.5184000000 -------------- Total ...................... $20.5180300000 Merger consideration (Section 2.6) -------------------- cash ......................... $20.5180300000
8 EXHIBIT A FOOD 4 LESS HOLDINGS, INC. AND NORWEST BANK MINNESOTA, N.A. AS TRUSTEE INDENTURE Dated as of ___________ __, 1995 $131,500,000 13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 9 CROSS-REFERENCE TABLE
TIA INDENTURE Section Section - ------- --------------- 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8; 7.10; 13.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6; 13.2 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10; 13.2 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2; 13.4 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2; 13.4 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(b) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5; 13.2 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 - -----------------------
N.A. means Not Applicable NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. 10 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . 1 Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2. Incorporation by Reference of TIA . . . . . . . . . . . . . . . 19 Section 1.3. Rules of Construction . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE II THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.1. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.2. Execution and Authentication . . . . . . . . . . . . . . . . . . 21 Section 2.3. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . 22 Section 2.4. Paying Agent To Hold Assets in Trust . . . . . . . . . . . . . . 22 Section 2.5. Securityholder Lists . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.6. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . 23 Section 2.7. Replacement Securities . . . . . . . . . . . . . . . . . . . . . 23 Section 2.8. Outstanding Securities . . . . . . . . . . . . . . . . . . . . . 24 Section 2.9. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.10. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . 25 Section 2.13. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE III REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.1. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.2. Selection of Securities To Be Redeemed . . . . . . . . . . . . . 25 Section 3.3. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . 26 Section 3.4. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . 27 Section 3.5. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . 27 Section 3.6. Securities Redeemed in Part . . . . . . . . . . . . . . . . . . 27 ARTICLE IV COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.1. Payment of Securities . . . . . . . . . . . . . . . . . . . . . 27 Section 4.2. Maintenance of Office or Agency . . . . . . . . . . . . . . . . 28 Section 4.3. Limitation on Restricted Payments . . . . . . . . . . . . . . . 28 Section 4.4. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.5. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . 29 Section 4.6. Maintenance of Properties and Insurance . . . . . . . . . . . . 30 Section 4.7. Compliance Certificate; Notice of Default . . . . . . . . . . . 30
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Page ---- Section 4.8. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 31 Section 4.9. SEC Reports and Other Information . . . . . . . . . . . . . . 31 Section 4.10. Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . 32 Section 4.11. Limitation on Transactions with Affiliates . . . . . . . . . . 32 Section 4.12. Limitation on Incurrences of Additional Indebtedness . . . . . 34 Section 4.13. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . 34 Section 4.14. Limitation on Change of Control . . . . . . . . . . . . . . . 34 Section 4.15. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . 36 Section 4.16. Limitation on Senior Subordinated Indebtedness . . . . . . . . 38 Section 4.17. Limitation on Preferred Stock of Subsidiaries . . . . . . . . 38 Section 4.18. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . . . . . . . . . 39 ARTICLE V SUCCESSOR CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 5.1. When Holdings May Merge, Etc . . . . . . . . . . . . . . . . . 39 Section 5.2. Successor Corporation Substituted . . . . . . . . . . . . . . 40 ARTICLE VI DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 6.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . 41 Section 6.2. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 6.3. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 6.4. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . 43 Section 6.5. Control by Majority . . . . . . . . . . . . . . . . . . . . . 44 Section 6.6. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . 44 Section 6.7. Rights of Holders To Receive Payment . . . . . . . . . . . . . 44 Section 6.8. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . 45 Section 6.9. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . 45 Section 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . 46 ARTICLE VII TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 7.1. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . 46 Section 7.2. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.3. Individual Rights of Trustee . . . . . . . . . . . . . . . . . 48 Section 7.4. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . 48 Section 7.5. Notice of Default . . . . . . . . . . . . . . . . . . . . . . 48 Section 7.6. Reports By Trustee to Holders . . . . . . . . . . . . . . . . 48 Section 7.7. Compensation and Indemnity . . . . . . . . . . . . . . . . . . 49 Section 7.8. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . 49
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Page ---- Section 7.9. Successor Trustee by Merger, Etc . . . . . . . . . . . . . . 50 Section 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . 50 Section 7.11. Preferential Collection of Claims Against Holdings . . . . . 51 ARTICLE VIII LEGAL DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . . . . 51 Section 8.1. Option to Effect Legal Defeasance or Covenant Defeasance . . 51 Section 8.2. Legal Defeasance . . . . . . . . . . . . . . . . . . . . . . 51 Section 8.3. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . 51 Section 8.4. Conditions to Legal or Covenant Defeasance . . . . . . . . . 52 Section 8.5. Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions. . . . . . . . Section 8.6. Repayment to Holdings . . . . . . . . . . . . . . . . . . . 54 Section 8.7. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS . . . . . . . . . . . . . . . . . 55 Section 9.1. Without Consent of Holders . . . . . . . . . . . . . . . . . 55 Section 9.2. With Consent of Holders . . . . . . . . . . . . . . . . . . 55 Section 9.3. Compliance with TIA . . . . . . . . . . . . . . . . . . . . 57 Section 9.4. Revocation and Effect of Consents . . . . . . . . . . . . . 57 Section 9.5. Notation on or Exchange of Securities . . . . . . . . . . . 57 Section 9.6. Trustee To Sign Amendments, Etc. . . . . . . . . . . . . . . 58 ARTICLE X MEETINGS OF SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . 58 Section 10.1. Purposes for Which Meetings May Be Called . . . . . . . . . 58 Section 10.2. Manner of Calling Meetings . . . . . . . . . . . . . . . . . 58 Section 10.3. Call of Meetings by Holdings or Holders . . . . . . . . . . 59 Section 10.4. Who May Attend and Vote at Meetings . . . . . . . . . . . . 59 Section 10.5. Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment . . . . . . . . . . . . . . . . 59 Section 10.6. Voting at the Meeting and Record To Be Kept . . . . . . . . 60 Section 10.7. Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting . . . . . . . . . . 61 ARTICLE XI SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 11.1. Securities Subordinated to Senior Indebtedness . . . . . . . 61 Section 11.2. No Payment on Securities in Certain Circumstances . . . . . 61 Section 11.3. Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization of Holdings . . . . . . . . . . . . . . . . . 63
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Page ---- Section 11.4. Holders to Be Subrogated to Rights of Holders of Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . 64 Section 11.5. Obligations of Holdings Unconditional . . . . . . . . . . . . . . 65 Section 11.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice . . . . . . . . . . . . . . . . . . . . . . . 65 Section 11.7. Application by Trustee of Assets Deposited with It. . . . . . . . 65 Section 11.8. Subordination Rights Not Impaired by Acts or Omissions of Holdings or Holders of Senior Indebtedness . . . . 66 Section 11.9. Holders Authorize Trustee to Effectuate Subordination of Securities . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 11.10. Right of Trustee to Hold Senior Indebtedness . . . . . . . . . . 67 Section 11.11. Article Eleven Not to Prevent Events of Default . . . . . . . . . 67 Section 11.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness . 67 ARTICLE XII SATISFACTION AND DISCHARGE . . . . . . . . . . . . . . . . . . . . . . . 68 Section 12.1. Satisfaction and Discharge of the Indenture . . . . . . . . . . 68 Section 12.2. Conditions to Satisfaction and Discharge of the Indenture . . . 68 ARTICLE XIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 13.1. TIA Controls . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 13.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 13.3. Communications by Holders with Other Holders . . . . . . . . . . 69 Section 13.4. Certificate and Opinion as to Conditions Precedent . . . . . . . 70 Section 13.5. Statements Required in Certificate or Opinion . . . . . . . . . 70 Section 13.6. Rules by Trustee, Paying Agent, Registrar . . . . . . . . . . . 70 Section 13.7. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 13.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.9. No Adverse Interpretation of Other Agreements . . . . . . . . . 71 Section 13.10. No Recourse Against Others . . . . . . . . . . . . . . . . . . . 71 Section 13.11. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.12. Duplicate Originals . . . . . . . . . . . . . . . . . . . . . . . 71 Section 13.13. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 71
iv 14 INDENTURE dated as of ________ __, 1995, between FOOD 4 LESS HOLDINGS, INC., a Delaware corporation ("Holdings"), and Norwest Bank Minnesota, N.A., a National Banking Association, as Trustee. Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the 13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007: ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1. Definitions. "Acquired Indebtedness" means Indebtedness of a person or any of its subsidiaries existing at the time such person becomes a Subsidiary or assumed in connection with the acquisition of assets from such person and not incurred by such person in connection with, or in anticipation or contemplation of, such person becoming a Subsidiary or such acquisition. "Affiliate" means, with respect to any person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of this Indenture, neither BT Securities Corporation nor any of its Affiliates shall be deemed to be an Affiliate of Holdings or any of its Subsidiaries. "Affiliate Obligation" means any contractual obligation (not constituting Indebtedness) between Holdings and any Affiliate, other than obligations relating to the purchase or sale of goods in the ordinary course of business made in compliance with Section 4.11 hereof. "Affiliate Transaction" shall have the meaning provided in Section 4.11. "Agent" means any Registrar, Paying Agent or co-Registrar. "Asset Sale" means, with respect to any person, any sale, transfer or other disposition or series of sales, transfers or other dispositions (including, without limitation, by merger or consolidation or by exchange of assets and whether by operation of law or otherwise), made by such person or any of its subsidiaries to any person other than such person or one of its wholly-owned subsidiaries (or, in the case of a sale, transfer or other disposition by a Subsidiary, to any person other than Holdings or a directly or indirectly wholly-owned Subsidiary) of any assets of such person or any of its subsidiaries including, without limitation, assets consisting of any Capital Stock or other securities held by such person or any of its subsidiaries, and any Capital Stock issued by any subsidiary of such person, in each case, 1 15 outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions, (i) involving only Excluded Assets, (ii) resulting in Net Proceeds to Holdings or any Subsidiary of $500,000 or less, (iii) pursuant to any foreclosure of assets or other remedy provided by applicable law to a creditor of Holdings or any Subsidiary with a Lien on such assets, which Lien is permitted under this Indenture, provided that such foreclosure or other remedy is conducted in a commercially reasonable manner or in accordance with any Bankruptcy Law, or (iv) the proceeds of which are not applied as contemplated in Section 4.15 hereof and which, together with all other such Asset Sale proceeds, do not exceed $20 million. "Average Life" means, as of any date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principal payments of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or foreign law for the relief of debtors. "Board of Directors" means, with respect to any person, the Board of Directors of such person or any committee of the Board of Directors of such person duly authorized, with respect to any particular matter, to exercise the power of the Board of Directors of such person. "Board Resolution" means, with respect to any person, a duly adopted resolution of the Board of Directors of such person. "Business Day" means a day that is not a Legal Holiday. "Capital Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such person, including Preferred Stock. "Capitalized Lease Obligation" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Equivalents" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group and maturing not more than one year from the date of creation thereof, (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500 million and maturing not more than one year from the date of creation thereof, (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any 2 16 bank described in clause (iii) and (v) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group. "Change of Control" means (I) the acquisition after the Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) by (i) any person or entity (other than any Permitted Holder) or (ii) any group of persons or entities (excluding any Permitted Holders) who constitute a group (within the meaning of Section 13(d)(3) of the Exchange Act), in either case, of any securities of Holdings such that, as a result of such acquisition, such person, entity or group beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, 40% or more of the then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of Holdings (but only to the extent that such beneficial ownership is not shared with any Permitted Holder who has the power to direct the vote thereof); provided, however, that no such Change of Control shall be deemed to have occurred if (A) the Permitted Holders beneficially own, in the aggregate, at such time, a greater percentage of such voting securities than such other person, entity or group or (B) at the time of such acquisition, the Permitted Holders (or any of them) possess the ability (by contract or otherwise) to elect, or cause the election, of a majority of the members of Holdings' Board of Directors or (II) Holdings ceasing to own 100% of the outstanding voting securities entitled to vote on a regular basis to elect a majority of the Board of Directors of the Company (other than in connection with a merger of Holdings and the Company). "Change of Control Date" shall have the meaning provided in Section 4.14. "Change of Control Offer" shall have the meaning provided in Section 4.14. "Change of Control Payment Date" shall have the meaning provided in Section 4.14. "Company" means Food 4 Less Supermarkets, Inc., a Delaware corporation, and its successors, including, without limitation, Ralphs Supermarkets (to be renamed Ralphs Grocery Company) following the Merger. "Consolidated Net Income" means, with respect to any person, for any period, the aggregate of the net income (or loss) of such person and its subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any other person in which such person or any of its subsidiaries has an interest (which interest does not cause the net income of such other person to be consolidated with the net income of such person and its subsidiaries in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions actually paid to such person or such subsidiary by such other person in such period; (b) the net income of any subsidiary of such person that is subject to any Payment Restriction shall be excluded to the extent such Payment Restriction actually prevented the payment of an amount that otherwise could have been paid to, or received 3 17 by, such person or a subsidiary of such person not subject to any Payment Restriction, provided, however, that with respect to the net income of Holdings, the net income of the Company and its wholly-owned subsidiaries shall not be so excluded, notwithstanding the existence of any such Payment Restriction, so long as the terms of any such consensual Payment Restriction limiting the payment of dividends are not materially more restrictive at the time of determination of Consolidated Net Income than the most restrictive Payment Restriction limiting the payment of dividends in effect on the Issue Date and so long as the Company continues to be a wholly-owned subsidiary of Holdings; and (c)(i) the net income (or loss) of any other person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all gains realized upon or in connection with or as a consequence of the issuance of the Capital Stock of such person or any of its subsidiaries and any gains on pension reversions received by such person or any of its subsidiaries, (iv) all gains and losses realized on the purchase or other acquisition by such person or any of its subsidiaries of any securities of such person or any of its subsidiaries, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as amended, (vi) all other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) up to $10 million of severance costs and (C) any other restructuring reserves or charges (provided, however, that any cash payments actually made with respect to the liabilities for which such restructuring reserves or charges were created shall be deducted from Consolidated Net Income in the period when made), in each case, incurred by Holdings or any of its Subsidiaries in connection with the Merger, including, without limitation, the divestiture of the Excluded Assets, (viii) losses incurred by Holdings and its Subsidiaries resulting from earthquakes and (ix) with respect to Holdings and its Subsidiaries, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. "Consolidated Net Worth" means, with respect to any person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such person and its subsidiaries determined on a consolidated basis in accordance with GAAP. "Consulting Agreement" means that certain Consulting Agreement, dated as of the Issue Date, between Holdings, the Company and The Yucaipa Companies, as such Consulting Agreement may be amended or replaced, so long as any amounts paid under any amended or replacement agreement do not exceed the amounts payable under such Consulting Agreement as in effect on the Issue Date. "Covenant Defeasance" shall have the meaning provided in Section 8.3. "Credit Agent" means, at any time, the then-acting Administrative Agent as defined in and under the Credit Agreement, which initially shall be ____________________. Holdings shall promptly notify the Trustee of any change in the Credit Agent. "Credit Agreement" means the Credit Agreement, dated as of the Issue Date, by and among the Company as borrower, Holdings as guarantor, certain of the Company's subsidiaries, the Lenders referred to therein and Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise 4 18 modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or any such prior agreement as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all related or ancillary documents, including, without limitation, any guarantee agreements and security documents. Holdings shall promptly notify the Trustee of any such refunding or refinancing of the Credit Agreement. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Capital Stock" means, (i) with respect to any person, any Capital Stock of such person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security into which it is convertible, puttable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased by such person or its subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date or any other Capital Stock of such person or its subsidiaries designated as Disqualified Capital Stock by such person at the time of issuance; provided, however, that if such Capital Stock is either (a) redeemable or repurchasable solely at the option of such person or (b) issued to employees of Holdings or its Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated; and (ii) with respect to any Subsidiary of Holdings, any Preferred Stock issued by a Subsidiary of Holdings other than Preferred Stock issued to Holdings. "EBDIT" means, with respect to any person, for any period, the Consolidated Net Income of such person for such period, plus, in each case to the extent deducted in computing Consolidated Net Income of such person for such period (without duplication) (i) provisions for income taxes or similar charges recognized by such person and its consolidated subsidiaries accrued during such period, (ii) depreciation and amortization expense of such person and its consolidated subsidiaries accrued during such period (but only to the extent not included in Fixed Charges), (iii) Fixed Charges of such person and its consolidated subsidiaries for such period, (iv) LIFO charges (credit) of such person and its consolidated subsidiaries for such period, (v) the amount of any restructuring reserve or charge recorded during such period in accordance with GAAP, including any such reserve or charge related to the Merger, and (vi) any other non-cash charges reducing Consolidated Net Income for such period (excluding any such charge which requires an accrual of or a cash reserve for cash charges for any future period), less, without duplication, (i) non-cash items increasing Consolidated Net Income of such person for such period (excluding any such items which represent the reversal of any accrual of, or cash 5 19 reserve for, anticipated charges in any prior period) in each case determined in accordance with GAAP and (ii) the amount of all cash payments made by such person or its subsidiaries during such period to the extent that such cash payment has been provided for in a restructuring reserve or charge referred to in clause (v) above (and was not otherwise deducted in the computation of Consolidated Net Income of such person for such period). "EJDC" means The Edward J. DeBartolo Corporation, an Ohio corporation. "Event of Default" shall have the meaning provided in Section 6.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "Excluded Assets" means assets of Holdings or any Subsidiary required to be disposed of by applicable regulatory authorities in connection with the Merger. "Existing Indebtedness" means the following indebtedness of the Company outstanding on the Issue Date after giving effect to the Merger: (a) the ___% Senior Notes due 2004 issued pursuant to an indenture dated as of the Issue Date; (b) the 10.45% Senior Notes due 2000 issued pursuant to an indenture dated as of April 15, 1992; (c) the ___% Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date; (d) the 9% Senior Subordinated Notes due 2003 issued pursuant to an indenture dated as of March 30, 1993; (e) the 10 1/4% Senior Subordinated Notes due 2002 issued pursuant to an indenture dated as of July 29, 1992; (f) the 13.75% Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date; and (g) the 13.75% Senior Subordinated Notes due 2001 issued pursuant to an indenture dated as of June 15, 1991. "Fixed Charges" means, with respect to any person, for any period, the aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) in respect of all Indebtedness of such person and its consolidated subsidiaries (including (a) original issue discount on any Indebtedness (including (without duplication), in the case of Holdings, any original issue discount on the Senior Discount Debentures, the Senior Discount Notes and the Securities but excluding amortization of debt issuance costs and (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, in each case to the extent attributable to such period, but excluding the amortization of debt issuance costs) and (ii) dividend requirements on Capital Stock of such person and its consolidated subsidiaries declared or paid in cash or required to be declared or paid in cash during such period and excluding items eliminated in consolidation. For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Board of Directors of such person (as evidenced by a Board Resolution) to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest of such Indebtedness in effect on the date Fixed Charges are being calculated, (c) interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime 6 20 or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as Holdings may designate, and (d) Fixed Charges shall be increased or reduced by the net cost (including amortization of discount) or benefit associated with Interest Swap Obligations attributable to such period. For purposes of clause (ii) above, dividend requirements shall be increased to an amount representing the pretax earnings that would be required to cover such dividend requirements; accordingly, the increased amount shall be equal to a fraction, the numerator of which is the amount of such dividend requirements and the denominator of which is one (1) minus the applicable actual combined federal, state, local and foreign income tax rate of such person and its subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Fixed Charges. "Foreign Exchange Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. "Forward Period" shall have the meaning set forth in the definition of Operating Coverage Ratio contained in this Section 1.1. "GAAP" means generally accepted accounting principles as in effect in the United States of America as of the date of this Indenture. "Holder" means the person in whose name a Security is registered on the Registrar's books. "Holdings" means the party named as such above, until a successor replaces it in accordance with the terms of this Indenture, and thereafter means such successor. "incur" shall have the meaning set forth in Section 4.12. "Indebtedness" means with respect to any person, without duplication, (i) all liabilities, contingent or otherwise, of such person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such person in the ordinary course of business of such person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the incurrence thereof, which account is not overdue by more than 90 days, according to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such person or, if there is no such maximum fixed repurchase price, the liquidation preference of such Disqualified Capital Stock, plus accrued but unpaid dividends; (iii) 7 21 reimbursement obligations of such person with respect to letters of credit; (iv) obligations of such person with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is otherwise its legal liability; and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such person are subject, whether or not the obligations secured thereby shall have been assumed by such person or shall otherwise be such person's legal liability (provided that if the obligations so secured have not been assumed by such person or are not otherwise such person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution. For purposes hereof, Indebtedness incurred by any person that is a general partnership (other than non-recourse Indebtedness) shall be deemed to have been incurred by the general partners of such partnership pro rata in accordance with their respective interests in the liabilities of such partnership unless any such general partner shall, in the reasonable determination of the Board of Directors of Holdings, be unable to satisfy its pro rata share of the liabilities of the partnership, in which case the pro rata share of any Indebtedness attributable to such partner shall be deemed to be incurred at such time by the remaining general partners on a pro rata basis in accordance with their interests. "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof. "Independent Financial Advisor" means a reputable accounting, appraisal or a nationally recognized investment banking firm that is, in the reasonable judgment of the Board of Directors of Holdings, qualified to perform the task for which such firm has been engaged hereunder and disinterested and independent with respect to Holdings and its Affiliates. "Initial Public Offering" means an underwritten primary public offering of common stock of Holdings at a time when Holdings has not previously issued or sold any equity securities in an underwritten transaction pursuant to a registration statement filed pursuant to the Securities Act. "Initial Public Offering Consummation Date" means the first date on which Holdings or the Company receives any proceeds from an Initial Public Offering. "Interest Payment Date" means the stated maturity of an installment of interest on the Securities. 8 22 "Interest Swap Obligation" means any obligation of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such person calculated by applying a fixed or floating rate of interest on the same notional amount; provided that the term "Interest Swap Obligation" shall also include interest rate exchange, collar, cap, swap option or similar agreements providing interest rate protection. "Investment" by any person in any other person means any investment by such person in such other person, whether by share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances, or to permit the purchase of Qualified Capital Stock of Holdings or any Subsidiary and other similar customary expenses incurred, in each case in the ordinary course of business consistent with past practice) or similar credit extension constituting Indebtedness of such other person, and any guarantee of Indebtedness of any other person. "Issue Date" means the date of first issuance of the Securities pursuant to this Indenture. "Legal Defeasance" shall have the meaning provided in Section 8.2. "Legal Holiday" shall have the meaning provided in Section 13.7. "Letter of Credit Obligations" means Indebtedness of Subsidiaries with respect to letters of credit issued pursuant to the Credit Agreement, and for purposes of Section 4.12, the aggregate principal amount of Indebtedness outstanding at any time with respect thereto, shall be deemed to consist of (a) the aggregate maximum amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance against real or personal property, or a security interest of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell which is intended to constitute or create a security interest, mortgage, pledge or lien, any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction); provided that in no event shall an operating lease be deemed to constitute a Lien hereunder. "Maturity Date" means ________ __, 2007. "Merger" means (i) the merger of the Company into Ralphs Supermarkets (with Ralphs Supermarkets surviving such merger) pursuant to the Merger Agreement and (ii) immediately following the merger described in clause (i) of this definition, the merger of RGC 9 23 into Ralphs Supermarkets (with Ralphs Supermarkets surviving such merger and changing its name to "Ralphs Grocery Company" in connection with such merger). "Merger Agreement" means the Agreement and Plan of Merger, dated as of September 14, 1994, by and among Food 4 Less, Inc., a Delaware corporation, Holdings, Food 4 Less Holdings, Inc., a California corporation, Ralphs Supermarkets, the Company and the stockholders of Ralphs Supermarkets, as such agreement is in effect on the Issue Date. "Net Cash Proceeds" means Net Proceeds of (i) the sale of Qualified Capital Stock of Holdings or (ii) any Asset Sale, in each case, in the form of cash or Cash Equivalents. "Net Proceeds" means (a) in the case of any Asset Sale or any issuance and sale by any person of Qualified Capital Stock, the aggregate net proceeds received by such person after payment of expenses, taxes, commissions and the like incurred in connection therewith, (and, in the case of any Asset Sale, net of the amount of cash applied to repay Indebtedness secured by the asset involved in such Asset Sale) whether such proceeds are in cash or in property (valued at the fair market value thereof at the time of receipt as determined with respect to any Asset Sale resulting in Net Proceeds in excess of $5 million in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution) and (b) in the case of any conversion or exchange of any outstanding Indebtedness or Disqualified Capital Stock of such person for or into shares of Qualified Capital Stock of Holdings, the sum of (i) the fair market value of the proceeds received by Holdings in connection with the issuance of such Indebtedness or Disqualified Capital Stock on the date of such issuance and (ii) any additional amount paid by the holder to Holdings upon such conversion or exchange. "Officer" means, with respect to any person, the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Controller, or the Secretary of such person. "Officers' Certificate" means, with respect to any person, a certificate signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of such person and otherwise complying with the requirements of Sections 13.4 and 13.5. "Old RGC Notes" means the 9% Senior Subordinated Notes due 2003 and the 10-1/4% Senior Subordinated Notes due 2002 of Ralphs Grocery Company. "Operating Coverage Ratio" means with respect to any person, the ratio of (1) EBDIT of such person for the period (the "Pro Forma Period") consisting of the most recent four full fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Operating Coverage Ratio (the "Transaction Date") to (2) the aggregate Fixed Charges of such person for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter (the "Forward Period") reasonably anticipated by the Board of Directors of such person to become due from time to time during such period. For purposes of this definition, if the Transaction Date occurs prior to the first anniversary of the Merger, "EBDIT" for the Pro Forma Period shall be calculated, in the case of Holdings, after giving 10 24 effect on a pro forma basis to the Merger as if it had occurred on the first day of the Pro Forma Period. In addition to, but without duplication of, the foregoing, for purposes of this definition, "EBDIT" shall be calculated after giving effect (without duplication), on a pro forma basis for the Pro Forma Period (but no longer), to (a) any Investment, during the period commencing on the first day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other person that, as a result of such Investment, becomes a subsidiary of such person, (b) the acquisition, during the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, which acquisition is not prohibited by this Indenture, and (c) any sales or other dispositions of assets (other than sales of inventory in the ordinary course of business) occurring during the Reference Period, in each case as if such incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, "Fixed Charges" shall be calculated after giving effect (without duplication), on a pro forma basis for the Forward Period, to any Indebtedness incurred or repaid on or after the first day of the Forward Period and prior to the Transaction Date. If such person or any of its subsidiaries directly or indirectly guarantees any Indebtedness of a third person, the Operating Coverage Ratio shall give effect to the incurrence of such Indebtedness as if such person or subsidiary had directly incurred such guaranteed Indebtedness. "operating lease" means any lease the obligations under which do not constitute Capitalized Lease Obligations. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee complying with the requirements of Sections 13.4 and 13.5. Unless otherwise required by the Trustee, the legal counsel may be an employee of or counsel to Holdings or the Trustee. "Other Obligations" has the meaning set forth in Section 11.1 hereof. "Pari Passu Indebtedness" means, with respect to Holdings, Indebtedness that ranks pari passu in right of payment to the Securities (whether or not secured by any Lien). "Paying Agent" shall have the meaning provided in Section 2.3, except that, for the purposes of Articles Three and Eight and Section 4.14, the Paying Agent shall not be Holdings or any Subsidiary. "Payment Restriction" means, with respect to a Subsidiary of any person, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) such subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to such person or any other subsidiary of such person, (b) make loans or advances to such person or any other subsidiary of such person, or (c) transfer any of its properties or assets to such person or any other subsidiary of such person, or (ii) such person or any other subsidiary of such person to receive or retain any such (a) dividends, distributions or payments, (b) loans or advances, or (c) transfer of properties or assets. 11 25 "Permitted Holder" means (i) Food 4 Less Equity Partners, L.P., The Yucaipa Companies or any entity controlled thereby or any of the partners thereof, (ii) Apollo Advisors, L.P., Lion Advisors, L.P., or any entity controlled thereby or any of the partners thereof, (iii) an employee benefit plan of Holdings or any Subsidiary, or any participant therein, (iv) a trustee or other fiduciary holding securities under an employee benefit plan of Holdings or any Subsidiary or (v) any Permitted Transferee of any of the foregoing persons. "Permitted Indebtedness" means (a) Indebtedness of the Company and its subsidiaries pursuant to (i) the Term Loans (and the Company and each Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $750 million or such lesser amount as may be actually funded under the Term Loans on or within 91 days following the Issue Date (with any such amounts funded after the Issue Date to be used to finance the repurchase of up to $224.5 million aggregate principal amount of Old RGC Notes pursuant to the "change of control purchase offer" provision set forth in Section 1014 of the indentures pursuant to which the Old RGC Notes were issued, plus related fees and expenses), less the aggregate amount of all principal repayments thereunder pursuant to and in accordance with the provisions of Section 4.15 subsequent to the Issue Date and (ii) the revolving credit facility under the Credit Agreement (and the Company and each Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $325 million, less all permanent reductions thereunder pursuant to and in accordance with the provisions of Section 4.15; (b) any guarantee by Holdings of the Indebtedness referred to in the foregoing clause (a); (c) Indebtedness of Holdings or a Subsidiary owed to and held by Holdings or a Subsidiary; (d) Indebtedness incurred by Holdings or any Subsidiary in connection with the purchase or improvement of property (real or personal) or equipment or other capital expenditures in the ordinary course of business (including for the purchase of assets or stock of any retail grocery store or business) or consisting of Capitalized Lease Obligations, provided that (i) at the time of the incurrence thereof, such Indebtedness, together with any other Indebtedness incurred during the most recently completed four fiscal quarter period in reliance upon this clause (d) does not exceed, in the aggregate, 3% of net sales of Holdings and its Subsidiaries during the most recently completed four fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the first anniversary of the Merger) and (ii) such Indebtedness, together with all then outstanding Indebtedness incurred in reliance upon this clause (d) does not exceed, in the aggregate, 3% of the aggregate net sales of Holdings and its Subsidiaries during the most recently completed twelve fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the third anniversary of the Merger); (e) Indebtedness incurred by Holdings or any Subsidiary in connection with capital expenditures in an aggregate principal amount not exceeding $150 million, provided that such capital expenditures relate solely to the integration of the operations of Ralphs Supermarkets, the Company, and their respective subsidiaries as described in that certain Registration Statement of Holdings dated ______, 1995; (f) Indebtedness of Holdings or any Subsidiary incurred under Foreign Exchange Agreements and Interest Swap Obligations; (g) guarantees incurred in the ordinary course of business, by Holdings or a Subsidiary, of Indebtedness of any other person in aggregate not to exceed $25 million at any time outstanding; (h) guarantees by Holdings or a Subsidiary of Indebtedness incurred by a wholly-owned Subsidiary so long as the incurrence of such Indebtedness incurred by such wholly-owned 12 26 Subsidiary is permitted under the terms of this Indenture; (i) Refinancing Indebtedness; (j) Indebtedness for letters of credit relating to workers' compensation claims and self-insurance or similar requirements in the ordinary course of business; (k) Existing Indebtedness and other Indebtedness outstanding on the Issue Date (after giving effect to the Merger); (l) Indebtedness arising from guarantees of Indebtedness of Holdings or any Subsidiary or other agreements of Holdings or a Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Subsidiary, other than guarantees of Indebtedness incurred by any person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by Holdings and its Subsidiaries in connection with such disposition; (m) obligations in respect of performance bonds and completion guarantees provided by Holdings or any Subsidiary in the ordinary course of business; (n) Indebtedness of Holdings with respect to the Senior Discount Notes, if any, the Senior Discount Debentures (including the accretion of the Senior Discount Notes and the Senior Discount Debentures up to their respective stated principal amount at maturity) and the Securities (including the issuance of Secondary Securities in lieu of cash interest payments pursuant to the terms of this Indenture); and (o) additional Indebtedness of Holdings or any Subsidiary in an amount not to exceed $200 million at any time outstanding. "Permitted Investment" by any person means (i) any Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale or any other disposition of assets not constituting an Asset Sale by reason of the $500,000 threshold contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with Sections 4.3 and 4.11, (vi) Investments in any Subsidiary or by any Subsidiary in Holdings or any other Subsidiary in other Subsidiaries, and (vii) additional Investments in an aggregate amount not exceeding $5 million. "Permitted Payments" means any (i) payment by Holdings or any Subsidiary to The Yucaipa Companies or the principals or any Affiliates thereof for consulting, management, investment banking or similar services, or for reimbursement of losses, costs and expenses pursuant to the Consulting Agreement, (ii) payment by Holdings or any Subsidiary to Apollo Advisors, L.P. or the principals or any Affiliates thereof in an aggregate amount not to exceed $5 million as a commitment fee in connection with the purchase of equity securities of Holdings on the Issue Date, and (iii) payment by Holdings or any Subsidiary, (a) in connection with repurchases of outstanding shares of Holdings' common stock following the death, disability or termination of employment of management stockholders, and (b) of amounts required to be paid by Holdings or any Subsidiaries to participants in employee benefit plans upon any termination of employment by such participants, as provided in the documents related thereto, in an aggregate amount (for both clauses (a) and (b)) not to exceed $10 million in any Yearly Period (provided that any unused amounts may be carried over to any subsequent Yearly Period subject to a maximum amount of $20 million in any Yearly Period). "Permitted Transferees" means, with respect to any person, (i) any Affiliate of such person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or bene- 13 27 ficiaries of any such person, (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such person or his or her spouse or lineal descendants, in each case to whom such person has transferred the beneficial ownership of any securities of Holdings, (iv) any investment account whose investment managers and investment advisors consist solely of such person and/or Permitted Transferees of such person, and (v) any investment fund or investment entity that is a subsidiary of such person or a permitted transferee of such person. "Person" or "person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such person to holders of Capital Stock of such person. "Preferred Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of such person's preferred or preference stock, whether outstanding on the date hereof or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "principal" of any Indebtedness (including the Securities) means the principal of such Indebtedness plus the premium, if any, on such Indebtedness. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms of this Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act, as interpreted by Holdings' chief financial officer or Board of Directors in consultation with its independent certified public accountants. "Pro Forma Period" shall have the meaning set forth in the definition of Operating Coverage Ratio contained in this Section 1.1. "Qualified Capital Stock" means, with respect to any person, any Capital Stock of such person that is not Disqualified Capital Stock. "Ralphs Supermarkets" means Ralphs Supermarkets, Inc., a Delaware corporation, until a successor replaces it and thereafter means such successor. "Record Date" means the Record Dates specified in the Securities; provided that if any such date is a Legal Holiday, the Record Date shall be the first day immediately preceding such specified day that is not a Legal Holiday. 14 28 "Redemption Date," when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to this Indenture and the Securities. "Redemption Price," when used with respect to any Security to be redeemed, means the price fixed for such redemption pursuant to this Indenture and the Securities. "Reference Period" shall have the meaning provided in the definition of "Operating Coverage Ratio" contained in this Section 1.1. "Refinancing Indebtedness" means, with respect to any person, Indebtedness of such person issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of such person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to clauses (b), (d), (e), (i), (k) and (n) of the definition thereof) incurred in accordance with this Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date and (y) shall contain subordination and default provisions no less favorable in any material respect to Holders than those contained in such repaid or amended Subordinated Indebtedness. "Registrar" shall have the meaning provided in Section 2.3. "Registration Rights Agreement" means the registration rights agreement dated as of the Issue Date by and among Holdings, the Company and the stockholders of Ralphs Supermarkets with respect to the Securities. "Related Business Investment" means (i) any Investment by a person in any other person a majority of whose revenues are derived from the operation of one or more retail grocery stores or supermarkets or any other line of business engaged in by Holdings or any Subsidiary as of the Issue Date; (ii) any Investment by such person in any cooperative or other supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of Holdings and any Subsidiary as it is conducted as of the Issue 15 29 Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment in each case reasonably related to the business of Holdings and any Subsidiary as it is conducted as of the Issue Date and as such business may thereafter evolve or change. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Indebtedness. "Restricted Debt Prepayment" means the purchase, redemption, acquisition or retirement for value by Holdings, prior to the scheduled maturity or prior to any scheduled repayment of principal or any sinking fund payment in respect of any Subordinated Indebtedness. "Restricted Payment" means any (i) Stock Payment or (ii) Investment (other than a Permitted Investment) or (iii) Restricted Debt Prepayment. "RGC" means Ralphs Grocery Company, a Delaware corporation, until a successor replaces it and thereafter means such successor. "SEC" means the Securities and Exchange Commission. "Secondary Securities" has the meaning set forth in Section 2.2. "Securities" means the 13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 of Holdings, including any Secondary Securities issued in respect thereof, in each case, issued pursuant to this Indenture, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancing indebtedness is permitted to be incurred under this Indenture. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Senior Discount Debentures" means the 13-5/8% Senior Discount Debentures due 2005 of Holdings, issued pursuant to the Senior Discount Debenture Indenture, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancing indebtedness is permitted to be incurred under this Indenture. "Senior Discount Debenture Indenture" means the indenture between Holdings and United States Trust Company of New York, as trustee, dated as of the Issue Date, pursuant to which the Senior Discount Debentures were issued, as amended or supplemented from time to time in accordance with the terms thereof. "Senior Discount Notes" means the 15.25% Senior Discount Notes due 2004 of Food 4 Less Holdings, Inc., issued pursuant to the Senior Discount Note Indenture, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancing indebtedness is permitted to be incurred under this Indenture. 16 30 "Senior Discount Note Indenture" means the indenture between Holdings and United States Trust Company of New York, as trustee, dated as of December 15, 1992, pursuant to which the Senior Discount Notes were issued, as amended or supplemented from time to time in accordance with the terms thereof. "Senior Indebtedness" means the principal of, premium, if any, and interest on (such Senior Indebtedness being deemed to include for all purposes of Article XI of this Indenture the amount required to fully secure in cash undrawn Letter of Credit Obligations under the Credit Agreement and such interest on Senior Indebtedness being deemed to include for all purposes of Article XI interest accruing after the filing of a petition initiating any proceeding pursuant to any Bankruptcy Law in accordance with and at the rate (including any rate applicable upon any default, to the extent lawful) specified in any document evidencing the Senior Indebtedness, whether or not the claim for such interest is allowed as a claim after such filing in any proceeding under such Bankruptcy Law) any Indebtedness of Holdings (and, in the case of the Credit Agreement, all obligations of Holdings for fees, expenses, indemnities and other amounts payable thereunder or in connection therewith), whether outstanding on the Issue Date or thereafter created, incurred, assumed or guaranteed or in effect guaranteed by Holdings (including, without limitation, Indebtedness under the Credit Agreement), unless, in the case of any particular Indebtedness, the instrument creating or evidencing such Indebtedness expressly provides that such Indebtedness shall not be senior in right of payment to the Securities. Without limiting the generality of the foregoing, "Senior Indebtedness" shall include the principal of, premium, if any, and interest on all obligations of every nature of Holdings from time to time owed or guaranteed by Holdings with respect to the Credit Agreement, the Senior Discount Debentures and the Senior Discount Notes, if any. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) any Pari Passu Indebtedness or any Subordinated Indebtedness, (ii) any Indebtedness constituting Disqualified Capital Stock, (iii) Indebtedness of Holdings to any Subsidiary, (iv) that portion of any Indebtedness which is incurred in violation of Section 4.12 of this Indenture, (v) Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer or employee of Holdings or of any Subsidiary (including, without limitation, amounts owed for compensation), (vi) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, and (vii) any liability for federal, state, local or other taxes owed or owing by Holdings. "Significant Stockholder" means, with respect to any person, any other person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such person that are entitled to vote on a regular basis for the election of directors of such person. "Significant Subsidiary" means each Subsidiary that is either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the Securities Act and the Exchange Act (as such regulation is in effect on the date hereof) or (b) material to the financial condition or results of operations of Holdings and its Subsidiaries taken as a whole. "Stock Payment" means, with respect to any person, (a) the declaration or payment by such person, either in cash or in property, of any dividend on (except, in the case of Holdings, dividends payable solely in Qualified Capital Stock of Holdings), or the making by 17 31 such person or any of its subsidiaries of any other distribution in respect of, such person's Qualified Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), or (b) the redemption, repurchase, retirement or other acquisition for value by such person or any of its subsidiaries, directly or indirectly, of such person's Qualified Capital Stock (and, in the case of a Subsidiary, Qualified Capital Stock of Holdings) or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), other than, in the case of Holdings, through the issuance in exchange therefor solely of Qualified Capital Stock of Holdings; provided, however, that in the case of a Subsidiary, the term "Stock Payment" shall not include any such payment with respect to its Capital Stock or warrants, rights or options to purchase or acquire shares of any class of its Capital Stock that are owned solely by Holdings or a wholly-owned Subsidiary. "Subordinated Indebtedness" means Indebtedness of Holdings that is subordinated in right of payment to the Securities. "subsidiary" of any person means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly, owned by such person, by one or more subsidiaries of such person or by such person and one or more subsidiaries of such person or (ii) a partnership in which such person or a subsidiary of such person is, at the date of determination, a general partner of such partnership, but only if such person or its subsidiary is entitled to receive more than 50% of the assets of such partnership upon its dissolution, or (iii) any other person (other than a corporation or a partnership) in which such person, a subsidiary of such person or such person and one or more subsidiaries of such person, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such person. "Subsidiary" means any subsidiary of Holdings. "Term Loans" means the term loan facility under the Credit Agreement and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings outstanding under such facility or under any prior refunding, replacement or refinancing thereof (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). "The Yucaipa Companies" means The Yucaipa Companies, a California general partnership, or any successor thereto which is an Affiliate of Ronald W. Burkle or his Permitted Transferees and which has been established for the sole purpose of changing the form of The Yucaipa Companies from that of a partnership to that of a limited liability company or any other form of entity which is not materially adverse to the rights of the Holders under this Indenture. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb), as amended, as in effect on the date on which this Indenture is qualified under the TIA, except as otherwise provided in Section 9.3. 18 32 "Transaction Date" shall have the meaning provided in the definition of "Operating Coverage Ratio" contained in this Section 1.1. "Trustee" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "Trust Officer" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "U.S. Government Obligations" shall have the meaning provided in Section 8.4. "U.S. Legal Tender" means such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (y) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding principal amount of such Indebtedness. "wholly-owned Subsidiary" means any Subsidiary all of the shares of Capital Stock of which (other than permitted Preferred Stock and directors' qualifying shares) are at the time directly or indirectly owned by Holdings. "Yearly Period" means each fiscal year of Holdings; provided that the first Yearly Period shall begin on the Issue Date and shall end on January 28, 1996. Section 1.2. Incorporation by Reference of TIA. Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. 19 33 "obligor" on the indenture securities means Holdings or any other obligor on the Securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule and not otherwise defined herein have the meanings assigned to them therein. Section 1.3. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and words in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. ARTICLE II THE SECURITIES Section 2.1. Form and Dating. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage or as required by the Registration Rights Agreement. Holdings and the Trustee shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, Holdings and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. 20 34 Section 2.2. Execution and Authentication. An Officer or an Assistant Secretary, shall sign (either of whom shall, in each case, have been duly authorized by all requisite corporate actions) the Securities for Holdings by manual or facsimile signature. If an Officer whose signature is on a Security was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities, excluding Secondary Securities, for original issue in the aggregate principal amount of up to $131,500,000 upon a written order of Holdings in the form of an Officers' Certificate. The Officers' Certificate shall specify the amount of Securities to be authenticated and the date on which the Securities are to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed $131,500,000, except for any Securities that may be issued pursuant to the immediately following paragraph and except as provided in Section 2.7 and 2.8. Upon the written order of Holdings in the form of an Officers' Certificate, the Trustee shall authenticate Securities in substitution of Securities originally issued to reflect any name change of Holdings. Holdings may, on each Interest Payment Date prior to (and including) [the Interest Payment Date five years after the Issue Date], at its option and in its sole discretion, pay interest in additional Securities ("Secondary Securities") in lieu of the payment in whole or in part of interest in cash on the Securities as provided in paragraph 1 of the Securities. Holdings shall give written notice to the Trustee of the amount of interest to be paid in Secondary Securities not less than five Business Days prior to the relevant Interest Payment Date, and the Trustee or an authenticating agent (upon written order of Holdings signed by an Officer of Holdings given not less than five nor more than 45 days prior to such Interest Payment Date) shall authenticate for original issue (pro rata to each Holder of any Securities of such record date) Secondary Securities in an aggregate principal amount equal to the amount of cash interest not paid on such Interest Payment Date. Except as set forth in the following paragraph each issuance of Secondary Securities in lieu of the payment of interest in cash on the Securities shall be made pro rata with respect to the outstanding Securities, and Holdings shall have the right to aggregate amounts of interest payable in the form of Secondary Securities to a Holder of outstanding Securities and issue to such Holder a single Secondary Security in payment thereof. Any Secondary Securities may be denominated a separate series if Holdings deems it necessary to do so in order to comply with any law or other applicable regulation or requirement, with appropriate distinguishing designations. The Securities shall be issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof except that Secondary Securities or Securities issued upon registration of transfer of such Secondary Securities may be in 21 35 denominations of other than $1,000; provided that Holdings may at its option pay cash in lieu of issuing Secondary Securities in any denominations of less than $1,000. The Trustee may appoint an authenticating agent reasonably acceptable to Holdings to authenticate Securities. Unless otherwise provided in the appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holdings and Affiliates of Holdings. Section 2.3. Registrar and Paying Agent. Holdings shall maintain an office or agency in the Borough of Manhattan, The City of New York, where (a) Securities may be presented or surrendered for registration of transfer or for exchange ("Registrar"), (b) Securities may be presented or surrendered for payment ("Paying Agent") and (c) notices and demands to or upon Holdings in respect of the Securities and this Indenture may be served. Holdings may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve Holdings of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. Holdings may act as its own Registrar or Paying Agent except that for the purposes of Articles Three and Eight and Sections 4.4 and 4.14, neither Holdings nor any Subsidiary shall act as Paying Agent. The Registrar shall keep a register of the Securities and of their transfer and exchange. Holdings, upon notice to the Trustee, may have one or more co-Registrars and one or more additional paying agents reasonably acceptable to the Trustee. The term "Paying Agent" includes any additional paying agent. Holdings initially appoints the Trustee as Registrar and Paying Agent until such time as the Trustee has resigned or a successor has been appointed. Holdings shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. Holdings shall notify the Trustee, in advance, of the name and address of any such Agent. If Holdings fails to maintain a Registrar or Paying Agent, the Trustee shall act as such. Section 2.4. Paying Agent To Hold Assets in Trust. Holdings shall require each Paying Agent other than the Trustee to agree in writing that each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets and/or Secondary Securities held by the Paying Agent for the payment of principal of, or interest on, the Securities (whether such assets have been distributed to it by Holdings or any other obligor on the Securities), and shall notify the Trustee of any Default by Holdings (or any other obligor on the Securities) in making any such payment. If Holdings or a Subsidiary acts as Paying Agent, it shall segregate such assets and/or Secondary Securities and hold them as a separate trust fund. Holdings at any time may require a Paying Agent to distribute all assets and/or Secondary Securities held by it to the Trustee and account for any assets disbursed and 22 36 the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets and/or Secondary Securities held by it to the Trustee and to account for any assets so distributed. Upon distribution to the Trustee of all assets that shall have been delivered by Holdings to the Paying Agent, the Paying Agent shall have no further liability for such assets and/or Secondary Securities. Section 2.5. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, Holdings shall furnish to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, which list may be conclusively relied upon by the Trustee. Section 2.6. Transfer and Exchange. When a Security is presented to the Registrar or a co-registrar with a request to register a transfer, the Registrar shall register the transfer as requested if the requirements of the Registrar are met. The Registrar need not transfer or exchange any Securities selected for redemption. Also, it need not transfer or exchange any Securities for a period of 30 days before a selection of Securities to be redeemed. When Securities are presented to the Registrar or a co-registrar with a request to exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall make the exchange as requested if the requirements of the Registrar are met. Holdings shall cooperate with the Registrar in meeting its requirements. To permit transfers, registration and exchanges, the Trustee shall authenticate Securities at the Registrar's request. No service charge shall be made for any transfer, registration or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, but not for any exchange pursuant to Section 2.10, 3.6 or 9.5. Section 2.7. Replacement Securities. If a mutilated Security is surrendered to the Trustee or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, Holdings shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements are met. If required by the Trustee or Holdings, such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both Holdings and the Trustee, to protect Holdings, the Trustee or any Agent from any loss which any of them may suffer if a Security is replaced. Holdings may charge such Holder for its reasonable, out-of-pocket expenses in replacing a Security, including reasonable fees and expenses of counsel. Every replacement Security shall constitute an additional obligation of Holdings. 23 37 Section 2.8. Outstanding Securities. Securities outstanding at any time are all the Securities that have been authenticated by the Trustee, including the Secondary Securities, except those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because Holdings or any of its Affiliates holds the Security. If a Security is replaced pursuant to Section 2.7 (other than a mutilated Security surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. A mutilated Security ceases to be outstanding upon surrender of such Security and replacement thereof pursuant to Section 2.7. If on a Redemption Date or the Maturity Date the Paying Agent (other than Holdings or any Subsidiary) holds U.S. Legal Tender or U.S. Government Obligations sufficient to pay all of the principal and interest due on the Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue. Section 2.9. Treasury Securities. In determining whether the Holders of the required aggregate principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by Holdings or any of its Affiliates shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that the Trustee knows or has reason to know are so owned shall be disregarded. Notwithstanding the foregoing and except as otherwise provided by the TIA, a majority of Securities not owned by Holdings or any of its Affiliates shall be sufficient to approve any such direction, waiver or consent. Section 2.10. Temporary Securities. Until definitive Securities are ready for delivery, Holdings may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that Holdings considers appropriate for temporary Securities. Without unreasonable delay, Holdings shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Section 2.11. Cancellation. Holdings at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than Holdings or any Subsidiary), and no one else, shall cancel and, at the written direction of Holdings, shall dispose of all Securities surrendered for transfer, exchange, payment or cancellation. Subject to Section 2.7, Holdings may not issue new 24 38 Securities to replace Securities that it has paid or delivered to the Trustee for cancellation. If Holdings or any Subsidiary shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11. Section 2.12. Defaulted Interest. If Holdings defaults in a payment of interest on the Securities, it shall, unless the Trustee fixes another record date pursuant to Section 6.10, pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the persons who are Holders on a subsequent special record date, which date shall be the fifteenth day next preceding the date fixed by Holdings for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. At least 15 days before the subsequent special record date, Holdings shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. Section 2.13. CUSIP Number. Holdings in issuing the Securities may use a "CUSIP" number, and if so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. ARTICLE III REDEMPTION Section 3.1. Notices to Trustee. If Holdings elects to redeem Securities pursuant to Paragraph 5 of the Securities it shall notify the Trustee of the Redemption Date and aggregate principal amount of the Securities to be redeemed and whether it wants the Trustee to give notice of redemption to the Holders (at Holdings' expense) at least 30 days (unless a shorter notice shall be satisfactory to the Trustee) but not more than 60 days before the Redemption Date. Any notice given pursuant to this Section 3.1 may be cancelled at any time prior to notice of such redemption being mailed to any Holder and shall thereby be void and of no effect. Section 3.2. Selection of Securities To Be Redeemed. If fewer than all of the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata, by lot or by such other method as the Trustee considers to be fair and appropriate and in such manner as complies with applicable legal and stock exchange 25 39 requirements, if any; provided, however, that any redemption pursuant to paragraph 5(b) of the Securities shall be made on a pro rata basis. Securities in denominations of less than $1,000 shall be redeemed first. Thereafter the Trustee shall make the selection from the Securities outstanding and not previously called for redemption and shall promptly notify Holdings in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the aggregate principal amount thereof to be redeemed. Securities in denominations of $1,000 or less may be redeemed only in whole. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal of Securities that have denominations larger than $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. Section 3.3. Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, Holdings shall mail a notice of redemption by first class mail to each Holder whose Securities are to be redeemed at such Holder's registered address, with a copy to the Trustee. At Holdings' request, the Trustee shall give the notice of redemption in Holdings' name and at Holdings' expense. Each notice for redemption shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (5) that, unless Holdings defaults in making the redemption payment, interest on Securities called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Securities is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Securities redeemed; (6) if any Security is being redeemed in part, the portion of the aggregate principal amount of such Security to be redeemed and that, after the Redemption Date, and upon surrender of such Security, a new Security or Securities in aggregate principal amount equal to the unredeemed portion thereof will be issued; and (7) if fewer than all the Securities are to be redeemed, the identification of the particular Securities (or portion thereof to be redeemed), as well as the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of Securities to be outstanding after such partial redemption. 26 40 Section 3.4. Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.3, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender to the Trustee or Paying Agent, such Securities called for redemption shall be paid at the Redemption Price. Section 3.5. Deposit of Redemption Price. On or before the Redemption Date, Holdings shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Redemption Price of all Securities to be redeemed on that date (other than Securities or portions thereof called for redemption on that date which have been delivered by Holdings to the Trustee for cancellation). The Paying Agent shall promptly return to Holdings any U.S. Legal Tender so deposited which is not required for that purpose upon the written request of Holdings, except with respect to monies owed as obligations to the Trustee pursuant to Article Seven. If Holdings complies with the preceding paragraph, then, unless Holdings defaults in the payment of such Redemption Price, interest on the Securities to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Securities are presented for payment. If a Security is redeemed on or after a Record Date but on or prior to the related Interest Payment Date, then any accrued and unpaid interest shall be paid to the Person in whose name such Security was registered at the close of business on such Record Date. If any Security called for redemption shall not be so paid upon surrender for redemption because of the failure of Holdings to comply with the first paragraph of this Section 3.5, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the rate provided in the Securities and in Section 4.1 hereof. Section 3.6. Securities Redeemed in Part. Upon surrender of a Security that is to be redeemed in part, the Trustee shall authenticate for the Holder a new Security or Securities equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE IV COVENANTS Section 4.1. Payment of Securities. Holdings shall pay the principal amount of, premium, if any, and interest on, as the case may be, the Securities on the dates and in the manner provided in the Securities. An installment shall be considered paid on the date it is due if the Trustee or Paying Agent (other 27 41 than Holdings or a Subsidiary) holds on that date U.S. Legal Tender and/or, to the extent permitted by Section 2.2, Secondary Securities designated for and sufficient to pay the installment. Holdings shall pay interest on overdue principal (including post-petition interest in any proceeding under any Bankruptcy Law, to the extent allowable as a claim in any such proceeding) at the same rate borne by the Securities and it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law, to the extent allowable as a claim in any such proceeding) on overdue installments of interest (without regard to any applicable grace period) at the same rate borne by the Securities, to the extent lawful. Section 4.2. Maintenance of Office or Agency. Holdings shall maintain in the Borough of Manhattan, The City of New York, the office or agency required under Section 2.3. Holdings shall give prior notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time Holdings shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 13.2. Section 4.3. Limitation on Restricted Payments. Holdings shall not, and shall cause each of its Subsidiaries not to, directly or indirectly, make any Restricted Payment if, at the time of such proposed Restricted Payment, or after giving effect thereto, (a) a Default or an Event of Default shall have occurred and be continuing, (b) Holdings or such Subsidiary could not incur at least $1 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.12, or (c) the aggregate amount expended for all Restricted Payments, including such proposed Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment, as determined in good faith by the Board of Directors of Holdings, which determination shall be evidenced by a Board Resolution), subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such aggregate Consolidated Net Income is a loss, minus 100% of such loss) of Holdings earned subsequent to the Issue Date and on or prior to the date the proposed Restricted Payment occurs (the "Reference Date") plus (ii) 100% of the aggregate Net Proceeds received by Holdings from any person (other than a Subsidiary) from the issuance and sale (including upon exchange or conversion for other securities of Holdings) subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from issuances and sales financed directly or indirectly using funds borrowed from Holdings or any Subsidiary, until and to the extent such borrowing is repaid) plus (iii) 100% of the aggregate net cash proceeds received by Holdings as capital contributions to Holdings after the Issue Date, plus (iv) $25,000,000. Notwithstanding the foregoing, if no Default or Event of Default shall have occurred and be continuing as a consequence thereof, the provisions set forth in the immediately 28 42 preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of declaration, (2) the acquisition of any shares of Capital Stock of Holdings or the repurchase, redemption, or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of shares of Qualified Capital Stock of Holdings, (3) the repurchase, redemption or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of Subordinated Indebtedness of Holdings with an Average Life equal to or greater than the then remaining Average Life of the Subordinated Indebtedness repurchased, redeemed or repaid, and (4) Permitted Payments; provided, however, that (x) the declaration of each dividend paid in accordance with clause (1) above, each acquisition, repurchase, redemption or other repayment made in accordance with, or of the type set forth in, clause (2) above, and each payment described in clause (iii) of the definition of "Permitted Payments" shall each be counted for purposes of computing amounts expended pursuant to subclause (c) in the immediately preceding paragraph, and (y) no amounts paid pursuant to clause (3) above or pursuant to clause (i) or (ii) of the definition of "Permitted Payments" shall be so counted. Prior to making any Restricted Payment under the first paragraph of this Section 4.3, Holdings shall deliver to the Trustee an Officers' Certificate setting forth the computation by which the amount available for Restricted Payments pursuant to such paragraph was determined. The Trustee shall have no duty or responsibility to determine the accuracy or correctness of this computation and shall be fully protected in relying on such Officers' Certificate. Section 4.4. Corporate Existence. Except as otherwise permitted by Article Five, Holdings shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate or other existence of each of its Significant Subsidiaries in accordance with the respective organizational documents of each such Significant Subsidiary and the rights (charter and statutory) and franchises of Holdings and each such Significant Subsidiary; provided, however, that Holdings shall not be required to preserve, with respect to itself, any right or franchise, and with respect to any of its Significant Subsidiaries, any such existence, right or franchise, if the Board of Directors of Holdings or such Significant Subsidiary, as the case may be, shall determine that the preservation thereof is no longer desirable in the conduct of the business of Holdings or any such Significant Subsidiary. Section 4.5. Payment of Taxes and Other Claims. Holdings shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon it or any of its Subsidiaries or properties of it or any of its Subsidiaries and (ii) all lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of it or any of its Subsidiaries; provided, however, that Holdings shall not be required to pay or 29 43 discharge or cause to be paid or discharged any such tax, assessment, charge or claim if either (a) the amount, applicability or validity thereof is being contested in good faith by appropriate proceedings and an adequate reserve has been established therefor to the extent required by GAAP or (b) the failure to make such payment or effect such discharge (together with all other such failures) would not have a material adverse effect on the financial condition or results or operations of Holdings and its Subsidiaries taken as a whole. Section 4.6. Maintenance of Properties and Insurance. (a) Holdings shall cause all properties used or useful to the conduct of its business or the business of any Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in its judgment may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times unless the failure to so maintain such properties (together with all other such failures) would not have a material adverse effect on the financial condition or results of operations of Holdings and its Subsidiaries taken as a whole; provided, however, that nothing in this Section 4.6 shall prevent Holdings or any Subsidiary from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is either (i) in the ordinary course of business, (ii) in the good faith judgment of the Board of Directors of Holdings or the Subsidiary concerned, or of the senior officers of Holdings or such Subsidiary, as the case may be, desirable in the conduct of the business of Holdings or such Subsidiary, as the case may be, or (iii) is otherwise permitted by this Indenture. (b) Holdings shall provide or cause to be provided, for itself and each of its Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the reasonable, good faith opinion of Holdings, are adequate and appropriate for the conduct of the business of Holdings and such Subsidiaries in a prudent manner, with reputable insurers or with the government of the United States of America or an agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be either (i) consistent with past practices of Holdings or the applicable Subsidiary or (ii) customary, in the reasonable, good faith opinion of Holdings, for corporations similarly situated in the industry, unless the failure to provide such insurance (together with all other such failures) would not have a material adverse effect on the financial condition or results of operations of Holdings and its Subsidiaries, taken as a whole. Section 4.7. Compliance Certificate; Notice of Default. (a) Holdings shall deliver to the Trustee within 120 days after the end of Holdings' fiscal year an Officers' Certificate stating that a review of its activities and the activities of its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether it has kept, observed, performed and fulfilled its obligations under this Indenture and further stating, as to each such Officer signing such certificate, that to the best of his knowledge Holdings during such preceding fiscal year has kept, observed, performed and fulfilled each and every such covenant and no Default or Event 30 44 of Default occurred during such year or, if such signers do know of such a Default or Event of Default, the certificate shall describe the Default or Event of Default and its status with particularity. The Officers' Certificate shall also notify the Trustee should Holdings elect to change the manner in which it fixes its fiscal year end. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, Holdings shall deliver to the Trustee within 120 days after the end of each fiscal year a written statement by Holdings' independent certified public accountants stating (A) that their audit examination has included a review of the terms of this Indenture and the Securities as they relate to accounting matters, and (B) whether, in connection with their audit examination, any Default has come to their attention and if such a Default has come to their attention, specifying the nature and period of existence thereof. (c) Holdings shall, so long as the Securities are outstanding, deliver to the Trustee, within five Business Days after any officer becomes aware of any Default or Event of Default, an Officer's Certificate specifying such Default or Event of Default and what action Holdings is taking or proposes to take with respect thereto. Section 4.8. Compliance with Laws. Holdings shall comply, and shall cause each of its Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America, all states and municipalities thereof, and of any governmental department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except such as are being contested in good faith and by appropriate proceedings and except for such noncompliances as would not in the aggregate have a material adverse effect on the financial condition or results of operations of Holdings and its Subsidiaries taken as a whole. Section 4.9. SEC Reports and Other Information. (a) To the extent permitted by applicable law or regulation, whether or not Holdings is subject to the requirements of Section 13 or 15(d) of the Exchange Act, Holdings shall file with the SEC all quarterly and annual reports and such other information, documents or other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) required to be filed pursuant to such provisions of the Exchange Act. Holdings shall file with the Trustee, within 5 days after it files the same with the SEC, copies of the quarterly and annual reports and the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to this Section 4.9. Holdings shall also comply with the other provisions of TIA Section 314(a). If Holdings is not permitted by applicable law or regulations to file the aforementioned reports, Holdings (at its own expense) shall file with the Trustee and mail, or cause the Trustee to mail, to Holders at their addresses appearing in the register of Securities maintained by the Registrar at the time of such mailing within 5 days after it would have been required to file such information with the SEC, all information and financial statements, including any notes thereto and with respect to annual reports, an auditors' report 31 45 by an accounting firm of established national reputation, and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," comparable to the disclosure that Holdings would have been required to include in annual and quarterly reports, information, documents or other reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K, if Holdings was subject to the requirements of such Section 13 or 15(d) of the Exchange Act. (b) At any time when Holdings is not permitted by applicable law or regulations to file the aforementioned reports, upon the request of a Holder of Securities, Holdings will promptly furnish or cause to be furnished such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) to such Holder or to a prospective purchaser of such Securities designated by such Holder, as the case may be, in order to permit compliance by such Holder with Rule 144A under the Securities Act. Section 4.10. Waiver of Stay, Extension or Usury Laws. Holdings covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive Holdings from paying all or any portion of the principal of or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) Holdings hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 4.11. Limitation on Transactions with Affiliates. (a) Neither Holdings nor any of its Subsidiaries shall (i) sell, lease, transfer or otherwise dispose of any of its properties or assets, or issue securities (other than equity securities which do not constitute Disqualified Capital Stock) to, (ii) purchase any property, assets or securities (other than equity securities which do not constitute Disqualified Capital Stock) from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, an Affiliate or Significant Stockholder (or any Affiliate of such Significant Stockholder) of Holdings or any Subsidiary (an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under Section 4.11(b) and (y) Affiliate Transactions in the ordinary course of business, that are fair to Holdings or such Subsidiary, as the case may be, and on terms at least as favorable as might reasonably have been obtainable at such time from an unaffiliated party; provided, that (A) with respect to Affiliate Transactions involving aggregate payments in excess of $1 million and less than $5 million, Holdings or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the Trustee certifying that such transaction or series of transactions complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business), (B) with respect to Affiliate Transactions involving aggregate payments in excess of $5 million and less than $15 million, Holdings or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the Trustee certifying that such 32 46 Affiliate Transaction complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business) and that such Affiliate Transaction has received the approval of a majority of the disinterested members of the Board of Directors of Holdings or the Subsidiary, as the case may be, or, in the absence of any such approval by the disinterested members of the Board of Directors of Holdings or the Subsidiary, as the case may be, that an Independent Financial Advisor has reasonably and in good faith determined that the financial terms of such Affiliate Transaction are fair to Holdings or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as might reasonably have been obtained at such time from an unaffiliated party and that such Independent Financial Advisor has provided written confirmation of such determination to the Board of Directors and (C) with respect to Affiliates Transactions involving aggregate payments in excess of $15 million, Holdings or such Subsidiary, as the case may be, shall have delivered to the Trustee, a written opinion from an Independent Financial Advisor to the effect that the financial terms of such Affiliate Transaction are fair to Holdings or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as those that might reasonably have been obtained at the time from an unaffiliated party. (b) The provisions of Section 4.11(a) shall not apply to (i) any Permitted Payment, (ii) any Restricted Payment that is made in compliance with the provisions of Section 4.3, (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of Holdings or any Subsidiary, as determined by the Board of Directors of Holdings or any Subsidiary or the senior management thereof in good faith, (iv) transactions exclusively between or among Holdings and any of its wholly-owned Subsidiaries or exclusively between or among such wholly-owned Subsidiaries, provided such transactions are not otherwise prohibited by this Indenture, (v) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) so long as any such amendment is not disadvantageous to the Holders in any material respect, (vi) the existence of, or the performance by Holdings or any of its Subsidiaries of its obligations under the terms of, any stockholder agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Issue Date and any similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by Holdings or any of its Subsidiaries of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders in any material respect, (vii) transactions permitted by, and complying with, the provisions of Section 5.1, and (viii) transactions with suppliers or other purchases or sales of goods or services, in each case, in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of this Indenture which are fair to Holdings or any Subsidiary, in the reasonable determination of the Board of Directors or senior management of Holdings, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. 33 47 Section 4.12. Limitation on Incurrences of Additional Indebtedness.1/ Holdings will not, and will not permit any Subsidiary, directly or indirectly, to incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment of (collectively "incur") any Indebtedness other than Permitted Indebtedness; provided, however, that if no Default with respect to payment of principal of, or interest on, the Securities or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of any such Indebtedness, (i) Holdings may incur Indebtedness if immediately before and immediately after giving effect to the incurrence of such Indebtedness the Operating Coverage Ratio of Holdings would be greater than 2.0 to 1.0 and (ii) the Company or any subsidiary of the Company may incur Indebtedness if immediately before and immediately after giving effect to the incurrence of such Indebtedness the Operating Coverage Ratio of the Company would be greater than 2.0 to 1.0. Section 4.13. Limitation on Liens. Holdings will not create, incur, assume or suffer to exist any Lien of any kind securing any Pari Passu Indebtedness, any Subordinated Indebtedness or any Affiliate Obligation upon any property or assets of Holdings owned on the Issue Date or acquired after the Issue Date, or any income or profits therefrom, unless the Securities are secured equally and ratably with (or prior to in the case of Subordinated Indebtedness) to the obligation or liability secured by such Lien, and except for any Lien securing Acquired Indebtedness created prior to the incurrence of such Indebtedness by Holdings, provided that any such Lien only extends to the assets that were subject to such Lien securing such Acquired Indebtedness prior to the related acquisition by Holdings. Section 4.14. Limitation on Change of Control. (a) Upon the occurrence of a Change of Control (the "Change of Control Date"), each Holder shall have the right to require the repurchase of such Holder's Securities pursuant to the offer described in paragraph (b), below (the "Change of Control Offer"), at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued interest, if any, to the date of purchase. Prior to the mailing of the notice to Holders provided for in paragraph (b) below, but in any event within 30 days following the Change of Control Date, Holdings shall cause the Company to either (a) repay in full and terminate all commitments under Indebtedness under the Credit Agreement to the extent the terms thereof require repayment upon a Change of Control (or offer to repay in full and terminate all commitments under all such Indebtedness under the Credit Agreement and repay the Indebtedness owed to each lender which has accepted such offer), or (b) obtain the requisite consents under the Credit Agreement, the terms of which require repayment upon a Change of Control, to permit the repurchase of the Securities as provided for in this Section 4.14. Holdings shall first comply with the covenant in the immediately preceding sentence before Holdings shall be required to repurchase Securities ____________________ 1. This Section 4.12 will conform to the covenant in the new public securities, as appropriately modified to be applicable to Holdings and its subsidiaries. 34 48 pursuant to this Section 4.14, and any failure to so comply shall constitute an Event of Default under this Indenture. Within 10 days after any Change of Control Date requiring Holdings to make a Change of Control Offer pursuant to this Section 4.14, Holdings shall so notify the Trustee. (b) The Change of Control Offer shall be made to all Holders and the notice to the Holders shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Change of Control Offer. Within 30 days following any Change of Control Date, Holdings shall send, by first class mail, a notice to each Holder, with copies to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state: (1) that the Change of Control Offer is being made pursuant to this Section 4.14 and that all Securities tendered will be accepted for payment; (2) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law) (the "Change of Control Payment Date"); (3) that any Security not tendered will continue to accrue interest if interest is then accruing; (4) that, unless Holdings defaults in making payment therefor, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have a Security purchased pursuant to a Change of Control Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than two Business Days prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the aggregate principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; (7) that Holders whose Securities are being purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; provided that each Holder shall tender Securities, and each Security purchased and each such new Security issued by Holdings shall be, in a principal amount of $1,000 or integral multiples thereof (except for Secondary Securities that were issued in denominations other than $1,000); and 35 49 (8) the circumstances and relevant facts regarding such Change of Control, including information available to Holdings concerning the Person or Persons acquiring control and such historical or pro forma financial information as Holdings reasonably deems appropriate under the circumstances. (c) On or before the Change of Control Payment Date, Holdings shall (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price of all Securities so tendered and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by Holdings. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price; provided that each such new Security shall be in the principal amount of $1,000 or integral multiples thereof. Holdings will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 4.14, the Trustee shall act as the Paying Agent. (d) Holdings, to the extent applicable and if required by law, will comply with Rule 14e-1 under the Exchange Act and any other applicable provisions of the federal securities laws in connection with a Change of Control Offer. Section 4.15. Limitation on Asset Sales. (a) Neither Holdings nor any of its Subsidiaries will consummate an Asset Sale, unless (a) Holdings or the applicable Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold and (b) upon consummation of an Asset Sale, Holdings or the applicable Subsidiary will, within 365 days of the receipt of the proceeds therefrom, either: (i) apply or cause its Subsidiary to apply the Net Cash Proceeds of any Asset Sale to (1) a Related Business Investment (2) an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale, or (3) an investment in properties and assets that will be used in the business of Holdings and its Subsidiaries existing on the Issue Date or in a business reasonably related thereto; (ii) apply or cause to be applied such Net Cash Proceeds to the repayment of Senior Indebtedness or Pari Passu Indebtedness of Holdings or any Indebtedness of any Subsidiary; (iii) use such Net Cash Proceeds to secure Letter of Credit Obligations to the extent the related letters of credit have not been drawn upon or returned undrawn; or (iv) after such time as the accumulated Net Cash Proceeds equals or exceeds $20 million, apply or cause to be applied such Net Cash Proceeds to the purchase of Securities tendered to Holdings for purchase at a price equal to 100% of the aggregate principal amount thereof, plus accrued interest to the date of purchase pursuant to an offer to purchase made by Holdings as set forth below (a "Net Proceeds Offer"), provided, however, that if at any time any noncash consideration received by Holdings or any Subsidiary in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash, then such cash shall constitute Net Cash Proceeds for purposes of this Section 4.15 and shall be applied in accordance with clause (b) above within 365 days of the receipt of such cash; and provided further, however, that if at any time any security deposits or other amounts used to secure Letter of Credit Obligations pursuant to clause (b) (iii) above are returned to Holdings or any Subsidiary, then such security deposits or other amounts shall constitute Net Cash Proceeds for 36 50 purposes of this Section 4.15 and shall be applied in accordance with clause (b) above within 365 days of the receipt of such security deposits or other amounts. A Net Proceeds Offer as a result of an Asset Sale made by the Company or one of its subsidiaries shall not be required to be in excess of the Net Cash Proceeds of such Asset Sale less the Net Cash Proceeds actually applied in accordance with clauses (b)(i), (ii) or (iii) above; provided, however, that Holdings shall have the right to exclude from the foregoing provisions Asset Sales subsequent to the Issue Date, the proceeds of which are derived from the sale and substantially concurrent lease-back of one or more supermarkets and/or related assets or equipment which are acquired or constructed by Holdings or a Subsidiary subsequent to the Issue Date, provided that any such sale and substantially concurrent lease-back occurs within 270 days following such acquisition or the completion of such construction, as the case may be. (b) Notice of a Net Proceeds Offer pursuant to this Section 4.15 shall be mailed, by first class mail, by Holdings not less than 305 days nor more than 335 days after the relevant Asset Sale to all Holders at their last registered addresses, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Net Proceeds Offer and shall state the following terms: (1) that the Net Proceeds Offer is being made pursuant to Section 4.15 and that all Securities tendered will be accepted for payment; provided, however, that if the aggregate principal amount of Securities tendered in a Net Proceeds Offer plus accrued interest at the expiration of such offer exceeds the aggregate amount of the Net Proceeds Offer, Holdings shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by Holdings so that only Securities in denominations of $1,000 or multiples thereof shall be purchased, except for Secondary Securities that were issued in denominations other than $1,000); (2) the purchase price (including the amount of accrued interest) and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law) (the "Proceeds Purchase Date"); (3) that any Security not tendered will continue to accrue interest if interest is then accruing; (4) that, unless Holdings defaults in making payment therefor, any Security accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Proceeds Purchase Date; (5) that Holders electing to have a Security purchased pursuant to a Net Proceeds Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Proceeds Purchase Date; 37 51 (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than two Business Days prior to the Proceeds Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; and (7) that Holders whose Securities were purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. On or before the Proceeds Purchase Date, Holdings shall (i) accept for payment Securities or portions thereof tendered pursuant to the Net Proceeds Offer which are to be purchased in accordance with item (b)(l) above, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price of all Securities to be purchased and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof being purchased by Holdings. The Paying Agent shall promptly mail to the Holders of Securities so accepted payment in an amount equal to the purchase price. Holdings will publicly announce the results of the Net Proceeds Offer on or as soon as practicable after the Proceeds Purchase Date. For purposes of this Section 4.15, the Trustee shall act as the Paying Agent. (c) Holdings will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Securities pursuant to a Net Proceeds Offer. Any amounts remaining after the purchase of Securities pursuant to a Net Proceeds Offer shall be returned by the Trustee to Holdings. Section 4.16. Limitation on Senior Subordinated Indebtedness. Holdings will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that by its terms is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the Securities. Section 4.17. Limitation on Preferred Stock of Subsidiaries. Holdings will not permit any of its Subsidiaries to issue any Preferred Stock (other than to Holdings or a wholly-owned Subsidiary), or permit any person (other than Holdings or a wholly-owned Subsidiary) to own or hold an interest in any Preferred Stock of any such Subsidiary, unless such Subsidiary would be entitled to incur Indebtedness in accordance with the provisions of Section 4.12 in the aggregate principal amount equal to the aggregate liquidation value of such Preferred Stock. 38 52 Section 4.18. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. Holdings shall not, and shall not permit any Subsidiary to, directly or indirectly, create or suffer to exist, or allow to become effective any consensual Payment Restriction with respect to any of its Subsidiaries, except for (a) any such restrictions contained in (i) the Credit Agreement as in effect on the Issue Date, as any such Payment Restriction may apply to any present or future Subsidiary, (ii) this Indenture, the Senior Discount Note Indenture, the Senior Discount Debenture Indenture, the indentures with respect to Existing Indebtedness and any other agreement in effect at or entered into on the Issue Date, (iii) Indebtedness of a person existing at the time such person becomes a Subsidiary (provided that (x) such Indebtedness is not incurred in connection with, or in contemplation of, such person becoming a Subsidiary, (y) such restriction is not applicable to any person, or the properties or assets of any person, other than the person so acquired and (z) such Indebtedness is otherwise permitted to be incurred pursuant to Section 4.12), (iv) secured Indebtedness otherwise permitted to be incurred pursuant to Sections 4.12 and 4.13 that limit the right of the debtor to dispose of the assets securing such Indebtedness; (b) customary non-assignment provisions restricting subletting or assignment of any lease or other agreement entered into by a Subsidiary; (c) customary net worth provisions contained in leases and other agreements entered into by a Subsidiary in the ordinary course of business; (d) customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary; (e) customary provisions in joint venture agreements and other similar agreements; (f) restrictions contained in Indebtedness incurred to refinance, refund, extend or renew Indebtedness referred to in clause (a) above; provided that the restrictions contained therein are not materially more restrictive taken as a whole, than those provided for in such Indebtedness being refinanced, refunded, extended or renewed, and (g) Payment Restrictions contained in any other Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to the provisions of Section 4.12; provided that any such Payment Restrictions are ordinary and customary with respect to the type of Indebtedness being incurred (under the relevant circumstances) and, in any event, no more restrictive than the most restrictive Payment Restrictions in effect of the Issue Date. ARTICLE V SUCCESSOR CORPORATION Section 5.1. When Holdings May Merge, Etc. (a) Holdings, in a single transaction or through a series of related transactions, shall not (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case: (1) either Holdings shall be the continuing person, or the person (if other than Holdings) formed by such consolidation or into which Holdings is merged or to which 39 53 all or substantially all of the properties and assets of Holdings as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any person to which assets are transferred) (Holdings or such other person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any state thereof or the District of Columbia, and shall expressly assume, by an indenture supplement, all the obligations of Holdings under the Securities and this Indenture; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (A) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of Holdings immediately preceding the transaction and (B) the Surviving Person could incur at least $1 of additional Indebtedness other than Permitted Indebtedness pursuant to Section 4.12; and (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing. (b) For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of Holdings shall be deemed to be the transfer of all or substantially all of the properties and assets of Holdings. Section 5.2. Successor Corporation Substituted. Upon any consolidation or merger or any transfer of all or substantially all of the assets of Holdings or any adoption of a Plan of Liquidation by Holdings in accordance with Section 5.1, the surviving person formed by such consolidation or into which Holdings is merged or to which such transfer is made, (or, in the case of a Plan of Liquidation, to which assets are transferred) shall succeed to, and be substituted for, and may exercise every right and power of, Holdings under this Indenture with the same effect as if such surviving person had been named as Holdings herein; provided, however, that solely for purposes of computing amounts described in subclause (c) of Section 4.3, any such surviving person shall only be deemed to have succeeded to and be substituted for Holdings with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets. When a successor corporation assumes all of the obligations of Holdings hereunder and under the Securities and agrees to be bound hereby and thereby, the predecessor shall be released from such obligations. 40 54 ARTICLE VI DEFAULT AND REMEDIES Section 6.1. Events of Default. An "Event of Default" occurs if: (1) Holdings defaults in the payment of interest on the Securities when the same becomes due and payable and the default continues for a period of 30 days; (2) Holdings defaults in the payment of the principal of the Securities when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise (including the failure to repurchase Securities tendered pursuant to the requirements set forth in Sections 4.14 and 4.15), whether or not such payment shall be prohibited by the provisions of Article Eleven hereof; (3) Holdings fails to comply with any of its other agreements or covenants in, or provisions of, the Securities or this Indenture and the default continues for the period and after the notice specified below; (4) there shall be a default under any bond, debenture, or other evidence of Indebtedness of Holdings or of any Significant Subsidiary or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced any such Indebtedness, whether such Indebtedness now exists or shall hereafter be created, if both (A) such default either (i) results from the failure to pay such Indebtedness at its stated final maturity (that is, the date of the last principal installment of any installment Indebtedness under the instrument or agreement pursuant to or under which such Indebtedness was created or is evidenced) or (ii) relates to an obligation (including any obligation to pay interest, to purchase such Indebtedness or to pay the principal of such Indebtedness, other than the obligation to pay any principal of such Indebtedness at its stated final maturity) and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated final maturity) and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness the maturity of which has been so accelerated, aggregates $25 million or more at any one time outstanding; (5) Holdings or any Significant Subsidiary (A) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (B) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (C) consents to the appointment of a Custodian of it or for substantially all of its property, (D) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it, (E) makes a general assignment for the benefit of its creditors, or (F) takes any corporate action to authorize or effect any of the foregoing; 41 55 (6) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of Holdings or any Significant Subsidiary in an involuntary case or proceeding under any Bankruptcy Law, which shall (A) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of Holdings or any Significant Subsidiary, (B) appoint a Custodian of Holdings or any Significant Subsidiary or for substantially all of its property or (C) order the winding-up or liquidation of its affairs; and such judgment, decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (7) the lenders under the Credit Agreement shall commence judicial proceedings to foreclose upon any material portion of the assets of Holdings and its Subsidiaries; or (8) any final judgment or order for payment of money in excess of $25 million shall be entered against Holdings or any Significant Subsidiary by a court of competent jurisdiction and shall remain undischarged for a period of 60 days after such judgment becomes final and nonappealable. A Default under clause (3) above (other than in the case of any Defaults resulting from any Default under Section 4.3, 4.14 or 5.1, which Defaults shall be Events of Default with the notice specified in this paragraph but without the passage of time specified in this paragraph) is not an Event of Default until the Trustee notifies Holdings, or the Holders of at least 25% in aggregate principal amount of the outstanding Securities notify Holdings and the Trustee, of the Default, and Holdings does not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." Such notice shall be given by the Trustee if so requested by the Holders of at least 25% in aggregate principal amount of the Securities then outstanding. When a Default is cured, it ceases. Section 6.2. Acceleration. (a) If an Event of Default (other than an Event of Default specified in Section 6.1(5) or (6) with respect to Holdings or any Significant Subsidiary) occurs and is continuing, the Trustee may, by notice to Holdings (and, if any Indebtedness is outstanding under the Credit Agreement or the Credit Agreement is otherwise in effect, to the Credit Agent), or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding may, by written notice to Holdings and the Trustee, and the Trustee shall (with notice to the Credit Agent if any Indebtedness is outstanding under the Credit Agreement or the Credit Agreement is otherwise in effect), upon the request of such Holders, declare the aggregate principal amount of the Securities outstanding, together with accrued but unpaid interest thereon to the date of payment, to be due and payable and, upon any such declaration, the same shall become and be due and payable; provided, that so long as the Credit Agreement shall be in force and effect, if any such Event of Default shall have occurred and be continuing, any such acceleration shall not be effective until the earlier of (a) five Business Days following a notice of acceleration given to Holdings and the Credit Agent under the Credit Agreement and only if upon such fifth Business Day such Event of Default shall be continuing or (b) the acceleration 42 56 of any Indebtedness under the Credit Agreement. If an Event of Default specified in Section 6.1(5) or (6) occurs with respect to Holdings or any Significant Subsidiary, all unpaid principal and accrued interest on the Securities then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. Upon payment of such principal amount, interest, and premium, if any, all of Holdings' obligations under the Securities and this Indenture, other than obligations under Section 7.7, shall terminate. The Holders of a majority in aggregate principal amount of the Securities then outstanding by notice to the Trustee may rescind an acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal and interest on the Securities which have become due solely by such declaration of acceleration, have been cured or waived, (ii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, and (iii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. (b) In the event of a declaration of acceleration under this Indenture because an Event of Default set forth in Section 6.1(4) has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if either (i) the holders of the Indebtedness which is the subject of such Event of Default have waived such failure to pay at maturity or have rescinded the acceleration in respect of such Indebtedness within 90 days of such maturity or declaration of acceleration, as the case may be, and no other Event of Default has occurred during such 90-day period which has not been cured or waived, or (ii) such Indebtedness shall have been discharged or the maturity thereof shall have been extended such that it is not then due and payable, or the underlying default has been cured (and any acceleration based thereon of such other Indebtedness has been rescinded), within 90 days of such maturity or declaration of acceleration, as the case may be. Section 6.3. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. Section 6.4. Waiver of Past Defaults. Subject to Sections 6.7 and 9.2, the Holders of at least fifty four percent (54%) in aggregate principal amount of the outstanding Securities (or at least a majority in aggregate principal amount of the outstanding Securities in the event that EJDC shall cease to beneficially 43 57 own at least a majority in aggregate principal amount of the outstanding Securities), by notice to the Trustee may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of or interest on any Security as specified in clauses (1) and (2) of Section 6.1. When a Default or Event of Default is waived, it is cured and ceases. Section 6.5. Control by Majority. The Holders of at least a majority in aggregate principal amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. Subject to Section 7.1, however, the Trustee may refuse to follow any direction that conflicts with any law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of another Holder, or that may involve the Trustee in personal liability; provided that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 6.6. Limitation on Suits. A Holder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee notice of a continuing Event of Default; (2) the Holder or Holders of at least 25% in aggregate principal amount of the outstanding Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense to be incurred in compliance with such request; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holder or Holders of at least 25% in aggregate principal amount of the outstanding Securities do not give the Trustee a direction which, in the opinion of the Trustee, is inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. Section 6.7. Rights of Holders To Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. 44 58 Section 6.8. Collection Suit by Trustee. If an Event of Default in payment of principal or interest specified in clause (1) or (2) of Section 6.1 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against Holdings or any other obligor on the Securities for the whole amount of principal and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate per annum borne by the Securities and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relating to Holdings or any other obligor upon the Securities, any of their respective creditors or any of their respective property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10. Priorities. If the Trustee collects any money pursuant to this Article Six, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.7; Second: if the Holders are forced to proceed against Holdings directly without the Trustee, to the Holders for their collection costs; Third: to the Holders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and Fourth: to Holdings. 45 59 The Trustee, upon prior notice to Holdings, may fix a record date and payment date for any payment to the Holders pursuant to this Section 6.10. Section 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by a Holder or Holders of more than 10% in aggregate principal amount of the outstanding Securities. ARTICLE VII TRUSTEE The Trustee hereby accepts the trust imposed upon it by this Indenture and covenants and agrees to perform the same, as herein expressed. Section 7.1. Duties of Trustee. (a) If a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise thereof as a prudent person could exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of a Default or an Event of Default: (1) The Trustee need perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture that are adverse to the Trustee. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section 7.1. 46 60 (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.1. (f) The Trustee shall not be liable for interest on any assets received by it except as the Trustee may agree with Holdings. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. Section 7.2. Rights of Trustee. Subject to Section 7.1: (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may consult with counsel and may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Sections 13.4 and 13.5. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action that it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. 47 61 (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. Section 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with Holdings, its Subsidiaries, or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. Section 7.4. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for Holdings' use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities other than the Trustee's certificate of authentication. Section 7.5. Notice of Default. If a Default or an Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder notice of the uncured Default or Event of Default within 90 days after such Default or Event of Default occurs. Except in the case of a Default or an Event of Default in payment of principal of, premium, if any, or interest on, any Security, including the failure to make payment on the Change of Control Payment Date pursuant to a Change of Control Offer, the Trustee may withhold the notice if and so long as its board of directors, the executive committee of its board of directors or a committee of its directors and/or Trust Officers in good faith determines that withholding the notice is in the interest of the Holders. Section 7.6. Reports By Trustee to Holders. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, the Trustee shall, to the extent that any of the events described in TIA Section 313(a) occurred within the previous twelve months, but not otherwise, mail to each Holder a brief report dated as of such May 15 that complies with TIA Section 313(a). The Trustee also shall comply with TIA Sections 313(b) and 313(c). A copy of each report at the time of its mailing to Holders shall be mailed to Holdings and filed with the SEC and each stock exchange, if any, on which the Securities are listed. Holdings shall notify the Trustee if the Securities become listed on any stock exchange. 48 62 Section 7.7. Compensation and Indemnity. Holdings shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. Holdings shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it including, without limitation, any taxes imposed on the trust or on the income from the Securities. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. Holdings shall indemnify the Trustee for, and hold it harmless against, any loss or liability incurred by it except for such actions to the extent caused by any negligence or bad faith on its part, arising out of or in connection with the administration of this trust and its rights or duties hereunder. The Trustee shall notify Holdings promptly of any claim asserted against the Trustee for which it may seek indemnity. Holdings shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and Holdings shall pay the reasonable fees and expenses of such counsel; provided that Holdings will not be required to pay such fees and expenses if it assumes the Trustee's defense and there is no conflict of interest between Holdings and the Trustee in connection with such defense as reasonably determined by the Trustee. Holdings need not pay for any settlement made without its written consent. Holdings need not reimburse any expense or indemnify against any loss or liability to the extent incurred by the Trustee through its negligence, bad faith or willful misconduct. To secure Holdings' payment obligations in this Section 7.7, the Trustee shall have a lien prior to the Securities on all assets held or collected by the Trustee, in its capacity as Trustee, except assets held in trust to pay principal of, premium, if any, or interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(5) or (6) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 7.8. Replacement of Trustee. The Trustee may resign by so notifying Holdings. The Holders of a majority in aggregate principal amount of the outstanding Securities may remove the Trustee by so notifying Holdings and the Trustee may appoint a successor Trustee with Holdings' consent. Holdings may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or 49 63 (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, Holdings shall notify each Holder of such event and shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in aggregate principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by Holdings. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to Holdings. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided in Section 7.7, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, Holdings or the Holders of at least 10% in aggregate principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, Holdings' obligations under Section 7.7 shall continue for the benefit of the retiring Trustee. Section 7.9. Successor Trustee by Merger, Etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee. Section 7.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA Sections 310(a)(1) and 310(a)(5). The Trustee shall have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of Holdings are outstanding, if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. 50 64 Section 7.11. Preferential Collection of Claims Against Holdings. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. ARTICLE VIII LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.1. Option to Effect Legal Defeasance or Covenant Defeasance. Holdings may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding Securities upon compliance with the conditions set forth below in this Article Eight. Section 8.2. Legal Defeasance. Upon Holdings' exercise under Section 8.1 hereof of the option applicable to this Section 8.2, Holdings shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Securities on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that Holdings shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.5 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Securities and this Indenture (and the Trustee, on demand of and at the expense of Holdings, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Securities to receive solely from the trust fund described in Section 8.4 hereof, and as more fully set forth in such Section, payments in respect of the principal, of, premium, if any, and interest on such Securities when such payments are due, (b) Holdings' obligations with respect to such Securities under Article Two and Section 4.2 hereof and the rights, powers, trusts, duties and immunities of the Trustee and Holdings' obligations in connection therewith, and (c) this Article Eight. Subject to compliance with this Article Eight, Holdings may exercise its option under this Section 8.2 notwithstanding the prior exercise of its option under Section 8.3 hereof. Section 8.3. Covenant Defeasance. Upon Holdings' exercise under Section 8.1 hereof of the option applicable to this Section 8.3, Holdings shall, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, be released from its obligations under the covenants contained in Sections 4.3 and 4.6 through 4.18 and Article V hereof with respect to the outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the 51 65 Securities shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Securities shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Securities, Holdings may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1 hereof, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. In addition, upon Holdings' exercise under Section 8.1 hereof of the option applicable to this Section 8.3 hereof, subject to the satisfaction of the conditions set forth in Section 8.4 hereof, Sections 6.1(3) (but only to the extent it relates to a breach of any of the covenants contained in Sections 4.3 and 4.6 through 4.18 and Article V hereof), 6.1(4) and 6.1(7) hereof shall not constitute Events of Default. Section 8.4. Conditions to Legal or Covenant Defeasance. The following shall be the conditions to the application of either Section 8.2 or 8.3 hereof to the outstanding Securities: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) Holdings must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Securities, cash in United States dollars, or direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which obligation or guarantee the full faith and credit of the United States of America is pledged ("U.S. Government Obligations"), or a combination thereof, in such amounts and at such times as will be sufficient, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges or assessments in respect thereof payable by the Trustee, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding Securities to redemption or maturity provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities on the Maturity Date or such redemption date, as the case may be; (b) in the case of an election under Section 8.2 hereof, Holdings shall have delivered to the Trustee an Opinion of Counsel stating that (A) Holdings has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the 52 66 outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and Legal Defeasance had not occurred; (c) in the case of an election under Section 8.3 hereof, Holdings shall have delivered to the Trustee an Opinion of Counsel stating that the Holders of the outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if deposit and such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Section 6.1(5) or 6.1(6) hereof is concerned, at any time in the period ending on the 91st day after the date of deposit (it being understood that this condition shall not be deemed satisfied until after such 91st day); (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which Holdings is a party or by which Holdings is bound (and in that connection, the Trustee shall have received a certificate from the administrative agent under the Credit Agreement to that effect with respect to such Credit Agreement if then in effect); (f) Holdings shall have delivered to the Trustee an Opinion of Counsel to the effect that, assuming that no Default or Event of Default shall occur and be continuing under Section 6.1(5) or 6.1(6) during the period ending on the 91st day after the date of deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (g) Holdings shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by Holdings with the intent of preferring the Holders over the other creditors of Holdings or with the intent of defeating, hindering, delaying or defrauding creditors of Holdings, or others; and (h) Holdings shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. 53 67 Section 8.5. Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions. Subject to Section 8.6 hereof, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 8.4 hereof in respect of the outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (excluding Holdings or any Affiliate thereof) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. Holdings shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or U.S. Government Obligations deposited pursuant to Section 8.4 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Securities. Anything in this Article Eight to the contrary notwithstanding, the Trustee shall deliver or pay to Holdings from time to time upon the request of Holdings any money or non-callable U.S. Government Obligations held by it as provided in Section 8.4 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.4(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Covenant Defeasance. Section 8.6. Repayment to Holdings. Any money deposited with the Trustee or any Paying Agent in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to Holdings on its request or shall be discharged from such trust; and the Holder of such Security shall thereafter, as a creditor, look only to Holdings for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense of Holdings cause to be published once, in The New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to Holdings. Section 8.7. Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or U.S. Government Obligations in accordance with Section 8.2 or 8.3 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining 54 68 or otherwise prohibiting such application, then Holdings' obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.2 or 8.3 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.2 or 8.3 hereof, as the case may be; provided, however, that, if Holdings makes any payment of principal of, premium, if any, or interest on any Security following the reinstatement of its obligations, Holdings shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 9.1. Without Consent of Holders. Holdings, when authorized by a Board Resolution, and the Trustee, together, may amend or supplement this Indenture or the Securities without notice to or consent of any Holder: (1) to cure any ambiguity, defect or inconsistency; provided that such amendment or supplement does not adversely affect the rights of any Holder; (2) to comply with Article Five; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Internal Revenue Code of 1986, as from time to time amended, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Internal Revenue Code of 1986, as from time to time amended; (4) to make any other change that does not adversely affect the rights of any Holders; or (5) to comply with any requirements of the SEC in connection with the qualification of this Indenture under the TIA; provided that Holdings has delivered to the Trustee an Opinion of Counsel stating that such amendment or supplement complies with the provisions of this Section 9.1. Section 9.2. With Consent of Holders. Subject to Section 6.7, Holdings, when authorized by a Board Resolution, and the Trustee, together, with the written consent of the Holder or Holders of at least fifty four percent (54%) in aggregate principal amount of the outstanding Securities (or at least a majority in aggregate principal amount of the outstanding Securities in the event that EJDC shall cease to 55 69 beneficially own at least a majority in aggregate principal amount of the outstanding Securities), may amend or supplement this Indenture or the Securities, without notice to any other Holders. Subject to Section 6.7, the Holder or Holders of at least fifty four percent (54%) in aggregate principal amount of the outstanding Securities (or at least a majority in aggregate principal amount of the outstanding Securities in the event that EJDC shall cease to beneficially own at least a majority in aggregate principal amount of the outstanding Securities) may waive compliance by Holdings with any provision of this Indenture or the Securities without notice to any other Holder. Without the consent of each Holder affected, however, no amendment, supplement or waiver, including a waiver pursuant to Section 6.4, may: (1) change the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver of any provision of this Indenture or the Securities; (2) reduce the rate or extend the time for payment of interest on any Security; (3) reduce the principal amount of any Security; (4) change the Maturity Date of any Security, or alter the redemption provisions contained in paragraph 5 of the Securities in a manner adverse to any Holder; (5) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders or the rights of Holders to recover the principal of, interest on, or redemption payment with respect to, any Security; (6) make any changes in Section 6.4, 6.7 or this third sentence of this Section 9.2; or (7) make the principal of, or the interest on any Security payable with anything or in any manner other than as provided for in this Indenture and the Securities as in effect on the date hereof. Without the consent of the Holder or Holders of at least 75% of the aggregate principal amount of the outstanding Securities, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of Securities pursuant to Section 4.14 hereof in a manner adverse to any Holder or waive a Default or Event of Default resulting from a failure to comply with Section 4.14 hereof. Without the consent of the Holder or Holders of at least 66-2/3% of the aggregate principal amount of the outstanding Securities, no change may be made to the provisions of Article Eleven that adversely affects the rights of any Holder under Article Eleven. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. 56 70 After an amendment, supplement or waiver under this Section becomes effective, Holdings shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of Holdings to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. In connection with any amendment, supplement or waiver under this Article Nine, Holdings may, but shall not be obligated to, offer to any Holder who consents to such amendment, supplement or waiver, or to all Holders, consideration for such Holder's consent to such amendment, supplement or waiver. Holdings agrees that no amendment, supplement or waiver under this Article Nine may make any change that adversely affects the rights under Article Eleven of any holders of Senior Indebtedness unless the holders of such Senior Indebtedness consent to the change. Section 9.3. Compliance with TIA. Every amendment, waiver or supplement of this Indenture or the Securities shall comply with the TIA as then in effect. Section 9.4. Revocation and Effect of Consents. Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of his Security by notice to the Trustee or Holdings received before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Securities have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. Holdings may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver, which record date shall be at least 30 days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (1) through (7) of Section 9.2, in which case, the amendment, supplement or waiver shall bind only each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in such Security, or to bring suit for 57 71 the enforcement of any such payment on or after such respective dates without the consent of such Holder. Section 9.5. Notation on or Exchange of Securities. If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if Holdings or the Trustee so determines, Holdings in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Section 9.6. Trustee To Sign Amendments, Etc. The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; provided that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture. ARTICLE X MEETINGS OF SECURITYHOLDERS Section 10.1. Purposes for Which Meetings May Be Called. A meeting of Holders may be called at any time and from time to time pursuant to the provisions of this Article Ten for any of the following purposes: (a) to give any notice to Holdings or to the Trustee, or to give any directions to the Trustee, or to waive or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article Six; (b) to remove the Trustee or appoint a successor Trustee pursuant to the provisions of Article Seven; (c) to consent to an amendment, supplement or waiver pursuant to the provisions of Section 9.2; or (d) to take any other action (i) authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture, or authorized or permitted by law or (ii) which the Trustee deems necessary or appropriate in connection with the administration of this Indenture. 58 72 Section 10.2. Manner of Calling Meetings. The Trustee may at any time call a meeting of Holders to take any action specified in Section 10.1, to be held at such time and at such place in New York, New York or elsewhere as the Trustee shall determine. Notice of every meeting of Holders, setting forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed by the Trustee, first-class postage prepaid, to Holdings and to the Holders at their last addresses as they shall appear on the registration books of the Registrar not less than 10 nor more than 60 days prior to the date fixed for a meeting. Any meeting of Holders shall be valid without notice if the Holders of all Securities then outstanding are present in person or by proxy, or if notice is waived before or after the meeting by the Holders of all Securities outstanding, and if Holdings, any Subsidiary and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. Section 10.3. Call of Meetings by Holdings or Holders. In case at any time Holdings, pursuant to a Board Resolution, or the Holders of not less than 10% in aggregate principal amount of the Securities then outstanding shall have requested the Trustee to call a meeting of Holders to take any action specified in Section 10.1, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then Holdings or the Holders in the amount above specified may determine the time and place in New York, New York or elsewhere for such meeting and may call such meeting for the purpose of taking such action, by mailing or causing to be mailed notice thereof as provided in Section 10.2, or by causing notice thereof to be published at least once in each of two successive calendar weeks (on any Business Day during such week) in a newspaper or newspapers printed in the English language, customarily published at least five days a week of a general circulation in New York, New York, the first such publication to be not less than 10 nor more than 60 days prior to the date fixed for the meeting. Section 10.4. Who May Attend and Vote at Meetings. To be entitled to vote at any meeting of Holders, a person shall (a) be a registered Holder of one or more Securities, or (b) be a person appointed by an instrument in writing as proxy for the registered Holder or Holders of Securities. The only persons who shall be entitled to be present or to speak at any meeting of Holders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of Holdings and its counsel. Section 10.5. Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment. Notwithstanding any other provision of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any action by or any meeting of Holders, 59 73 in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, and submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think appropriate. Such regulations may fix a record date and time for determining the Holders of record of Securities entitled to vote at such meeting, in which case those and only those persons who are Holders of Securities at the record date and time so fixed, or their proxies, shall be entitled to vote at such meeting whether or not they shall be such Holders at the time of the meeting. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by Holdings or by Holders as provided in Section 10.3, in which case Holdings or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in aggregate principal amount of the Securities represented at the meeting and entitled to vote. At any meeting each Holder or proxy shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Securities challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman may adjourn any such meeting if he is unable to determine whether any Holder or proxy shall be entitled to vote at such meeting. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Holders. Any meeting of Holders duly called pursuant to the provisions of Section 10.2 or Section 10.3 may be adjourned from time to time by vote of the Holders of a majority in aggregate principal amount of the Securities represented at the meeting and entitled to vote, and the meeting may be held as so adjourned without further notice. Section 10.6. Voting at the Meeting and Record To Be Kept. The vote upon any resolution submitted to any meeting of Holders shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities or of their representatives by proxy and the principal amount of the Securities voted by the ballot. The permanent chairman of the meeting shall appoint two inspectors of votes, who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to such record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts, setting forth a copy of the notice of the meeting and showing that such notice was mailed as provided in Section 10.2 or published as provided in Section 10.3. The record shall be signed and verified by the affidavits of the permanent chairman and the secretary of the meeting and one of the duplicates shall be delivered to Holdings and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. 60 74 Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 10.7. Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting. Nothing contained in this Article Ten shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Holders under any of the provisions of this Indenture or of the Securities. ARTICLE XI SUBORDINATION Section 11.1. Securities Subordinated to Senior Indebtedness. Anything herein to the contrary notwithstanding, Holdings, for itself and its successors, and each Holder, by accepting a Security, agrees, that the payment of the principal of and interest on and premiums, penalties, fees and other liabilities (including, without limitation, liabilities in respect of any indemnity, reimbursement, compensation or contribution obligations, the occurrence of a Change of Control, any liquidated damage provision, any breach of representation or warranty, or any rights of redemption or rescission under this Indenture, the Merger Agreement and the Registration Rights Agreement or by law or otherwise) ("Other Obligations") with respect to the Securities is subordinated, to the extent and in the manner provided in this Article Eleven, to the prior payment in full in cash of all Senior Indebtedness. This Article Eleven shall constitute a continuing offer to all persons who become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness and such holders are made obligees hereunder and any one or more of them may enforce such provisions. Holders of Senior Indebtedness need not prove reliance on the subordination provisions hereof. Section 11.2. No Payment on Securities in Certain Circumstances. (a) No direct or indirect payment or distribution shall be made by or on behalf of Holdings (other than a payment in Secondary Securities) on account of principal of or interest on or Other Obligations with respect to the Securities or to acquire, repurchase, redeem, retire or defease any of the Securities or on account of the redemption provisions of the Securities (i) upon the maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise, unless and until all principal thereof and interest thereon shall first be paid in full in cash or (ii) upon the happening of any default in payment of any principal of or interest on any Senior Indebtedness when the same becomes due and payable (a "Payment Default"), unless and until such default shall have been cured or waived or shall have ceased to exist. 61 75 (b) Without limiting the effect of Section 11.2(a), upon the happening of a default or event of default (other than a Payment Default) (including any event which, with the giving of notice or lapse of time, or both, would become an event of default and including any default or event of default that would result upon any payment with respect to the Securities) with respect to any Senior Indebtedness, as such default or event of default is defined therein or in the instrument or agreement under which it is outstanding, and upon written notice thereof given to Holdings and the Trustee by any holders of such Senior Indebtedness or their Representative specifying an intent to effect a Payment Blockage Period hereunder ("Payment Notice"), then, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment or distribution (other than of Secondary Securities) shall be made by or on behalf of Holdings on account of principal of or interest on or Other Obligations with respect to the Securities or to acquire, repurchase, redeem, retire or defease any of the Securities or on account of the redemption provisions of the Securities; provided, however, that this paragraph (b) shall not prevent the making of any payment for a period of (a "Payment Blockage Period") of more than 179 days after a Payment Notice shall have been given (or earlier if such Payment Blockage Period is terminated (i) by written notice to the Trustee and Holdings from the Credit Agent or the Representative which gave such Payment Notice, (ii) repayment in full of such Senior Indebtedness or (iii) because the default specified in the Payment Notice is no longer continuing). Subject to the provisions contained in Section 11.2(a) above, Holdings may resume payments on the Securities after such Payment Blockage Period expires. Notwithstanding the foregoing, (i) not more than one Payment Notice shall be given within a period of 360 consecutive days, and (ii) a Payment Notice may only be given (A) if Senior Indebtedness is outstanding under the Credit Agreement at the time of such notice, by the Credit Agent and (B) if no Senior Indebtedness is outstanding under the Credit Agreement at the time of such notice, by a holder or holders (or the Representative of holders) of at least $35,000,000 principal amount of such Senior Indebtedness. For purposes of this Section, no default or event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis of the commencement of a subsequent Payment Blockage Period by the Representative of such Senior Indebtedness whether or not within a period of 360 consecutive days unless such default or event of default shall have been cured or waived for a period of not less than 90 consecutive days. (c) In furtherance of the provisions of Section 11.1, if, notwithstanding the foregoing provisions of this Section 11.2, any direct or indirect payment or distribution other than Secondary Securities on account of principal of or interest on or Other Obligations with respect to the Securities or to acquire, repurchase, redeem, retire or defease any of the Securities or on account of the redemption provisions of the Securities shall be made by or on behalf of Holdings and received by the Trustee, by any Holder or by any Paying Agent (or, if Holdings or any Subsidiary or Affiliate of Holdings is acting as Paying Agent, money for any such payment or distribution shall be segregated and held in trust), at a time when such payment or distribution was prohibited by the provisions of this Section 11.2, then, unless and until such payment or distribution is no longer prohibited by this Section 11.2, such payment or distribution (subject to the provisions of Sections 11.6 and 11.7) shall be received, segregated from other funds, and held in trust by the Trustee or such Holder or Paying Agent, as the case may be, for the benefit of, and shall be immediately paid over to, the holders of Senior Indebtedness or their 62 76 Representative, ratably according to the respective amounts of Senior Indebtedness held or represented by each, to the extent necessary to make payment in full in cash of all Senior Indebtedness remaining unpaid, after giving effect to all concurrent payments and distributions to or for the holders of Senior Indebtedness. Holdings shall give prompt notice to the Trustee of any default or event of default or any acceleration under any Senior Indebtedness or under any agreement pursuant to which Senior Indebtedness may have been issued. Failure to give such notice shall not affect the subordination of the Securities to Senior Indebtedness provided in this Article Eleven. Notwithstanding anything to the contrary contained herein, in the absence of its gross negligence or willful misconduct, the Trustee shall have no duty to collect or retrieve monies previously paid by it in good faith; provided that this sentence shall not affect the obligation of any other party receiving such payment to hold such payment for the benefit of, and to pay such payment over to, the holders of Senior Indebtedness or their Representative. Section 11.3. Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization of Holdings. Upon any payment or distribution of assets or securities of Holdings of any kind or character, whether in cash, property or securities, upon any dissolution, winding-up, total or partial liquidation or total or partial reorganization of Holdings (including, without limitation, in bankruptcy, insolvency or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of assets and liabilities of Holdings and whether voluntary or involuntary): (a) the holders of all Senior Indebtedness shall first be entitled to receive payments in full in cash of the principal thereof and interest thereon before the Holders are entitled to receive any payment on account of the principal of or interest on or Other Obligations with respect to the Securities (whether by payment, acquisition, retirement, defeasance, redemption or otherwise) or any other payment or distribution of assets or securities by or on behalf of Holdings; (b) any payment or distribution of assets or securities of Holdings of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee on behalf of the Holders would be entitled except for the provisions of this Article Eleven, including any such payment or distribution that is payable or deliverable by reason of the payment of any other Indebtedness of Holdings being subordinated to the payment of the Securities (except for any such payment or distribution (x) authorized by an order or decree giving effect, and stating in such order or decree that effect is given, to the subordination of the Securities to the Senior Indebtedness, and made by a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law, (y) of securities that (i) are unsecured, (ii) have a Weighted Average Life to Maturity and final maturity that are no shorter than the Weighted Average Life to Maturity of the Securities or any securities issued to the holders of Senior Indebtedness under the Credit Agreement pursuant to a plan of reorganization or readjustment and (iii) are subordinated, to at least the same extent as the Securities, to the payment of all Senior Indebtedness then outstanding or (z) of Capital Stock), shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, 63 77 directly to the holders of Senior Indebtedness or their Representative, ratably according to the respective amounts of Senior Indebtedness held or represented by each, until all Senior Indebtedness remaining unpaid shall have been paid in full in cash, after giving effect to all concurrent payments and distributions to or for the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets or securities of Holdings of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders or any Paying Agent (or, if Holdings or any Subsidiary or Affiliate of Holdings is acting as Paying Agent, money, assets or securities of any kind or character for any such payment or distribution shall be segregated or held in trust) on account of principal of or interest on or Other Obligations with respect to the Securities before all Senior Indebtedness is paid in full in cash, such payment or distribution (subject to the provisions of Sections 11.6 and 11.7) shall be received, segregated from other funds, and held in trust by the Trustee or such Holder or Paying Agent for the benefit of, and shall immediately be paid over to, the holders of Senior Indebtedness or their Representative, ratably according to the respective amounts of Senior Indebtedness held or represented by each, until all Senior Indebtedness remaining unpaid shall have been paid in full in cash, after giving effect to all concurrent payments and distributions to or for the holders of Senior Indebtedness. Notwithstanding anything to the contrary contained herein, in the absence of its gross negligence or wilful misconduct, the Trustee shall have no duty to collect or retrieve monies previously paid by it in good faith; provided that this sentence shall not affect the obligation of any other party receiving such payment to hold such payment for the benefit of, and to pay over such payment over to, the holders of Senior Indebtedness or their Representative. Holdings shall give prompt notice to the Trustee prior to any dissolution, winding-up, total or partial liquidation or total or partial reorganization of Holdings or assignment for the benefit of creditors by Holdings. Section 11.4. Holders to Be Subrogated to Rights of Holders of Senior Indebtedness. Subject to the payment in full in cash of all Senior Indebtedness, the Holders of Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of Holdings applicable to the Senior Indebtedness until all amounts owing on the Securities shall be paid in full in cash, and for the purpose of such subrogation no payments or distributions to the holders of Senior Indebtedness by or on behalf of Holdings, or by or on behalf of the Holders by virtue of this Article Eleven, which otherwise would have been made to the Holders, shall, as between Holdings and the Holders, be deemed to be payment by Holdings to or on account of the Senior Indebtedness, it being understood that the provisions of this Article Eleven are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Senior Indebtedness, on the other hand. 64 78 If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article Eleven shall have been applied, pursuant to the provisions of this Article Eleven, to the payment of all amounts payable under the Senior Indebtedness, then the Holders shall be entitled to receive from the holders of such Senior Indebtedness any payments or distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable under or in respect of the Senior Indebtedness in full in cash. Section 11.5. Obligations of Holdings Unconditional. Nothing contained in this Article Eleven or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between Holdings and the Holders, the obligation of Holdings, which is absolute and unconditional, to pay to the Holders the principal of and interest on and Other Obligations in respect of the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of Holdings other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Eleven, of the holders of Senior Indebtedness in respect of cash, property or securities of Holdings received upon the exercise of any such remedy. Upon any payment or distribution of assets or securities of Holdings referred to in this Article Eleven, the Trustee, subject to the provisions of Sections 7.1 and 7.2, and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee or agent or other person making any payment or distribution to the Trustee or to the Holders for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other Indebtedness of Holdings, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Eleven. Nothing in this Section 11.5 shall apply to the claims of, or payments to, the Trustee under or pursuant to Section 7.7. Section 11.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. The Trustee shall not at any time be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee unless and until the Trustee or any Paying Agent shall have received written notice thereof from Holdings or from one or more holders of Senior Indebtedness or from any Representative therefor and, prior to the receipt of any such notice, the Trustee, subject to the provisions of Sections 7.1 and 7.2, shall be entitled in all respects conclusively to assume that no such fact exists. Section 11.7. Application by Trustee of Assets Deposited with It. U.S. Legal Tender or U.S. Government Obligations deposited in trust with the Trustee pursuant to and in accordance with Section 8.4 shall be for the sole benefit of Holders and, to the extent allocated for the payment of Securities, shall not be subject to the 65 79 subordination provisions of this Article Eleven. Otherwise, any deposit of assets or securities by or on behalf of Holdings with the Trustee or any Paying Agent (whether or not in trust) for the payment of principal of or interest on or Other Obligations with respect to any Securities shall be subject to the provisions of this Article Eleven; provided that if prior to the second Business Day preceding the date on which by the terms of this Indenture any such assets may become distributable for any purpose (including, without limitation, the payment of either principal of or interest on any Security) the Trustee or such Paying Agent shall not have received with respect to such assets the notice provided for in Section 11.6, then the Trustee or such Paying Agent shall have full power and authority to receive such assets and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary received by it on or after such date. The foregoing shall not apply to the Paying Agent if Holdings or any Subsidiary or Affiliate of Holdings is acting as Paying Agent. Nothing contained in this Section 11.7 (except the first sentence of this Section 11.7) shall limit the right of the holders of Senior Indebtedness to recover payments as contemplated by this Article Eleven. Section 11.8. Subordination Rights Not Impaired by Acts or Omissions of Holdings or Holders of Senior Indebtedness. No right of any present or future holders of any Senior Indebtedness to enforce the subordination provisions contained in this Article Eleven shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of Holdings or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by Holdings with the terms of this Indenture, regardless of any knowledge thereof that any such holder may have or be otherwise charged with. The holders of Senior Indebtedness may extend, renew, restate, supplement, modify or amend the terms of the Senior Indebtedness or any security therefor and release, sell or exchange such security and otherwise deal freely with Holdings and its Subsidiaries all without affecting the liabilities and obligations of the parties to this Indenture or the Holders. No provision in any supplemental indenture that affects the subordination of the Securities or other provisions of this Article Eleven shall be effective against the holders of the Senior Indebtedness who have not consented thereto. Each Holder by accepting a Security agrees that the Representative of any Senior Indebtedness (including without limitation, the Credit Agent), in its discretion, without notice or demand and without affecting any rights of any holder of Senior Indebtedness under this Article Eleven, may foreclose any mortgage or deed of trust covering interests in real property secured thereby, by judicial or nonjudicial sale; and such Holder hereby waives any defense to the enforcement by the Representative (including without limitation, the Credit Agent) of any Senior Indebtedness or by any holder of any Senior Indebtedness against such Holder of this Article Eleven after a judicial or nonjudicial sale or other disposition of its interests in real property secured by such mortgage or deed of trust; and such Holder expressly waives any defense or benefits that may be derived from California Civil Code Section Section 2808, 2809, 2810, 2819, 2845, 2849 or 2850, or California Code of Civil Procedure Section Section 580a, 580d or 726, or comparable provisions of the laws of any other jurisdiction or any similar statute in effect in any other jurisdiction. 66 80 Section 11.9. Holders Authorize Trustee to Effectuate Subordination of Securities. Each Holder by accepting a Security authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effect the subordination provisions contained in this Article Eleven, and appoints the Trustee his attorney-in-fact for such purpose, including, in the event of any dissolution, winding up, liquidation or reorganization of Holdings (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of assets and liabilities of Holdings) tending towards liquidation or reorganization of the business and assets of Holdings, the immediate filing of a claim for the unpaid balance of its or his Securities and Other Obligations in the form required in said proceedings and cause said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Senior Indebtedness or their Representative is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Securities. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Senior Indebtedness or their Representative to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee or the holders of Senior Indebtedness or their Representative to vote in respect of the claim of any Holder in any such proceeding. Section 11.10. Right of Trustee to Hold Senior Indebtedness. The Trustee shall be entitled to all of the rights set forth in this Article Eleven in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. Section 11.11. Article Eleven Not to Prevent Events of Default. The failure to make a payment on account of principal of or interest on the Securities by reason of any provision of this Article Eleven shall not be construed as preventing the occurrence of a Default or an Event of Default under Section 6.1. Section 11.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be liable to any such holders (other than for its willful misconduct or gross negligence) if it shall in good faith mistakenly pay over or deliver to the Holders of Securities or Holdings or any other person, money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article Eleven or otherwise. Nothing in this Section 11.12 shall affect the obligation of any person other than the Trustee to hold such payment for the benefit of, and to pay such payment over to, the holders of Senior Indebtedness or their Representative. 67 81 ARTICLE XII SATISFACTION AND DISCHARGE Section 12.1. Satisfaction and Discharge of the Indenture. This Indenture will be discharged and will cease to be of further effect as to all outstanding Securities when: (a) all Securities theretofore authenticated and delivered (except lost, stolen or destroyed Securities which have been replaced or paid and Securities for whose payment money has theretofore been deposited in trust and thereafter repaid to Holdings) have been delivered to the Trustee for cancellation; or (b) (1) all Securities not theretofore delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise and Holdings has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on the Securities not theretofore delivered to the Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption; (2) Holdings has paid all sums payable by it under this Indenture; and (3) Holdings has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Securities at maturity or the redemption date, as the case may be. Section 12.2. Conditions to Satisfaction and Discharge of the Indenture. Holdings shall deliver an Officers' Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been complied with. ARTICLE XIII MISCELLANEOUS Section 13.1. TIA Controls. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of Section 3.18(c) of the TIA, the imposed duties shall control. 68 82 Section 13.2. Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: if to Holdings: c/o The Yucaipa Companies 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 Attention: Mark A. Resnik if to the Trustee: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------ Attention: Corporate Trust Administration Each of Holdings and the Trustee by written notice to each other such person may designate additional or different addresses for notices to such person. Any notice or communication to Holdings and the Trustee shall be deemed to have been given or made as of the date so delivered if personally delivered; when answered back, if telexed; when receipt is acknowledged, if telecopied; and five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Section 13.3. Communications by Holders with Other Holders. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities. Holdings, the Trustee, the Registrar and any other person shall have the protection of TIA Section 312(c). 69 83 Section 13.4. Certificate and Opinion as to Conditions Precedent. Upon any request or application by Holdings to the Trustee to take any action under this Indenture, Holdings shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 13.5. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officers' Certificate required by Section 4.7, shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. Section 13.6. Rules by Trustee, Paying Agent, Registrar. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. Section 13.7. Legal Holidays. A "Legal Holiday" used with respect to a particular place of payment is a Saturday, a Sunday or a day on which banking institutions in New York, New York, Los Angeles, California or at such place of payment are not required to be open. If a payment date is a Legal Holiday at such place, payment may be made at such place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 70 84 Section 13.8. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Each of the parties hereto agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture. Section 13.9. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of any of Holdings or any Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.10. No Recourse Against Others. A director, officer, employee, stockholder or incorporator, as such, of Holdings shall not have any liability for any obligations of Holdings under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creations. Each Holder by accepting a Security waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Securities. Section 13.11. Successors. All agreements of Holdings in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor. Section 13.12. Duplicate Originals. All parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together shall represent the same agreement. Section 13.13. Severability. In case any one or more of the provisions in this Indenture or in the Securities shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. 71 85 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first written above. Dated: ________ __, 1995 [SEAL] FOOD 4 LESS HOLDINGS, INC. Attest: By: ______________________________ Name: Mark A. Resnik Title: Vice President ____________________________ Dated: ________ __, 1995 [SEAL] _______________________________ _______________________________ as Trustee Attest: By: ______________________________ Name: Title: ____________________________ S-1 86 EXHIBIT A PURSUANT TO PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986 RELATING TO ORIGINAL ISSUE DISCOUNT AND TREASURY REGULATIONS PROMULGATED THEREUNDER WITH RESPECT TO DEBT INSTRUMENTS ISSUED ON OR AFTER APRIL 4, 1994, THE FOLLOWING INFORMATION IS PROVIDED: (1) THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT IN THE AMOUNT OF $____ PER FACE AMOUNT; (2) THE ISSUE PRICE OF THIS SECURITY IS $___ PER FACE AMOUNT; (3) THE ISSUE DATE OF THIS SECURITY IS ______ __, ____; AND (4) THE YIELD TO MATURITY OF THIS SECURITY IS __%. FOOD 4 LESS HOLDINGS, INC. 13-5/8% Senior Subordinated Pay-in-Kind Debentures due ________ __, 2007 No. $ Food 4 Less Holdings, Inc., a Delaware corporation ("Holdings," which term includes any successor entity), for value received promises to pay to or registered assigns, the principal sum of dollars, on ________ __, 2007. Interest payment dates: ________________ and _______________ commencing ________ __, ____. Record dates: _________ and _________. Reference is made to the further provisions of this security contained herein, which will for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, Holdings has caused this Security to be signed manually or by facsimile by its duly authorized officers. Dated: ________ __, 1995 FOOD 4 LESS HOLDINGS, INC. By: _______________________________________ Name: Title: This is one of the Securities described in the within-mentioned Indenture. Dated: ________ __, 1995 __________________________________ as Trustee By: _______________________________________ Title: A-1 87 FOOD 4 LESS HOLDINGS, INC. 13-5/8% Senior Subordinated Pay-in-Kind Debenture due ________ __, 2007 1. Interest. FOOD 4 LESS HOLDINGS, INC., a Delaware corporation ("Holdings"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. Holdings may, in its sole discretion, issue additional Securities ("Secondary Securities") in lieu of a cash payment of any or all of the interest due on any Interest Payment Date occurring on or prior to [the Interest Payment Date five years after the Issue Date]. If Holdings issues Secondary Securities in lieu of cash payment, in whole or in part, of interest due on any Interest Payment Date occurring on or prior to [the Interest Payment Date five years after the Issue Date], pursuant to this paragraph, it shall give notice to the Trustee not less than 5 Business Days prior to the relevant Interest Payment Date, and shall instruct the Trustee (upon written order of Holdings signed by an Officer of Holdings given not less than 5 nor more than 45 days prior to such Interest Payment Date) to authenticate a Secondary Security, dated such Interest Payment Date, in a principal amount equal to the amount of interest not paid in cash in respect of this Security on such Interest Payment Date. Each issuance of Secondary Securities in lieu of cash payments of interest on the Securities shall be made pro rata with respect to the outstanding Securities. Any such Secondary Securities shall be governed by the Indenture and shall be subject to the same terms (including the maturity date and the rate of interest from time to time payable thereon) as this Security (except, as the case may be, with respect to the title, issuance date and aggregate principal amount). The term Securities shall include the Secondary Securities that may be issued under the Indenture. Holdings will pay interest semi-annually in arrears on ___________ and _________ of each year (the "Interest Payment Date"), commencing ___________, ____. Interest on this Security will accrue from the date of issuance or from the most recent date to which interest has been paid. Interest will be computed on the basis of a 360-day year of twelve 30-day months and actual number of days elapsed. Holdings shall pay interest on overdue principal and interest on overdue installments of interest, to the extent lawful, at the rate per annum borne by the Securities. 2. Method of Payment. Holdings shall pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date even if the Securities are cancelled on registration of transfer or registration of exchange after such Record Date. Holders must surrender Securities to a Paying Agent to collect principal payments. Holdings shall pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender") (or, pursuant to A-2 88 Paragraph 1 hereof, in Secondary Securities). However, Holdings may pay principal and interest by its check payable in such U.S. Legal Tender or by wire transfer of federal funds (or, pursuant to Paragraph 1 hereof, in Secondary Securities). Holdings may deliver any such interest payment to the Paying Agent or to a Holder at the Holder's registered address. 3. Paying Agent and Registrar. Initially, Norwest Bank Minnesota, N.A. (the "Trustee"), will act as Paying Agent and Registrar. Holdings may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. Holdings or any Subsidiary may, subject to certain exceptions, act as Paying Agent, Registrar or co-Registrar. 4. Indenture. Holdings issued the Securities under an Indenture, dated as of ________ __, 1995 (the "Indenture"), between Holdings and the Trustee. This Security is one of a duly authorized issue of Securities of Holdings designated as its 13-5/8% Senior Subordinated Pay-in-Kind Debentures due 2007. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Section Section 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture until such time as the Indenture is qualified under the TIA, and thereafter as in effect on the date on which the Indenture is qualified under the TIA. Notwithstanding anything to the contrary herein, the Securities are subject to all such terms, and Holders of Securities are referred to the Indenture and said Act for a statement of them. The Securities are general unsecured obligations of Holdings limited in aggregate principal amount to $131,500,000, except for Secondary Securities and except as otherwise provided in the Indenture. 5. Optional Redemption. (a) The Securities may not be redeemed at the option of Holdings prior to ________ __, 2000. Thereafter, upon at least 30 days' but not more than 60 days' notice to the Holders, Holdings may redeem all or any of the Securities at any time at redemption prices equal to the applicable percentage of the principal amount thereof set forth below, plus accrued interest, if any, to the Redemption Date (as defined in the Indenture) if redeemed during the 12-month period beginning ________ __ of the years indicated below: Applicable Year Percentage 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.8125% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.1094% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.4063% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.7031% 2004 and thereafter . . . . . . . . . . . . . . . . . . . . . 100.0000% (b) Notwithstanding the foregoing, prior to ________ __, 1998, Holdings may use the Net Proceeds (as defined in the Indenture) of an Initial Public Offering (as defined in the A-3 89 Indenture) of Holdings or the Company to redeem up to 35% of the Securities at a redemption price equal to 110% of the principal amount thereof plus accrued interest, if any, to the date of redemption. In order to effect the foregoing redemption, Holdings shall send the notice required by Section 3.3 of the Indenture not later than 30 days after the Initial Public Offering Consummation Date (as defined in the Indenture). 6. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at such Holder's registered address. Securities in denominations larger than $1,000 may be redeemed in part. Except as set forth in the Indenture, from and after any Redemption Date, if monies for the redemption of the Securities called for redemption shall have been deposited with the Paying Agent for redemption on such Redemption Date, then, unless Holdings defaults in the payment of such Redemption Price, the Securities called for redemption will cease to bear interest and the only right of the Holders of such Securities will be to receive payment of the Redemption Price. 7. Change of Control Offer. In the event of a Change of Control, upon the satisfaction of the conditions set forth in the Indenture, Holdings shall be required to offer to purchase all of the then outstanding Securities pursuant to a Change of Control Offer at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued interest, if any, to the date of purchase. Holders of Securities which are the subject of such an offer to repurchase shall receive an offer to repurchase and may elect to have such Securities repurchased in accordance with the provisions of the Indenture pursuant to and in accordance with the terms of the Indenture. 8. Limitation on Disposition of Assets. Under certain circumstances Holdings is required to apply the net proceeds from Asset Sales to the repayment of Indebtedness of Holdings or any Subsidiary, to make Related Business Investments and certain other investments or to purchase in a Net Proceeds Offer at a price equal to 100% of the aggregate principal amount thereof, plus accrued interest, if any, to the date of purchase, which shall in the aggregate equal the net proceeds required to be applied thereto. 9. Subordination. The Securities are subordinated in right of payment, in the manner and to the extent set forth in the Indenture, to the prior payment in full of Senior Indebtedness of Holdings whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed. Each Holder, by accepting a Security, agrees to such subordination and authorizes the Trustee to give it effect. A-4 90 10. Denominations; Transfer; Exchange. The Securities are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000 (other than Secondary Securities which may be in denominations of less than $1,000). A Holder shall register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay certain transfer taxes or similar governmental charges payable in connection therewith as permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities or portions thereof selected for redemption. No service charge shall be made for any transfer, registration or exchange, but Holdings may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith, but not for any exchange pursuant to Section 2.10, 3.6 or 9.5 of the Indenture. 11. Persons Deemed Owners. The registered Holder of a Security shall be treated as the owner of it for all purposes. 12. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for one year, the Trustee and the Paying Agents will pay the money back to Holdings at its request. After that, all liability of the Trustee and such Paying Agents with respect to such money shall cease. 13. Discharge Prior to Redemption or Maturity. If Holdings at any time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations sufficient to pay the principal of and interest on the Securities to redemption or maturity and complies with the other provisions of the Indenture relating thereto, Holdings will be discharged from certain provisions of the Indenture and the Securities (including the financial covenants, but excluding its obligation to pay the principal of and interest on the Securities). 14. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the written consent of the Holders of at least fifty four percent (and, in some cases, a majority) in aggregate principal amount of the Securities then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of fifty four percent (and, in some cases, a majority) in aggregate principal amount, as the case may be, of the Securities then outstanding. Without the consent of the Holders of at least 75% in aggregate principal amount of the Securities then outstanding, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of Securities pursuant to Section 4.14 of the Indenture in a manner adverse to any Holder or waive a A-5 91 Default or Event of Default resulting from a failure to comply with Section 4.14 of the Indenture. Without the consent of the Holders of at least 66-2/3% in aggregate principal amount of the Securities then outstanding, no change may be made to the provisions of Article Eleven of the Indenture that adversely affects the rights of any Holder under Article Eleven. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Securities in addition to or in place of certificated Securities, comply with Article Five of the Indenture or comply with any requirements of the SEC in connection with the qualification of the Indenture under the TIA, or make any other change that does not adversely affect the rights of any Holder of a Security. An amendment may not make any change that adversely affects the rights under Article Eleven of the Indenture of any holders of Senior Indebtedness unless the holders of Senior Indebtedness consent to the change. 15. Successors. When a successor assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor will be released from those obligations. 16. Defaults and Remedies. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of Securities then outstanding may declare all the Securities to be due and payable in the manner, at the time and with the effect provided in the Indenture. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee is not obligated to enforce the Indenture or the Securities unless it has received indemnity satisfactory to it. The Indenture permits, subject to certain limitations therein provided, Holders of a majority in aggregate principal amount of the Securities then outstanding to direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of any continuing Default or Event of Default (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. 17. Trustee Dealings with Holdings. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with Holdings, its Subsidiaries or their respective Affiliates as if it were not the Trustee. 18. No Recourse Against Others. No stockholder, director, officer, employee or incorporator, as such, of Holdings shall have any liability for any obligation of Holdings under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. A-6 92 19. Authentication. This Security shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on this Security. 20. Governing Law. The Laws of the State of New York shall govern this Security and the Indenture. 21. Abbreviations and Defined Terms. Customary abbreviations may be used in the name of a Holder of a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 22. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, Holdings will cause CUSIP numbers to be printed on the Securities immediately prior to the qualification of the Indenture under the TIA as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon. 23. Indenture. Each Holder, by accepting a Security, agrees to be bound by all of the terms and provisions of the Indenture, as the same may be amended from time to time. Holdings will furnish to any Holder of a Security upon written request and without charge a copy of the Indenture. Requests may be made to: FOOD 4 LESS HOLDINGS, INC., c/o The Yucaipa Companies, 10000 Santa Monica Boulevard, Fifth Floor, Los Angeles, California 90067, Attn: Mark A. Resnik. 24. Certain Information Obligations. To the extent permitted by applicable law or regulation, whether or not Holdings is subject to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), Holdings shall file with the SEC all quarterly and annual reports and such other information, documents or other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) required to be filed pursuant to such provisions of the Exchange Act. Holdings shall file with the Trustee copies of the quarterly and annual reports and the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to the Indenture. At any time when Holdings is not permitted by applicable law or regulations to file the aforementioned reports, Holdings shall furnish the Trustee and the Holders with the information that Holdings would have had to provide to the SEC if Holdings had been subject to Section 13 or 15(d) of the Exchange Act. A-7 93 25. Holdings Indebtedness. Each Holder acknowledges that Holdings is the sole obligor of the Securities and no Subsidiary of Holdings is a co-obligor or a guarantor of the Securities. A-8 94 [FORM OF ASSIGNMENT] I or we assign this Security to ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type name, address and zip code of assignee) Please insert Social Security or other identifying number of assignee _________________________________________ and irrevocably appoint _______________________ agent to transfer this Security on the books of Holdings. The agent may substitute another to act for him. Dated:____________________________ Signed:________________________________ ________________________________________________________________________________ (Sign exactly as your name appears on the front of this Security) Signature Guarantee:______________________________________________________ A-9 95 [OPTION OF HOLDER TO ELECT PURCHASE] If you want to elect to have this Security purchased by Holdings pursuant to Section 4.14 or Section 4.15 of the Indenture, check the box: Section 4.14 [ ] Section 4.15 [ ] If you want to elect to have only part of this Security purchased by Holdings pursuant to Section 4.14 or Section 4.15 of the Indenture, state the amount: $ Date:_______________ Signature:_____________________________ (Sign exactly as your name appears on the front of this Security) Signature Guarantee:____________________________________________________ A-10 96 EXHIBIT I DESCRIPTION OF THE NEW DISCOUNT DEBENTURES GENERAL The 13 5/8% Senior Discount Debentures due 2005 (the "New Discount Debentures") will be issued under an indenture (the "New Discount Debenture Indenture"), to be dated as of , 1995, between New Holdings and United States Trust Company of New York, as trustee (the "New Discount Debenture Trustee"). The following summary of certain provisions of the New Discount Debentures and the New Discount Debenture Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the New Discount Debentures and the New Discount Debenture Indenture, including the definitions of certain terms therein and those terms made a part of the New Discount Debenture Indenture by reference to the TIA. The definitions of certain capitalized terms used in the following summary are set forth below under "-- Certain Definitions." A copy of the form of the New Discount Debenture Indenture may be obtained from New Holdings. As used below in this "Description of the New Discount Debentures," "New Holdings" means Food 4 Less Holdings, Inc., a Delaware corporation, as survivor of the FFL Merger and the Reincorporation Merger, but not any of its subsidiaries. PRINCIPAL, MATURITY AND INTEREST The New Discount Debentures will be limited in aggregate principal amount at maturity to $193,300,000 and will mature on , 2005. The New Discount Debentures will be issued at a substantial discount from their principal amount. Until , 2000, no interest will accrue on the New Discount Debentures, but the Accreted Value will accrete at a rate of 13 5/8% (representing the amortization of the original issue discount) from the date of original issuance until , 2000, on a semi-annual bond equivalent basis using a 360 day year comprised of twelve 30-day months and actual number of days elapsed, such that the Accreted Value shall be equal to the full principal amount of the New Discount Debenture on , 2000. The initial Accreted Value per $1,000 principal amount of New Discount Debentures will be $ (representing the original purchase price). Beginning on , 2000, cash interest on the New Discount Debentures will accrue at a rate of 13 5/8% per annum and will be payable semiannually in arrears on and of each year, commencing , 2000, to the Holders of record on the immediately preceding and . Interest is computed on the basis of a 360-day year comprised of twelve 30-day months and actual number of days elapsed. The New Discount Debentures will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the New Discount Debenture Trustee will act as Paying Agent and Registrar for the New Discount Debentures. The New Discount Debentures may be presented for registration of transfer and exchange at the offices of the Registrar, which initially will be the New Discount Debenture Trustee's corporate trust office. New Holdings may change any Paying Agent and Registrar without notice to holders of the New Discount Debentures (the "Holders"). New Holdings will pay principal, premium, if any, and interest on the New Discount Debentures at the Trustee's corporate office located in the Borough of Manhattan, The City of New York. At New Holdings' option, interest may be paid at the New Discount Debenture Trustee's corporate office or by check mailed to the registered holders of the New Discount Debentures at their respective addresses set forth in the register of Holders of New Discount Debentures. Unless otherwise designated by New Holdings, New Holdings' office or agency in New York is the office of the New Discount Debenture Trustee maintained for such purpose. 1 97 OPTIONAL REDEMPTION On or after , 2000, the New Discount Debentures may be redeemed, at the option of New Holdings, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, together with accrued and unpaid interest to the redemption date, if redeemed during the twelve-month period commencing on in the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2000.............................................................. 106.8125% 2001.............................................................. 105.1094% 2002.............................................................. 103.4063% 2003.............................................................. 101.7031% 2004 and thereafter............................................... 100.0000%
Notwithstanding the foregoing, prior to 1998, New Holdings may use the net proceeds of an Initial Public Offering of New Holdings or the Company to redeem up to 35% of the New Discount Debentures at a redemption price equal to 110% of the Accreted Value thereof on the date of redemption. NOTICES AND SELECTION In the event of a redemption of less than all of the New Discount Debentures at the option of New Holdings, such New Discount Debentures will be selected for redemption by the New Discount Debenture Trustee pro rata, by lot or by any other method that the New Discount Debenture Trustee considers fair and appropriate and in such manner as complies with applicable legal and stock exchange requirements, if any; provided, however, that any redemption pursuant to the provisions relating to an Initial Public Offering shall be made on a pro rata basis. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose New Discount Debentures are to be redeemed at such Holder's registered address. New Discount Debentures in denominations of $1,000 principal amount at maturity may be redeemed only in whole and the New Discount Debenture Trustee may select for redemption portions (equal to $1,000 principal amount at maturity or any integral multiple thereof) of the principal amount of New Discount Debentures that have denominations larger than $1,000 principal amount at maturity. If any New Discount Debenture is to be redeemed in part, the notice of redemption relating to such New Discount Debenture will state the portion of the principal amount (in integral multiples of $1,000 principal amount at maturity) to be redeemed and that a New Discount Debenture or New Discount Debentures in the principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender of the original New Discount Debenture. On and after the redemption date, interest will cease to accrue on the New Discount Debentures or portions thereof called for redemption (unless New Holdings shall default in the payment of the redemption price or accrued interest). New Discount Debentures that are redeemed by New Holdings or that are purchased by New Holdings pursuant to a Net Proceeds Offer as described under "-- Certain Covenants -- Limitation on Asset Sales" below or pursuant to a Change of Control Offer as described under "-- Change of Control" below or that are otherwise acquired by New Holdings will be surrendered to the New Discount Debenture Trustee for cancellation. RANKING The New Discount Debentures will be senior unsecured obligations of New Holdings and will rank senior in right of payment to all Subordinated Indebtedness of New Holdings, including the Seller Debentures. The New Discount Debentures will rank pari passu in right of payment with all unsubordinated Indebtedness of New Holdings, including New Holdings' guarantees of the Company's obligations under the Credit Agreement and the Senior Discount Notes to the extent any remain outstanding following the Merger. In addition, the New Discount Debentures will effectively be subordinated to all liabilities (including trade payables) of the Company. 2 98 CHANGE OF CONTROL Upon the occurrence of a Change of Control (as defined below), each Holder will have the right to require the repurchase of such Holder's New Discount Debentures pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the Accreted Value thereof on the Change of Control Payment Date (as defined below) (if such date is prior to , 2000) or 101% of the principal amount thereof, plus accrued interest, if any, to the Change of Control Payment Date (if such date is on or after , 2000). Within 30 days following the date upon which the Change of Control occurred (the "Change of Control Date"), New Holdings must send, by first class mail, a notice to each Holder, with a copy to the New Discount Debenture Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 40 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a New Discount Debenture purchased pursuant to a Change of Control Offer will be required to surrender the New Discount Debenture, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the New Discount Debenture completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Payment Date. The New Discount Debenture Indenture will further provide that, notwithstanding the foregoing, prior to the mailing of the notice of a Change of Control Offer referred to above, within 30 days following any Change of Control, New Holdings will cause the Company to either (a) repay in full and terminate all commitments under Indebtedness under the Credit Agreement to the extent the terms thereof require repayment upon a Change of Control (or offer to repay in full and terminate all commitments under all such Indebtedness under the Credit Agreement and repay the Indebtedness owed to each lender which has accepted such offer) or (b) obtain the requisite consents under the Credit Agreement, the terms of which require repayment upon a Change of Control, to permit the repurchase of the New Discount Debentures as provided above. New Holdings shall first comply with the covenant in the immediately preceding sentence before New Holdings shall be required to repurchase New Discount Debentures pursuant to the provisions described above. New Holdings' failure to comply with the covenants described in this paragraph shall constitute an Event of Default under the New Discount Debenture Indenture. New Holdings will comply with the requirements of Rule 14e-1 under the Exchange Act and any other applicable provisions of the federal securities laws in connection with a Change of Control Offer. CERTAIN COVENANTS The New Discount Debenture Indenture will contain, among other things, the following covenants: Limitation on Restricted Payments. The New Discount Debenture Indenture will provide that New Holdings shall not, and shall cause each of its Subsidiaries not to, directly or indirectly, make any Restricted Payment if, at the time of such proposed Restricted Payment, or after giving effect thereto, (a) a Default or an Event of Default shall have occurred and be continuing, (b) New Holdings or such Subsidiary could not incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under "-- Limitation on Incurrences of Additional Indebtedness" below or (c) the aggregate amount expended for all Restricted Payments, including such proposed Restricted Payment (the amount of any Restricted Payment, if other than cash, to be the fair market value thereof at the date of payment, as determined in good faith by the Board of Directors of New Holdings, which determination shall be evidenced by a Board Resolution), subsequent to the Issue Date, shall exceed the sum of (i) 50% of the aggregate Consolidated Net Income (or if such aggregate Consolidated Net Income is a loss, minus 100% of such loss) of New Holdings earned subsequent to the Issue Date and on or prior to the date the proposed Restricted Payment occurs (the "Reference Date") plus (ii) 100% of the aggregate Net Proceeds received by New Holdings from any person (other than a Subsidiary) from the issuance and sale (including upon exchange or conversion for other securities of New Holdings) subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock (excluding (A) Qualified Capital Stock paid as a dividend on any 3 99 Capital Stock or as interest on any Indebtedness and (B) any Net Proceeds from issuances and sales financed directly or indirectly using funds borrowed from New Holdings or any Subsidiary, until and to the extent such borrowing is repaid), plus (iii) 100% of the aggregate net cash proceeds received by New Holdings as capital contributions to New Holdings after the Issue Date, plus (iv) $25 million. Notwithstanding the foregoing, if no Default or Event of Default shall have occurred and be continuing as a consequence thereof, the provisions set forth in the immediately preceding paragraph will not prevent (1) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of declaration, (2) the acquisition of any shares of Capital Stock of New Holdings or the repurchase, redemption, or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of shares of Qualified Capital Stock of New Holdings, (3) the repurchase, redemption or other repayment of any Subordinated Indebtedness in exchange for or solely out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of Subordinated Indebtedness of New Holdings with an Average Life equal to or greater than the then remaining Average Life of the Subordinated Indebtedness repurchased, redeemed or repaid, and (4) Permitted Payments; provided, however, that (x) the declaration of each dividend paid in accordance with clause (1) above, each acquisition, repurchase, redemption or other repayment made in accordance with, or of the type set forth in, clause (2) above, and each payment described in clause (iii) of the definition of Permitted Payments shall each be counted for purposes of computing amounts expended pursuant to subclause (c) in the immediately preceding paragraph, and (y) no amounts paid pursuant to clause (3) above or pursuant to clause (i) or (ii) of the definition of "Permitted Payments" shall be so counted. Limitation on Incurrences of Additional Indebtedness. The New Discount Debenture Indenture will provide that New Holdings shall not, and shall not permit any Subsidiary, directly or indirectly, to incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment of (collectively "incur") any Indebtedness other than Permitted Indebtedness; provided, however, that if no Default with respect to payment of principal of, or interest on, the New Discount Debentures or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of any such Indebtedness, (i) New Holdings may incur Indebtedness if immediately before and immediately after giving effect to the incurrence of such Indebtedness the Operating Coverage Ratio of New Holdings would be greater than 2.0 to 1.0 and (ii) the Company or any subsidiary of the Company may incur Indebtedness if immediately before and immediately after giving effect to the incurrence of such Indebtedness the Operating Coverage Ratio of the Company would be greater than 2.0 to 1.0. Limitation on Liens. The New Discount Debenture Indenture will provide that New Holdings shall not create, incur, assume or suffer to exist any Liens upon any of its assets unless the New Discount Debentures are equally and ratably secured by the Liens covering such assets, except for (i) existing and future Liens securing Indebtedness and other obligations of New Holdings and its Subsidiaries under the Credit Agreement and related documents or any refinancing or replacement thereof in whole or in part permitted under the New Discount Debenture Indenture, (ii) Permitted Liens, (iii) Liens securing Acquired Indebtedness; provided that such Liens (x) are not incurred in connection with, or in contemplation of, the acquisition of the property or assets acquired and (y) do not extend to or cover any property or assets of New Holdings or any Subsidiary other than the property or assets so acquired, (iv) Liens existing on the Issue Date (after giving effect to the Merger), (v) Liens to secure Capitalized Lease Obligations and certain other Indebtedness that is otherwise permitted under the New Discount Debenture Indenture; provided that (A) any such Lien is created solely for the purpose of securing such other Indebtedness representing, or incurred to finance, refinance or refund, the cost (including sales and excise taxes, installation and delivery charges and other direct costs of, and other direct expenses paid or charged in connection with, the purchase (whether through stock or asset purchase, merger or otherwise) or construction or improvement of the property subject thereto (whether real or personal, including fixtures and other equipment), (B) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such costs and (C) such Lien does not extend to or cover any property other than such item of property and any improvement on such item; (vi) Liens in favor of the New Discount Debenture Trustee under the New Discount Debenture Indenture and any substantially equivalent lien granted to any trustee or similar institution under any indenture for Indebtedness permitted by 4 100 the terms of the New Discount Debenture Indenture; and (vii) any replacement, extension or renewal, in whole or in part, of any Lien described in this or the foregoing clauses, including in connection with any refinancing of the Indebtedness, in whole or in part, secured by any such Lien; provided that if any such clauses limit the amount secured by or the assets subject to such Liens, no replacement, extension or renewal shall increase the amount or the assets subject to such Liens, except to the extent that the Liens associated with such additional assets are otherwise permitted hereunder. Limitation on Asset Sales. The New Discount Debenture Indenture will provide that neither New Holdings nor any of its Subsidiaries shall consummate an Asset Sale unless (a) New Holdings or the applicable Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold and (b) upon consummation of an Asset Sale, New Holdings or the applicable Subsidiary will, within 365 days of the receipt of the proceeds therefrom, either: (i) apply or cause its Subsidiary to apply the Net Cash Proceeds of any Asset Sale to (1) a Related Business Investment (2) an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale or (3) an investment in properties and assets that will be used in the business of New Holdings and its Subsidiaries existing on the Issue Date or in a business reasonably related thereto; (ii) apply or cause to be applied such Net Cash Proceeds to the repayment of Pari Passu Indebtedness of New Holdings or any Indebtedness of any Subsidiary; (iii) use such Net Cash Proceeds to secure Letter of Credit Obligations to the extent the related letters of credit have not been drawn upon or returned undrawn; or (iv) after such time as the accumulated Net Cash Proceeds equals or exceeds $20 million, apply or cause to be applied such Net Cash Proceeds to the purchase of New Discount Debentures tendered to New Holdings pursuant to an offer to purchase made by New Holdings as set forth below (a "Net Proceeds Offer") for purchase at a price equal to 100% of the Accreted Value thereof on the date of purchase, if such date is prior to , 2000 or 100% of the principal amount thereof, plus accrued interest to the date of purchase if such date is on or after , 2000; provided, however, that if at any time any non-cash consideration received by New Holdings or any Subsidiary in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash, then such cash shall constitute Net Cash Proceeds for purposes of this covenant and shall be applied in accordance with clause (b) above within 365 days of the receipt of such cash; and provided further, however, that if at any time any security deposits or other amounts used to secure Letter of Credit Obligations pursuant to clause (b)(iii) above are returned to New Holdings or any Subsidiary, then such security deposits or other amounts shall constitute Net Cash Proceeds for purposes of this covenant and shall be applied in accordance with clause (b) above within 365 days of the receipt of such security deposits or other amounts. A Net Proceeds Offer as a result of an Asset Sale made by the Company or one of its subsidiaries shall not be required to be in excess of the Net Cash Proceeds of such Asset Sale less the Net Cash Proceeds actually applied in accordance with clauses (b)(i), (ii) or (iii) above; provided, however, that New Holdings shall have the right to exclude from the foregoing provisions Asset Sales subsequent to the Issue Date, the proceeds of which are derived from the sale and substantially concurrent lease-back of one or more supermarkets and/or related assets or equipment which are acquired or constructed by New Holdings or a Subsidiary subsequent to the Issue Date, provided that any such sale and substantially concurrent lease-back occurs within [270] days following such acquisition or the completion of such construction, as the case may be. Each Net Proceeds Offer will be mailed to record Holders of New Discount Debentures as shown on the register of Holders not less than 305 nor more than 335 days after the relevant Asset Sale, with a copy to the Trustee, shall specify the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed) and shall otherwise comply with the procedures set forth in the New Discount Debenture Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender the New Discount Debentures in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender New Discount Debentures in an amount exceeding the Net Proceeds Offer, New Discount Debentures of tendering Holders will be repurchased on a pro rata basis (based on amounts tendered). New Holdings will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of New Discount Debentures pursuant to a Net Proceeds Offer. 5 101 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The New Discount Debenture Indenture will provide that New Holdings shall not, and shall not permit any Subsidiary to, directly or indirectly, create or suffer to exist, or allow to become effective any consensual Payment Restriction with respect to any of its Subsidiaries, except for (a) any such restrictions contained in (i) the Credit Agreement as in effect on the Issue Date, as any such Payment Restriction may apply to any present or future Subsidiary, (ii) the New Discount Debenture Indenture, the Seller Debenture Indenture, the Senior Discount Note Indenture, the indentures with respect to Existing Indebtedness and any other agreement in effect at or entered into on the Issue Date, (iii) Indebtedness of a person existing at the time such person becomes a Subsidiary (provided that (x) such Indebtedness is not incurred in connection with, or in contemplation of, such person becoming a Subsidiary, (y) such restriction is not applicable to any person, or the properties or assets of any person, other than the person so acquired and (z) such Indebtedness is otherwise permitted to be incurred pursuant to the provisions of the covenant described under "-- Limitation on Incurrences of Additional Indebtedness" above), (iv) secured Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenants described under "-- Limitation on Incurrences of Additional Indebtedness" and "-- Limitation on Liens" above that limit the right of the debtor to dispose of the assets securing such Indebtedness; (b) customary non-assignment provisions restricting subletting or assignment of any lease or other agreement entered into by a Subsidiary; (c) customary net worth provisions contained in leases and other agreements entered into by a Subsidiary in the ordinary course of business; (d) customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary; (e) customary provisions in joint venture agreements and other similar agreements; and (f) restrictions contained in Indebtedness incurred to refinance, refund, extend or renew Indebtedness referred to in clause (a) above; provided that the restrictions contained therein are not materially more restrictive taken as a whole than those provided for in such Indebtedness being refinanced, refunded, extended or renewed and (g) Payment Restrictions contained in any other Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to the provisions of the covenant described under "-- Limitation on Incurrences of Additional Indebtedness" above; provided that any such Payment Restrictions are ordinary and customary with respect to the type of Indebtedness being incurred (under the relevant circumstances) and, in any event, no more restrictive than the most restrictive Payment Restrictions in effect on the Issue Date. Limitation on Transactions with Affiliates. The New Discount Debenture Indenture will provide that neither New Holdings nor any of its Subsidiaries shall (i) sell, lease, transfer or otherwise dispose of any of its properties or assets or issue securities (other than equity securities which do not constitute Disqualified Capital Stock) to, (ii) purchase any property, assets or securities (other than equity securities which do not constitute Disqualified Capital Stock) from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, an Affiliate or Significant Stockholder (or any Affiliate of such Significant Stockholder) of New Holdings or any Subsidiary (an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under the following paragraph and (y) Affiliate Transactions in the ordinary course of business that are fair to New Holdings or such Subsidiary, as the case may be, and on terms at least as favorable as might reasonably have been obtainable at such time from an unaffiliated party; provided, that (A) with respect to Affiliate Transactions involving aggregate payments in excess of $1 million and less than $5 million, New Holdings or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the New Discount Debenture Trustee certifying that such transaction or series of transactions complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business), (B) with respect to Affiliate Transactions involving aggregate payments in excess of $5 million and less than $15 million, New Holdings or such Subsidiary, as the case may be, shall have delivered an Officers' Certificate to the New Discount Debenture Trustee certifying that such Affiliate Transaction complies with clause (y) above (other than the requirement set forth in such clause (y) that such Affiliate Transaction be in the ordinary course of business) and that such Affiliate Transaction has received the approval of a majority of the disinterested members of the Board of Directors of New Holdings or the Subsidiary, as the case may be, or, in the absence of any such approval by the disinterested members of the Board of Directors of New Holdings or the Subsidiary, as the case may be, that an Independent Financial Advisor has reasonably and in good faith determined that the financial terms of 6 102 such Affiliate Transaction are fair to New Holdings or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as might reasonably have been obtained at such time from an unaffiliated party and that such Independent Financial Advisor has provided written confirmation of such determination to the Board of Directors and (C) with respect to Affiliate Transactions involving aggregate payments in excess of $15 million, New Holdings or such Subsidiary, as the case may be, shall have delivered to the New Discount Debenture Trustee, a written opinion from an Independent Financial Advisor to the effect that the financial terms of such Affiliate Transaction are fair to New Holdings or such Subsidiary, as the case may be, or that the terms of such Affiliate Transaction are at least as favorable as those that might reasonably have been obtained at the time from an unaffiliated party. The provisions of the foregoing paragraph shall not apply to (i) any Permitted Payment, (ii) any Restricted Payment that is made in compliance with the provisions of the covenant described under "-- Limitation on Restricted Payments" above, (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of New Holdings or any Subsidiary, as determined by the Board of Directors of New Holdings or any Subsidiary or the senior management thereof in good faith, (iv) transactions exclusively between or among New Holdings and any of its wholly-owned Subsidiaries or exclusively between or among such wholly-owned Subsidiaries, provided such transactions are not otherwise prohibited by the New Discount Debenture Indenture, (v) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) so long as any such amendment is not disadvantageous to the Holders in any material respect, (vi) the existence of, or the performance by New Holdings or any of its Subsidiaries of its obligations under the terms of, any stockholder agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the Issue Date and any similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by New Holdings or any Subsidiaries of obligations under any future amendment to, any such existing agreement or under any similar agreement entered into after the Issue Date shall only be permitted by this clause (vi) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders in any material respect, (vii) transactions permitted by, and complying with, the provisions of the covenant described under "-- Limitation on Mergers and Certain Other Transactions" below, and (viii) transactions with suppliers or other purchases or sales of goods or services, in each case, in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of the New Discount Debenture Indenture which are fair to New Holdings, in the reasonable determination of the Board of Directors or senior management of New Holdings, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. Limitations on Preferred Stock of Subsidiaries. The New Discount Debenture Indenture will provide that New Holdings will not permit any of its Subsidiaries to issue any Preferred Stock (other than to New Holdings or a wholly-owned Subsidiary), or permit any person (other than New Holdings or a wholly-owned Subsidiary) to own or hold an interest in any Preferred Stock of such Subsidiary, unless such Subsidiary would be entitled to incur Indebtedness in accordance with the provisions described above under "-- Limitation on Incurrence of Additional Indebtedness" in the aggregate principal amount equal to the aggregate liquidation value of such Preferred Stock. No Amendment to Subordination Provisions of Seller Debentures. The New Discount Debenture Indenture will provide that New Holdings will not amend, modify or alter the Seller Debenture Indenture in any way that would (i) increase the principal of, advance the final maturity date of or shorten the Weighted Average Life to Maturity of any Seller Debentures such that the final maturity date of the Seller Debentures is earlier than the 91st day following the final maturity date of the New Discount Debentures or (ii) amend the provisions of Article Eleven of the Seller Debenture Indenture (which relates to subordination) or certain of the defined terms used therein in a manner that would be adverse to the Holders of the New Discount Debentures. Limitations on Mergers and Certain Other Transactions. The New Discount Debenture Indenture will provide that New Holdings, in a single transaction or through a series of related transactions, shall not (i) consolidate with or merge with or into any other person, or transfer (by lease, assignment, sale or 7 103 otherwise) all or substantially all of its properties and assets as an entirety or substantially as an entirety to another person or group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in either case, (1) either New Holdings shall be the continuing person, or the person (if other than New Holdings) formed by such consolidation or into which New Holdings is merged or to which all or substantially all of the properties and assets of New Holdings as an entirety or substantially as an entirety are transferred (or, in the case of a Plan of Liquidation, any person to which assets are transferred) (New Holdings or such other person being hereinafter referred to as the "Surviving Person") shall be a corporation organized and validly existing under the laws of the United States, any state thereof or the District of Columbia, and shall expressly assume, by an indenture supplement, all the obligations of New Holdings under the New Discount Debentures and the New Discount Debenture Indenture; (2) immediately after and giving effect to such transaction and the assumption contemplated by clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, (A) the Surviving Person shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of New Holdings immediately preceding the transaction, and (B) the Surviving Person could incur at least $1 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the provisions of the covenant described under the heading "-- Limitation on Incurrences of Additional Indebtedness" above; and (3) immediately before and immediately after and giving effect to such transaction and the assumption of the obligations as set forth in clause (1) above and the incurrence or anticipated incurrence of any Indebtedness to be incurred in connection therewith, no Default or Event of Default shall have occurred and be continuing. Notwithstanding the foregoing, the consummation of the Merger on the Issue Date need only comply with clauses (1) and (3) of the foregoing paragraph. The New Discount Debenture Indenture will provide that upon any consolidation or merger or any transfer of all or substantially all of the assets of New Holdings or any adoption of a Plan of Liquidation by New Holdings in accordance with the foregoing, the surviving person formed by such consolidation or into which New Holdings is merged or to which such transfer is made (or, in the case of a Plan of Liquidation, to which assets are transferred) shall succeed to, and be substituted for, and may exercise every right and power of, New Holdings under the New Discount Debenture Indenture with the same effect as if such surviving person had been named as New Holdings therein; provided, however, that solely for purposes of computing amounts described in subclause (c) of the first paragraph of the covenant described under " -- Limitation on Restricted Payments" above, any such surviving person shall only be deemed to have succeeded to and be substituted for New Holdings with respect to periods subsequent to the effective time of such merger, consolidation or transfer of assets. When a successor corporation assumes all of the obligations of New Holdings under the New Discount Debenture Indenture and under the New Discount Debentures and agrees to be bound thereby, the predecessor shall be released from such obligations. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of New Holdings shall be deemed to be the transfer of all or substantially all of the properties and assets of New Holdings. EVENTS OF DEFAULT The following events constitute "Events of Default" under the New Discount Debenture Indenture: (i) failure to make any payment of interest on the New Discount Debentures when due and the continuance of such default for a period of 30 days; (ii) failure to pay principal of, or premium, if any, on the New Discount Debentures when due, whether at maturity, upon acceleration, redemption or otherwise (including the failure to repurchase New Discount Debentures tendered pursuant to the requirements set forth in the covenants described under the headings "-- Certain Covenants -- Change of Control" and "-- Certain Covenants -- Limitation on Asset Sales"), (iii) failure to comply with any other agreement or covenant contained in, or provisions of, the New Discount Debentures or the New Discount Debenture Indenture, if such failure continues unremedied for 30 days after notice given by the New Discount Debenture Trustee or the Holders of at least 25% in principal amount of the New Discount Debentures then outstanding (except in the case of a default with respect to the covenants described under the headings "-- Certain Covenants -- Limitation on Restricted Payments," "-- Change of Control," "-- Certain Covenants -- Limitation 8 104 on Asset Sales" and "-- Certain Covenants -- Limitations on Mergers and Certain Other Transactions," which shall constitute Events of Default with notice but without passage of time); (iv) a default under any bond, debenture, or other evidence of Indebtedness of New Holdings or of any Significant Subsidiary or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced any such Indebtedness, whether such Indebtedness now exists or shall hereafter be created, if both (A) such default either (1) results from the failure to pay such Indebtedness at its stated final maturity or (2) relates to an obligation (other than the obligation to pay any principal of such Indebtedness at its stated final maturity) and results in the holder or holders of such Indebtedness causing such Indebtedness to become due prior to its stated final maturity and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at stated final maturity or the maturity of which has been so accelerated, aggregates $25 million or more at any one time outstanding; (v) New Holdings or any Significant Subsidiary (a) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (b) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (c) consents to the appointment of a Custodian of it or for substantially all of its property, (d) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it, (e) makes a general assignment for the benefit of its creditors, or (f) takes any corporate action to authorize or effect any of the foregoing; (vi) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of New Holdings or any Significant Subsidiary in an involuntary case or proceeding under any Bankruptcy Law, which shall (a) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of New Holdings or any Significant Subsidiary, (b) appoint a Custodian of New Holdings or any Significant Subsidiary or for substantially all of its property or (c) order the winding-up or liquidation of its affairs; and such judgment, decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (vii) the lenders under the Credit Agreement shall commence judicial proceedings to foreclose upon any material portion of the assets of New Holdings and its Subsidiaries; or (viii) any final judgment or order for payment of money in excess of $25 million shall be entered against New Holdings or any Significant Subsidiary by a court of competent jurisdiction and shall remain undischarged for a period of 60 days after such judgment becomes final and nonappealable. If an Event of Default (other than an Event of Default resulting from bankruptcy, insolvency, receivership or reorganization of New Holdings or any Significant Subsidiary) occurs and is continuing, the New Discount Debenture Trustee or the Holders of at least 25% in aggregate principal amount of the New Discount Debentures then outstanding may declare the Default Amount due and payable by notice in writing to New Holdings and the New Discount Debenture Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i) shall become immediately due and payable or (ii) if there are any amounts outstanding under the Credit Agreement, shall become due and payable upon the first to occur of an acceleration under the Credit Agreement, or five business days after receipt by New Holdings and the administrative agent under the Credit Agreement of such Acceleration Notice. If an Event of Default resulting from certain events of bankruptcy, insolvency, receivership or reorganization shall occur with respect to New Holdings or a Significant Subsidiary, the Default Amount shall ipso facto become immediately due and payable without any declaration or other act on the part of the New Discount Debenture Trustee or any of the Holders of the New Discount Debentures. Subject to certain conditions, the Holders of a majority in principal amount of the New Discount Debentures then outstanding, by notice to the New Discount Debenture Trustee, may rescind an acceleration if all existing Events of Default are remedied. In certain cases the Holders of a majority in principal amount of outstanding New Discount Debentures may waive any past default and its consequences, except a default in the payment of principal of or interest on any of the New Discount Debentures. The New Discount Debenture Indenture provides that if a Default or an Event of Default occurs and is continuing thereunder and if it is known to the New Discount Debenture Trustee, the New Discount Debenture Trustee shall mail to each Holder of the New Discount Debentures notice of the uncured Default or Event of Default within 90 days after such Default or Event of Default occurs; provided, however, that, except in the case of a Default or Event of Default in the payment of principal of, premium, if any, or interest on, any New Discount Debenture, including the failure to make payment on the Change of Control Payment 9 105 Date pursuant to a Change of Control Offer or payment when due pursuant to a Net Proceeds Offer, the New Discount Debenture Trustee may withhold such notice if it in good faith determines that withholding such notice is in the interest of the Holders. The New Discount Debenture Indenture provides that no holder may pursue any remedy thereunder unless the New Discount Debenture Trustee (i) shall have failed to act for a period of 60 days after receiving written notice of a continuing Event of Default by such Holder and a written request to act by Holders of at least 25% in principal amount of the New Discount Debentures and (ii) has received indemnification satisfactory to it; provided, however, that such provision does not affect the right of any Holder to sue for enforcement of any overdue payment on the New Discount Debentures. Under the New Discount Debenture Indenture, two officers of New Holdings are required to certify to the New Discount Debenture Trustee within 120 days after the end of each fiscal year of New Holdings whether or not they know of any Default or Event of Default that occurred during such fiscal year and, if applicable, describe such Default or Event of Default and the status thereof. DEFEASANCE OF INDENTURE New Holdings may, at its option and at any time, elect to have New Holdings' obligations discharged with respect to the outstanding New Discount Debentures. Such Legal Defeasance means that New Holdings shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding New Discount Debentures except for (i) the rights of Holders of outstanding New Discount Debentures to receive payments in respect of the principal of, premium, if any, and interest on such New Discount Debentures when such payments are due solely from the funds held by the New Discount Debenture Trustee in the trust referred to below; (ii) New Holdings' obligations to issue temporary New Discount Debentures, register the transfer or exchange of New Discount Debentures, replace mutilated, destroyed, lost or stolen New Discount Debentures and maintain an office or agency for payments in respect of the New Discount Debentures and money for security payments held in trust in respect of the New Discount Debentures; (iii) the rights, powers, trusts, duties and immunities of the New Discount Debenture Trustee and New Holdings' obligations in connection therewith; and (iv) the Legal Defeasance provisions of the New Discount Debenture Indenture. In addition, New Holdings may, at its option and at any time elect to have the obligations of New Holdings released with respect to certain covenants described above under "-- Certain Covenants" ("Covenant Defeasance"), and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the New Discount Debentures. In order to exercise either Legal Defeasance or Covenant Defeasance with respect to the New Discount Debentures, (i) New Holdings must have irrevocably deposited with the New Discount Debenture Trustee, in trust, for the benefit of the Holders of the New Discount Debentures, cash in U.S. dollars, U.S. Government Obligations (as defined in the New Discount Debenture Indenture), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding New Discount Debentures to redemption or maturity provided that the New Discount Debenture Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the New Discount Debentures on the Maturity Date or such redemption date, as the case may be; (ii) in the case of Legal Defeasance, New Holdings shall have delivered to the New Discount Debenture Trustee an opinion of counsel stating that (A) New Holdings has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of outstanding New Discount Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, New Holdings shall have delivered to the New Discount Debenture Trustee an opinion of counsel stating that the Holders of outstanding New Discount Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not 10 106 occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (v) and (vi) under the first paragraph under "-- Events of Default" above are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, the New Discount Debenture Indenture or any other material agreement or instrument to which New Holdings is a party or by which it is bound (and in that connection, the New Discount Debenture Trustee shall have received a certificate from the Agent under the Credit Agreement to that effect with respect to such Credit Agreement if then in effect); (vi) New Holdings shall have delivered to the New Discount Debenture Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) New Holdings shall have delivered to the New Discount Debenture Trustee an Officer's Certificate stating that the deposit was not made by New Holdings with the intent of preferring the Holders of the New Discount Debentures over other creditors of New Holdings or with the intent of defeating, hindering, delaying or defrauding creditors of Holdings, or others; and (viii) New Holdings shall have delivered to the New Discount Debenture Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or Covenant Defeasance, have been complied with. SATISFACTION AND DISCHARGE The New Discount Debenture Indenture will be discharged and will cease to be of further effect as to all outstanding New Discount Debentures when either (a) all New Discount Debentures theretofore authenticated and delivered (except lost, stolen or destroyed New Discount Debentures which have been replaced or paid and New Discount Debentures for whose payment money has theretofore been deposited in trust and thereafter repaid to New Holdings) have been delivered to the New Discount Debenture Trustee for cancellation; or (b)(i) all New Discount Debentures not theretofore delivered to the New Discount Debenture Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise and New Holdings has irrevocably deposited or caused to be deposited with the New Discount Debenture Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on the New Discount Debentures not theretofore delivered to the New Discount Debenture Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption; (ii) New Holdings has paid all sums payable by it under the New Discount Debenture Indenture; and (iii) New Holdings has delivered irrevocable instructions to the New Discount Debenture Trustee to apply the deposited money toward the payment of the New Discount Debentures at maturity or the redemption date, as the case may be. In addition, New Holdings must deliver an Officers' Certificate and an Opinion of Counsel to the New Discount Debenture Trustee stating that all conditions precedent to satisfaction and discharge have been complied with. MODIFICATION OF THE NEW DISCOUNT DEBENTURE INDENTURE The New Discount Debenture Indenture and the New Discount Debentures may be amended or supplemented (and compliance with any provision thereof may be waived) by New Holdings, the New Discount Debenture Trustee and the Holders of not less than a majority in aggregate principal amount of the New Discount Debentures then outstanding, except that (i) without the consent of each Holder of New Discount Debentures affected, no such amendment, supplement or waiver may (1) change the principal amount of New Discount Debentures whose Holders must consent to an amendment, supplement or waiver of any provision of the New Discount Debenture Indenture or the New Discount Debentures; (2) reduce the rate or extend the time for payment of interest on any New Discount Debenture; (3) reduce the Accreted Value of any New Discount Debenture; (4) reduce the principal amount of any New Discount Debenture; (5) change the Maturity Date of any New Discount Debenture, or alter the redemption provisions in a manner adverse to any Holder; (6) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders or the rights of Holders to recover the principal of, interest on, or redemption payment with respect to, any New Discount Debenture, or (7) make the principal of, or the interest on, any New Discount Debentures payable with anything or in any manner other than as provided for in the New Discount Debenture Indenture and the New Discount Debentures as in effect on the date of the New 11 107 Discount Debenture Indenture and (ii) without the consent of Holders of not less than 75% in aggregate principal amount of New Discount Debentures then outstanding, no such amendment, supplement or waiver may change the Change of Control Payment Date or the purchase price in connection with any repurchase of New Discount Debentures pursuant to the covenant described under "-- Change of Control" above in a manner adverse to any Holder or waive a Default or Event of Default resulting from a failure to comply with the covenant described under "-- Change of Control" above. In addition, New Holdings and the New Discount Debenture Trustee may amend the New Discount Debenture Indenture and the New Discount Debentures (a) to cure any ambiguity, defect or inconsistency therein; provided, that such amendment or supplement does not adversely affect the rights of any Holder or (b) to make any other change that does not adversely affect the rights of any Holder thereunder in any material respect. THE NEW DISCOUNT DEBENTURE TRUSTEE The Holders of a majority in principal amount of the outstanding New Discount Debentures may remove the New Discount Debenture Trustee and appoint a successor trustee with New Holdings' consent, by so notifying the New Discount Debenture Trustee to be so removed and New Holdings. In addition, the Holders of a majority in principal amount of the outstanding New Discount Debentures have the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any remedy available to the New Discount Debenture Trustee or of exercising any trust or power conferred on the New Discount Debenture Trustee. The New Discount Debenture Indenture provides that, in case a Default or an Event of Default has occurred and is continuing, the New Discount Debenture Trustee thereunder shall exercise such of the rights and powers vested in it by the New Discount Debenture Indenture, and use the same degree of care and skill in the exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. Subject to the latter provision, the New Discount Debenture Trustee is under no obligation to exercise any of its rights or powers under the New Discount Debenture Indenture at the request, order or direction of any of the Holders, unless they shall have offered to the New Discount Debenture Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred thereby. If New Holdings fails to pay such amounts of principal of, or interest on, the New Discount Debentures as shall have become due and payable upon demand as specified in the New Discount Debenture Indenture, the New Discount Debenture Trustee thereunder, at the request of the Holders of a majority in aggregate principal amount of the New Discount Debentures at the time outstanding, and upon being offered such reasonable indemnity as it may be required against the costs, expenses and liabilities incurred by it, except as a result of its negligence or bad faith, shall institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and collect in the manner provided by law the monies adjudged or decreed to be payable. The New Discount Debenture Indenture contains limitations on the rights of the New Discount Debenture Trustee, should it become a creditor of New Holdings, to obtain payment of claims in certain cases or to be realized on certain property received by it in respect of any such claims, securities or otherwise. The New Discount Debenture Trustee is permitted to engage in other transactions; however, if the New Discount Debenture Trustee acquires any "conflicting interest," it must eliminate such conflict or resign. The New Discount Debenture Trustee is also the trustee for (a) the % Senior Subordinated Notes due 2005 of the Company; (b) the 9% Senior Subordinated Notes due 2003 of the Company; (c) the 10 1/4% Senior Subordinated Notes due 2002 of the Company; (d) the 13.75% Senior Subordinated Notes due 2005 of the Company; and (e) the 13.75% Senior Subordinated Notes due 2001 of the Company. REPORTS The New Discount Debenture Indenture will provide that to the extent permitted by applicable law or regulation, whether or not New Holdings is subject to the requirements of Section 13 or 15(d) of the Exchange Act, New Holdings shall file with the SEC all quarterly and annual reports and such other information, documents or other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) required to be filed pursuant to such provisions of the Exchange Act. New 12 108 Holdings shall file with the New Discount Debenture Trustee, within 15 days after it files the same with the SEC, copies of the quarterly and annual reports and the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that it is required to file with the SEC pursuant to the New Discount Debenture Indenture. New Holdings shall also comply with the other provisions of TIA sec. 314(a). If New Holdings is not permitted by applicable law or regulations to file the aforementioned reports, New Holdings (at its own expense) shall file with the New Discount Debenture Trustee and mail, or cause the New Discount Debenture Trustee to mail, to Holders at their addresses appearing in the register of New Discount Debentures maintained by the Registrar at the time of such mailing within 5 days after it would have been required to file such information with the SEC, all information and financial statements, including any notes thereto and with respect to annual reports, an auditors' report by an accounting firm of established national reputation, and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," comparable to the disclosure that Holdings would have been required to include in annual and quarterly reports, information, documents or other reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K, if New Holdings was subject to the requirements of such Section 13 or 15(d) of the Exchange Act. At any time when New Holdings is not permitted by applicable law or regulations to file the aforementioned reports, upon the request of a Holder of New Discount Debentures, New Holdings will promptly furnish or cause to be furnished such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) to such Holder or to a prospective purchaser of such New Discount Debentures designated by such Holder, as the case may be, in order to permit compliance by such Holder with Rule 144A under the Securities Act. CERTAIN DEFINITIONS "Accreted Value" means, as of any date of determination prior to , 2000, the sum of (a) the initial purchase price of each New Discount Debenture and (b) the portion of the excess of the principal amount of each New Discount Debenture over such initial purchase price which shall have been accreted through such date, such amount to be so accreted on a daily basis and compounded semi-annually on each and at the rate of 13 5/8% per annum from the date of issuance of the New Discount Debentures through the date of determination, computed on the basis of a 360-day year of twelve 30-day months. "Acquired Indebtedness" means Indebtedness of a person or any of its subsidiaries existing at the time such person becomes a Subsidiary or assumed in connection with the acquisition of assets from such person and not incurred by such person in connection with, or in anticipation or contemplation of, such person becoming a Subsidiary or such acquisition. "Affiliate" means, with respect to any person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the New Discount Debenture Indenture, neither BT Securities Corporation nor any of its Affiliates shall be deemed to be an Affiliate of New Holdings or any of its Subsidiaries. "Asset Sale" means, with respect to any person, any sale, transfer or other disposition or series of sales, transfers or other dispositions (including, without limitation, by merger or consolidation or by exchange of assets and whether by operation of law or otherwise) made by such person or any of its subsidiaries to any person other than such person or one of its wholly-owned subsidiaries (or, in the case of a sale, transfer or other disposition by a Subsidiary, to any person other than New Holdings or a directly or indirectly wholly-owned Subsidiary) of any assets of such person or any of its subsidiaries including, without limitation, assets consisting of any Capital Stock or other securities held by such person or any of its subsidiaries, and any Capital Stock issued by any subsidiary of such person, in each case, outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions (i) involving only Excluded Assets, (ii) resulting in Net Proceeds to New Holdings or any 13 109 Subsidiary of $500,000 or less, (iii) pursuant to any foreclosure of assets or other remedy provided by applicable law to a creditor of New Holdings or any Subsidiary with a Lien on such assets, which Lien is permitted under the New Discount Debenture Indenture, provided that such foreclosure or other remedy is conducted in a commercially reasonable manner or in accordance with any Bankruptcy Law, or (iv) the proceeds of which are not applied as contemplated in "-- Certain Covenants -- Limitation on Asset Sales" and which, together with all other such Asset Sale proceeds, do not exceed $20 million. "Average Life" means, as of any date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principle payments of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or foreign law for the relief of debtors. "Board of Directors" means, with respect to any person, the Board of Directors of such person or any committee of the Board of Directors of such person duly authorized, with respect to any particular matter, to exercise the power of the Board of Directors of such person. "Board Resolution" means, with respect to any person, a duly adopted resolution of the Board of Directors of such person. "Business Day" means a day that is not a Legal Holiday. "Capital Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such person, including Preferred Stock. "Capitalized Lease Obligation" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Equivalents" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, (ii) commercial paper rated the highest grade by Moody's Investors Service, Inc and Standard & Poor's Ratings Group and maturing not more than one year from the date of creation thereof, (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500 million and maturing not more than one year from the date of creation thereof, (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any bank described in clause (iii) and (v) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's Investors Service, Inc. or Standard & Poor's Ratings Group. "Change of Control" means (I) the acquisition after the Issue Date, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) by (i) any person or entity (other than any Permitted Holder) or (ii) any group of persons or entities (excluding any Permitted Holders) who constitute a group (within the meaning of Section 13(d)(3) of the Exchange Act), in either case, of any securities of New Holdings such that, as a result of such acquisition, such person, entity or group beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, 40% or more of the then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of New Holdings (but only to the extent that such beneficial ownership is not shared with any Permitted Holder who has the power to direct the vote thereof); provided, however, that no such Change of Control shall be deemed to have occurred if (A) the Permitted Holders beneficially own, in the aggregate, at such time, a greater percentage of such voting securities than such other person, entity or group or (B) at the time of such acquisition, the Permitted Holders (or any of them) possess the ability (by contract or otherwise) to elect, or cause the election, of a majority of the members of New Holdings' Board of Directors or (II) New Holdings ceasing to own 100% of the outstanding voting securities entitled to vote on a regular basis to elect a majority 14 110 of the Board of Directors of the Company (other than in connection with a merger of New Holdings and the Company). "Company" means Food 4 Less Supermarkets, Inc., a Delaware corporation, and its successors, including, without limitation, Ralphs Supermarkets, Inc. (to be renamed Ralphs Grocery Company) following the Merger. "Consolidated Net Income" means, with respect to any person, for any period, the aggregate of the net income (or loss) of such person and its subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any other person in which such person or any of its subsidiaries has an interest (which interest does not cause the net income of such other person to be consolidated with the net income of such person and its subsidiaries in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions actually paid to such person or such subsidiary by such other person in such period; (b) the net income of any subsidiary of such person that is subject to any Payment Restriction shall be excluded to the extent such Payment Restriction actually prevented the payment of an amount that otherwise could have been paid to, or received by, such person or a subsidiary of such person not subject to any Payment Restriction; provided, however, that with respect to the net income of New Holdings, the net income of the Company and its wholly-owned subsidiaries shall not be so excluded, notwithstanding the existence of any such Payment Restriction, so long as the terms of any such consensual Payment Restriction limiting the payment of dividends are not materially more restrictive at the time of determination of Consolidated Net Income than the most restrictive Payment Restriction limiting the payment of dividends in effect on the Issue Date and so long as the Company continues to be a wholly-owned subsidiary of New Holdings; and (c)(i) the net income (or loss) of any other person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, (ii) all gains and losses realized on any Asset Sale, (iii) all gains realized upon or in connection with or as a consequence of the issuance of the Capital Stock of such person or any of its subsidiaries and any gains on pension reversions received by such person or any of its subsidiaries, (iv) all gains and losses realized on the purchase or other acquisition by such person or any of its subsidiaries of any securities of such person or any of its subsidiaries, (v) all gains and losses resulting from the cumulative effect of any accounting change pursuant to the application of Accounting Principles Board Opinion No. 20, as amended, (vi) all other extraordinary gains and losses, (vii) (A) all non-cash charges, (B) up to $10 million of severance costs and (C) any other restructuring reserves or charges (provided, however, that any cash payments actually made with respect to the liabilities for which such restructuring reserves or charges were created shall be deducted from Consolidated Net Income in the period when made), in each case, incurred by New Holdings or any of its Subsidiaries in connection with the Merger, including, without limitation, the divestiture of the Excluded Assets, (viii) losses incurred by New Holdings and its Subsidiaries resulting from earthquakes and (ix) with respect to New Holdings and its Subsidiaries, all deferred financing costs written off in connection with the early extinguishment of any Indebtedness, shall each be excluded. "Consolidated Net Worth" means, with respect to any person, the total stockholders' equity (exclusive of any Disqualified Capital Stock) of such person and its subsidiaries determined on a consolidated basis in accordance with GAAP. "Consulting Agreement" means that certain Consulting Agreement dated as of the Issue Date, between the Company, New Holdings and The Yucaipa Companies, as such Consulting Agreement may be amended or replaced, so long as any amounts paid under any amendment or replacement agreement do not exceed the amounts payable under such Consulting Agreement as in effect on the Issue Date. "Credit Agreement" means the Credit Agreement, dated as of the Issue Date, by and among the Company as borrower, New Holdings as guarantor, certain of the Company's subsidiaries, the Lenders referred to therein and Bankers Trust Company, as administrative agent, as the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or any such prior agreement as 15 111 the same may be amended, extended, renewed, restated, supplemented or otherwise modified (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). The term "Credit Agreement" shall include all related or ancillary documents, including, without limitation, any guarantee agreements and security documents. New Holdings shall promptly notify the New Discount Debenture Trustee of any such refunding or refinancing of the Credit Agreement. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Default Amount" means (i) if the Date of Declaration (as defined below) is prior to , 2000, the unpaid Accreted Value of the New Discount Debentures then outstanding as of the date on which the New Discount Debentures are declared to be due and payable (the "Date of Declaration"), and (ii) if the Date of Declaration is on or after , 2000, the aggregate principal amount of the New Discount Debentures then outstanding as of the Date of Declaration, plus accrued and unpaid interest thereon to the Date of Declaration. "Disqualified Capital Stock" means, (i) with respect to any person, any Capital Stock of such person or its subsidiaries that, by its terms, by the terms of any agreement related thereto or by the terms of any security into which it is convertible, putable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased by such person or its subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date or any other Capital Stock of such person or its subsidiaries designated as Disqualified Capital Stock by such person at the time of issuance; provided, however, that if such Capital Stock is either (a) redeemable or repurchasable solely at the option of such person or (b) issued to employees of New Holdings or its Subsidiaries or to any plan for the benefit of such employees, such Capital Stock shall not constitute Disqualified Capital Stock unless so designated; and (ii) with respect to any Subsidiary of New Holdings, any Preferred Stock issued by a Subsidiary of New Holdings other than Preferred Stock issued to New Holdings. "EBDIT" means, with respect to any person, for any period, the Consolidated Net Income of such person for such period, plus, in each case to the extent deducted in computing Consolidated Net Income of such person for such period (without duplication) (i) provisions for income taxes or similar charges recognized by such person and its consolidated subsidiaries accrued during such period, (ii) depreciation and amortization expense of such person and its consolidated subsidiaries accrued during such period (but only to the extent not included in Fixed Charges), (iii) Fixed Charges of such person and its consolidated subsidiaries for such period, (iv) LIFO charges (credit) of such person and its consolidated subsidiaries for such period, (v) the amount of any restructuring reserve or charge recorded during such period in accordance with GAAP, including any such reserve or charge related to the Merger, and (vi) any other non-cash charges reducing Consolidated Net Income for such period (excluding any such charge which requires an accrual of or a cash reserve for cash charges for any future period), less, without duplication, (i) non-cash items increasing Consolidated Net Income of such person for such period (excluding any such items which represent the reversal of any accrual of, or cash reserve for, anticipated charges in any prior period) in each case determined in accordance with GAAP and (ii) the amount of all cash payments made by such person or its subsidiaries during such period to the extent that such cash payment has been provided for in a restructuring reserve or charge referred to in clause (v) above (and was not otherwise deducted in the computation of Consolidated Net Income of such person for such period). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "Excluded Assets" means assets of New Holdings or any Subsidiary required to be disposed of by applicable regulatory authorities in connection with the Merger. 16 112 "Existing Indebtedness" means the following indebtedness of the Company outstanding on the Issue Date after giving effect to the Merger: (a) the % Senior Notes due 2004 issued pursuant to an indenture dated as of the Issue Date; (b) the 10.45% Senior Notes due 2000 issued pursuant to an indenture dated as of April 15, 1992; (c) the % Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date; (d) the 9% Senior Subordinated Notes due 2003 issued pursuant to an indenture dated as of March 30, 1993; (e) the 10 1/4% Senior Subordinated Notes due 2002 issued pursuant to an indenture dated as of July 29, 1992; (f) the 13.75% Senior Subordinated Notes due 2005 issued pursuant to an indenture dated as of the Issue Date; and (g) the 13.75% Senior Subordinated Notes due 2001 issued pursuant to an indenture dated as of June 15, 1991. "Fixed Charges" means, with respect to any person, for any period, the aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued or scheduled to be paid or accrued during such period (except to the extent accrued in a prior period) in respect of all Indebtedness of such person and its consolidated subsidiaries (including (a) original issue discount on any Indebtedness (including (without duplication), in the case of New Holdings, any original issue discount on the New Discount Debentures, the Senior Discount Notes and the Seller Debentures but excluding amortization of debt issuance costs and (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, in each case to the extent attributable to such period, but excluding the amortization of debt issuance costs) and (ii) dividend requirements on Capital Stock of such person and its consolidated subsidiaries declared or paid in cash or required to be declared or paid in cash, during such period, and excluding items eliminated in consolidation. For purposes of this definition, (a) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Board of Directors of such person (as evidenced by a Board Resolution) to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP, (b) interest on Indebtedness that is determined on a fluctuating basis shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest of such Indebtedness in effect on the date Fixed Charges are being calculated, (c) interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a Eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate chosen as New Holdings may designate, and (d) Fixed Charges shall be increased or reduced by the net cost (including amortization of discount) or benefit associated with Interest Swap Obligations attributable to such period. For purposes of clause (ii) above, dividend requirements shall be increased to an amount representing the pretax earnings that would be required to cover such dividend requirements; accordingly, the increased amount shall be equal to a fraction, the numerator of which is the amount of such dividend requirements and the denominator of which is one (1) minus the applicable actual combined federal, state, local and foreign income tax rate of such person and its subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Fixed Charges. "Foreign Exchange Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values. "GAAP" means generally accepted accounting principles as in effect in the United States of America as of the Issue Date. "Holdings" means Food 4 Less Holdings, Inc., a California corporation, and its successors, including, without limitation, New Holdings, following the Reincorporation Merger. "Indebtedness" means with respect to any person, without duplication, (i) all liabilities, contingent or otherwise, of such person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (b) evidenced by bonds, notes, debentures, drafts accepted or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property (other than any such balance that represents an account payable or any other monetary obligation to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such person in the ordinary course of business of such person in connection with obtaining goods, materials or services and due within twelve months (or such longer period for payment as is customarily extended by such trade creditor) of the incurrence thereof, which account is not overdue by more than 90 days, according 17 113 to the original terms of sale, unless such account payable is being contested in good faith), or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) the maximum fixed repurchase price of all Disqualified Capital Stock of such person or, if there is no such maximum fixed repurchase price, the liquidation preference of such Disqualified Capital Stock, plus accrued but unpaid dividends; (iii) reimbursement obligations of such person with respect to letters of credit; (iv) obligations of such person with respect to Interest Swap Obligations and Foreign Exchange Agreements; (v) all liabilities of others of the kind described in the preceding clause (i), (ii), (iii) or (iv) that such person has guaranteed or that is otherwise its legal liability, and (vi) all obligations of others secured by a Lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such person are subject, whether or not the obligations secured thereby shall have been assumed by such person or shall otherwise be such person's legal liability (provided that if the obligations so secured have not been assumed by such person or are not otherwise such person's legal liability, such obligations shall be deemed to be in an amount equal to the fair market value of such properties or assets, as determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution). For purposes of the preceding sentence, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the New Discount Debenture Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution. For purposes of the New Discount Debenture Indenture, Indebtedness incurred by any person that is a general partnership (other than non-recourse Indebtedness) shall be deemed to have been incurred by the general partners of such partnership pro rata in accordance with their respective interests in the liabilities of such partnership unless any such general partner shall, in the reasonable determination of the Board of Directors of New Holdings, be unable to satisfy its pro rata share of the liabilities of the partnership, in which case the pro rata share of any Indebtedness attributable to such partner shall be deemed to be incurred at such time by the remaining general partners on a pro rata basis in accordance with their interests. "Independent Financial Advisor" means a reputable accounting, appraisal or a nationally recognized investment banking firm that is, in the reasonable judgment of the Board of Directors of New Holdings, qualified to perform the task for which such firm has been engaged hereunder and disinterested and independent with respect to New Holdings and its Affiliates. "Initial Public Offering" means an underwritten primary public offering of common stock of New Holdings at a time when New Holdings has not previously issued or sold any equity securities in an underwritten transaction pursuant to a registration statement filed pursuant to the Securities Act. "Interest Swap Obligation" means any obligation of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such person calculated by applying a fixed or floating rate of interest on the same notional amount; provided that the term "Interest Swap Obligation" shall also include interest rate exchange, collar, cap, swap option or similar agreements providing interest rate protection. "Investment" by any person in any other person means any investment by such person in such other person, whether by share purchase, capital contribution, loan, advance (other than reasonable loans and advances to employees for moving and travel expenses, as salary advances, or to permit the purchase of Qualified Capital Stock of New Holdings or any Subsidiary and other similar customary expenses incurred, in each case in the ordinary course of business consistent with past practice) or similar credit extension constituting Indebtedness of such other person, and any guarantee of Indebtedness of any other person. "Issue Date" means the date of original issuance of the New Discount Debentures pursuant to the New Discount Debenture Indenture. 18 114 "Letter of Credit Obligations" means Indebtedness of the Subsidiaries with respect to letters of credit issued pursuant to the Credit Agreement, and for purposes of the provisions of the New Discount Debenture Indenture summarized under the heading "Limitations on Incurrences of Additional Indebtedness," the aggregate principal amount of Indebtedness outstanding at any time with respect thereto, shall be deemed to consist of (a) the aggregate maximum amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance against real or personal property, or a security interest of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell which is intended to constitute or create a security interest, mortgage, pledge or lien, and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction); provided that in no event shall an operating lease be deemed to constitute a Lien hereunder. "Maturity Date" means , 2005. "Merger" means (i) the merger of Food 4 Less Supermarkets, Inc. into Ralphs Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such merger) pursuant to the Merger Agreement and (ii) immediately following the merger described in clause (i) of this definition, the merger of Ralphs Grocery Company into Ralphs Supermarkets, Inc. (with Ralphs Supermarkets, Inc. surviving such merger and changing its name to "Ralphs Grocery Company" in connection with such merger). "Merger Agreement" means the Agreement and Plan of Merger, dated as of September 14, 1994, by and among New Holdings, Holdings, FFL, Food 4 Less Supermarkets, Inc., RSI and the stockholders of RSI, as such agreement is in effect on the Issue Date. "Net Cash Proceeds" means Net Proceeds of (i) the sale of Qualified Capital Stock of New Holdings or (ii) any Asset Sale, in each case, in the form of cash or Cash Equivalents. "Net Proceeds" means (a) in the case of any Asset Sale or any issuance and sale by any person of Qualified Capital Stock, the aggregate net proceeds received by such person after payment of expenses, taxes, commissions and the like incurred in connection therewith (and, in the case of any Asset Sale, net of the amount of cash applied to repay Indebtedness secured by the asset involved in such Asset Sale), whether such proceeds are in cash or in property (valued at the fair market value thereof at the time of receipt as determined with respect to any Asset Sale resulting in Net Proceeds in excess of $5 million in good faith by the Board of Directors of such person, which determination shall be evidenced by a Board Resolution) and (b) in the case of any conversion or exchange of any outstanding Indebtedness or Disqualified Capital Stock of such person for or into shares of Qualified Capital Stock of New Holdings, the sum of (i) the fair market value of the proceeds received by New Holdings in connection with the issuance of such Indebtedness or Disqualified Capital Stock on the date of such issuance and (ii) any additional amount paid by the Holder to New Holdings upon such conversion or exchange. "New Discount Debentures" means the 13 5/8% Senior Discount Debentures due 2005 of New Holdings issued pursuant to the New Discount Debenture Indenture, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancing indebtedness is permitted to be incurred under the New Discount Debenture Indenture. "New Discount Debenture Indenture" means the indenture between New Holdings and United States Trust Company of New York, as trustee, dated as of the Issue Date, pursuant to which the New Discount Debentures will be issued, as amended or supplemented from time to time in accordance with the terms thereof. "New Holdings" means Food 4 Less Holdings, Inc., a Delaware corporation, and its successors. "Operating Coverage Ratio" means, with respect to any person, the ratio of (1) EBDIT of such person for the period (the "Pro Forma Period") consisting of the most recent four full fiscal quarters for which 19 115 financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Operating Coverage Ratio (the "Transaction Date") to (2) the aggregate Fixed Charges of such person for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter (the "Forward Period") reasonably anticipated by the Board of Directors of such person to become due from time to time during such period. For purposes of this definition, if the Transaction Date occurs prior to the first anniversary of the Merger, EBDIT for the Pro Forma Period shall be calculated, in the case of New Holdings, after giving effect on a pro forma basis to the Merger as if it had occurred on the first day of the Pro Forma Period. In addition to, but without duplication of, the foregoing, for purposes of this definition, EBDIT shall be calculated after giving effect (without duplication), on a pro forma basis for the Pro Forma Period (but no longer), to (a) any Investment, during the period commencing on the first day of the Pro Forma Period to and including the Transaction Date (the "Reference Period"), in any other person that, as a result of such Investment, becomes a subsidiary of such person, (b) the acquisition, during the Reference Period (by merger, consolidation or purchase of stock or assets) of any business or assets, which acquisition is not prohibited by the Indenture, and (c) any sales or other dispositions of assets (other than sales of inventory in the ordinary course of business) occurring during the Reference Period, in each case as if such incurrence, Investment, repayment, acquisition or asset sale had occurred on the first day of the Reference Period. In addition, for purposes of this definition, Fixed Charges shall be calculated after giving effect (without duplication), on a pro forma basis for the Forward Period, to any Indebtedness incurred or repaid on or after the first day of the Forward Period and prior to the Transaction Date. If such person or any of its subsidiaries directly or indirectly guarantees any Indebtedness of a third person, the Operating Coverage Ratio shall give effect to the incurrence of such Indebtedness as if such person or subsidiary had directly incurred such guaranteed Indebtedness. "operating lease" means any lease the obligations under which do not constitute Capitalized Lease Obligations. "Pari Passu Indebtedness" means, with respect to New Holdings, Indebtedness that ranks pari passu in right of payment to the New Discount Debentures (whether or not secured by any Lien) including the Senior Discount Notes, to the extent any remain outstanding following the Merger. "Payment Restriction" means, with respect to a Subsidiary of any person, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) such subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to such person or any other subsidiary of such person, (b) make loans or advances to such person or any other subsidiary of such person, or (c) transfer any of its properties or assets to such person or any other subsidiary of such person, or (ii) such person or any other subsidiary of such person to receive or retain any such (a) dividends, distributions or payments, (b) loans or advances, or (c) transfer of properties or assets. "Permitted Holder" means (i) Food 4 Less Equity Partners, L.P., The Yucaipa Companies or any entity controlled thereby or any of the partners thereof, (ii) Apollo Advisors, L.P., Lion Advisors, L.P., or any entity controlled thereby or any of the partners thereof, (iii) an employee benefit plan of New Holdings or any Subsidiary, or any participant therein, (iv) a trustee or other fiduciary holding securities under an employee benefit plan of New Holdings or any Subsidiary or (v) any Permitted Transferee of any of the foregoing persons. "Permitted Indebtedness" means (a) Indebtedness of the Company and its subsidiaries pursuant to (i) the Term Loans (and the Company and each Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $750 million or such lesser amount as may be actually funded under the Term Loans on or within 91 days following the Issue Date (with any such amounts funded after the Issue Date to be used to finance the repurchase of up to $224.5 million aggregate principal amount of Old RGC Notes pursuant to the "change of control purchase offer" provision set forth in section 1014 of the indentures pursuant to which the Old RGC Notes were issued, plus related fees and expenses) less the aggregate amount of all principal repayments thereunder pursuant to 20 116 and in accordance with the covenant described under "-- Certain Covenants -- Limitation on Asset Sales" above subsequent to the Issue Date and (ii) the revolving credit facility under the Credit Agreement (and the Company and each Subsidiary (to the extent it is not an obligor) may guarantee such Indebtedness) in an aggregate principal amount at any time outstanding not to exceed $325 million, less all permanent reductions thereunder pursuant to and in accordance with the covenant described under "-- Certain Covenants -- Limitation on Asset Sales" above; (b) any guarantee by New Holdings of the Indebtedness referred to in the foregoing clause (a); (c) Indebtedness of New Holdings or a Subsidiary owed to and held by New Holdings or a Subsidiary; (d) Indebtedness incurred by New Holdings or any Subsidiary in connection with the purchase or improvement of property (real or personal) or equipment or other capital expenditures in the ordinary course of business (including for the purchase of assets or stock of any retail grocery store or business) or consisting of Capitalized Lease Obligations, provided that (i) at the time of the incurrence thereof, such Indebtedness, together with any other Indebtedness incurred during the most recently completed four fiscal quarter period in reliance upon this clause (d) does not exceed, in the aggregate, 3% of net sales of New Holdings and its Subsidiaries during the most recently completed four fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the first anniversary of the Merger) and (ii) such Indebtedness, together with all then outstanding Indebtedness incurred in reliance upon this clause (d) does not exceed, in the aggregate, 3% of the aggregate net sales of New Holdings and its Subsidiaries during the most recently completed twelve fiscal quarter period on a consolidated basis (calculated on a pro forma basis if the date of incurrence is prior to the third anniversary of the Merger); (e) Indebtedness incurred by New Holdings or any Subsidiary in connection with capital expenditures in an aggregate principal amount not exceeding $150 million, provided that such capital expenditures relate solely to the integration of the operations of RSI, Food 4 Less Supermarkets, Inc. and their respective subsidiaries as described in this Prospectus; (f) Indebtedness of New Holdings or any Subsidiary incurred under Foreign Exchange Agreements and Interest Swap Obligations; (g) guarantees incurred in the ordinary course of business, by New Holdings or a Subsidiary, of Indebtedness of any other person in aggregate not to exceed $25 million at any time outstanding; (h) guarantees by New Holdings or a Subsidiary of Indebtedness incurred by a wholly-owned Subsidiary so long as the incurrence of such Indebtedness incurred by such wholly-owned Subsidiary is permitted under the terms of the New Discount Debenture Indenture; (i) Refinancing Indebtedness; (j) Indebtedness for letters of credit relating to workers' compensation claims and self-insurance or similar requirements in the ordinary course of business; (k) Existing Indebtedness and other Indebtedness outstanding on the Issue Date (after giving effect to the Merger); (l) Indebtedness arising from guarantees of Indebtedness of New Holdings or any Subsidiary or other agreements of New Holdings or a Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Subsidiary, other than guarantees of Indebtedness incurred by any person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by New Holdings and its Subsidiaries in connection with such disposition; (m) obligations in respect of performance bonds and completion guarantees provided by New Holdings or any Subsidiary in the ordinary course of business; (n) Indebtedness of New Holdings with respect to the Senior Discount Notes, if any, New Discount Debentures (including the accretion of the Senior Discount Notes and the New Discount Debentures up to their respective stated principal amount at maturity) and Seller Debentures (including the issuance of secondary securities in lieu of cash interest payments pursuant to the terms of the Seller Debenture Indenture); and (o) additional Indebtedness of New Holdings or any Subsidiary in an amount not to exceed $200 million at any time outstanding. "Permitted Investment" by any person means (i) any Related Business Investment, (ii) Investments in securities not constituting cash or Cash Equivalents and received in connection with an Asset Sale or any other disposition of assets not constituting an Asset Sale by reason of the $500,000 threshold contained in the definition thereof, (iii) cash and Cash Equivalents, (iv) Investments existing on the Issue Date, (v) Investments specifically permitted by and made in accordance with the provisions of the New Discount Debenture Indenture summarized under "Limitation on Restricted Payments" and "Limitation on Transac- 21 117 tions with Affiliates," (vi) Investments by any Subsidiary in other Subsidiaries, and (vii) additional Investments in an aggregate amount not exceeding $5 million. "Permitted Liens" shall mean (i) Liens for taxes, assessments and governmental charges or claims not yet due or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers, warehouseman, mechanics, suppliers, materialmen, repairmen or other like Liens arising in the ordinary course of business, deposits made to obtain the release of such Liens, and with respect to amounts not yet delinquent for a period of more than 60 days or being contested in good faith by an appropriate process of law, and for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (iii) Liens incurred or pledges or deposits made in the ordinary course of business to secure obligations under workers' compensation, unemployment insurance and other types of social security or similar legislation; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, zoning or other restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of New Holdings or any of its Subsidiaries incurred in the ordinary course of business; (vi) Liens upon specific items of inventory or other goods and proceeds of any person securing such person's obligations in respect of bankers' acceptances issued or created for the account of such person to facilitate the purchase, shipment or storage of such inventory or other goods in the ordinary course of business; (vii) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of nondelinquent customs duties in connection with the importation of goods; (ix) judgement and attachment Liens not giving rise to a Default or Event of Default; (x) leases or subleases granted to others not interfering in any material respect with the business of New Holdings or any Subsidiary; (xi) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business that are within the general parameters customary in the industry, in each case securing Indebtedness under Interest Swap Obligations and Foreign Exchange Agreements and forward contracts, option futures contracts, futures options or similar agreements or arrangements designed to protect New Holdings or any Subsidiary from fluctuations in the price of commodities; (xii) Liens encumbering deposits made in the ordinary course of business to secure nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of New Holdings or its Subsidiaries for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made; (xiii) Liens arising out of consignment or similar arrangements for the sale of goods entered into by New Holdings or any Subsidiary in the ordinary course of business in accordance with past practices; (xiv) any interest or title of a lessor in the property subject to any lease, whether characterized as capitalized or operating other than any such interest or title resulting from or arising out of a default by New Holdings or any Subsidiary of its obligations under such lease; (xv) Liens arising from filing UCC financial statements for precautionary purposes in connection with true leases of personal property that are otherwise permitted under the New Discount Debenture Indenture and under which New Holdings or any Subsidiary is lessee; and (xvi) additional Liens securing Indebtedness of the Company at any one time outstanding not exceeding the sum of (i) $25 million and (ii) 10% of the aggregate Consolidated Net Income of the Company earned subsequent to the Issue Date and on or prior to such time. "Permitted Payments" means (i) any payment by New Holdings or any Subsidiary to The Yucaipa Companies or the principals or any Affiliate thereof for consulting, management, investment banking or similar services, or for reimbursement of losses, costs and expenses pursuant to the Consulting Agreement, (ii) any payment by New Holdings or any Subsidiary to Apollo Advisors, L.P. or the principals or Affiliates thereof in an aggregate amount not to exceed $5 million as a commitment fee in connection with the purchase of equity securities of New Holdings on the Issue Date, and (iii) any payment by New Holdings or any Subsidiary (a) in connection with repurchases of outstanding shares of New Holdings common stock following the death, disability or termination of employment of management stockholders, and (b) of amounts 22 118 required to be paid by New Holdings or any Subsidiaries to participants in employee benefit plans upon any termination of employment by such participants, as provided in the documents related thereto, in an aggregate amount (for both clauses (a) and (b)) not to exceed $10 million in any Yearly Period (provided that any unused amounts may be carried over to any subsequent Yearly Period subject to a maximum amount of $20 million in any Yearly Period). "Permitted Transferees" means, with respect to any person, (i) any Affiliate of such person, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any such person, (iii) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or general or limited partners of which, include only such person or his or her spouse or lineal descendants, in each case to whom such person has transferred the beneficial ownership of any securities of New Holdings, (iv) any investment account whose investment managers and investment advisors consist solely of such person and/or Permitted Transferees of such person and (v) any investment fund or investment entity that is a subsidiary of such person or a Permitted Transferee of such person. "Plan of Liquidation" means, with respect to any person, a plan that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously, in phases or otherwise) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such person to holders of Capital Stock of such person. "Preferred Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of such person's preferred or preference stock, whether outstanding on the date hereof or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms of the New Discount Debenture Indenture, a calculation in accordance with Article 11 of Regulation S-X under the Securities Act as interpreted by New Holdings' chief financial officer or Board of Directors in consultation with its independent certified public accountants. "Qualified Capital Stock" means, with respect to any person, any Capital Stock of such person that is not Disqualified Capital Stock. "Refinancing Indebtedness" means, with respect to any person, Indebtedness of such person issued in exchange for, or the proceeds from the issuance and sale or disbursement of which are used to substantially concurrently repay, redeem, refund, refinance, discharge or otherwise retire for value, in whole or in part (collectively, "repay"), or constituting an amendment, modification or supplement to, or a deferral or renewal of (collectively, an "amendment"), any Indebtedness of such person existing on the Issue Date or Indebtedness (other than Permitted Indebtedness, except Permitted Indebtedness incurred pursuant to clauses (b), (d), (e), (i), (k) and (n) of the definition thereof) incurred in accordance with the New Discount Debenture Indenture (a) in a principal amount (or, if such Refinancing Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon the acceleration thereof, with an original issue price) not in excess of (without duplication) (i) the principal amount or the original issue price, as the case may be, of the Indebtedness so refinanced (or, if such Refinancing Indebtedness refinances Indebtedness under a revolving credit facility or other agreement providing a commitment for subsequent borrowings, with a maximum commitment not to exceed the maximum commitment under such revolving credit facility or other agreement) plus (ii) unpaid accrued interest on such Indebtedness plus (iii) premiums, penalties, fees and expenses actually incurred by such person in connection with the repayment or amendment thereof and (b) with respect to Refinancing Indebtedness that repays or constitutes an amendment to Subordinated Indebtedness, such Refinancing Indebtedness (x) shall not have any fixed mandatory redemption or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in such repaid or amended Subordinated Indebtedness, except to the extent that any such requirement applies on a date after the Maturity Date and (y) shall contain subordination and default 23 119 provisions no less favorable in any material respect to Holders than those contained in such repaid or amended Subordinated Indebtedness. "Reincorporation Merger" means the merger, prior to the Merger, of Holdings with and into New Holdings. "Related Business Investment" means (i) any Investment by a person in any other person a majority of whose revenues are derived from the operation of one or more retail grocery stores or supermarkets or any other line of business engaged in by New Holdings or any Subsidiary as of the Issue Date; (ii) any Investment by such person in any cooperative or other supplier, including, without limitation, any joint venture which is intended to supply any product or service useful to the business of New Holdings and any Subsidiary as it is conducted as of the Issue Date and as such business may thereafter evolve or change; and (iii) any capital expenditure or Investment in each case reasonably related to the business of New Holdings and any Subsidiary as it is conducted as of the Issue Date and as such business may thereafter evolve or change. "Restricted Debt Prepayment" means the purchase, redemption, acquisition or retirement for value by New Holdings, prior to the scheduled maturity or prior to any scheduled repayment of principal or any sinking fund payment in respect of any Subordinated Indebtedness. "Restricted Payment" means any (i) Stock Payment or (ii) Investment (other than a Permitted Investment) or (iii) Restricted Debt Prepayment. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Seller Debentures" means the 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 of New Holdings, including any secondary securities issued in respect thereof, in each case, issued pursuant to the Seller Debenture Indenture, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancing indebtedness is permitted to be incurred under the New Discount Debenture Indenture. "Seller Debenture Indenture" means the indenture between New Holdings and Norwest Bank Minnesota, N.A., as trustee, dated as of the Issue Date, pursuant to which the Seller Debentures will be issued, as amended or supplemented from time to time in accordance with the terms thereof. "Senior Discount Notes" means the 15.25% Senior Discount Notes due 2004 of Holdings issued pursuant to the Senior Discount Note Indenture, as the same may be modified or amended from time to time and refinancings thereof, to the extent such refinancing indebtedness is permitted to be incurred under the New Discount Debenture Indenture. "Senior Discount Note Indenture" means the indenture between Holdings and United States Trust Company of New York, as trustee, dated as of December 15, 1992, pursuant to which the Senior Discount Notes were issued, as amended or supplemented from time to time in accordance with the terms thereof. "Significant Stockholder" means, with respect to any person, any other person who is the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of any class of equity securities of such person that are entitled to vote on a regular basis for the election of directors of such person. "Significant Subsidiary" means each subsidiary of New Holdings that is either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the Securities Act and the Exchange Act (as such regulation is in effect on the date hereof) or (b) material to the financial condition or results of operations of New Holdings and its Subsidiaries taken as a whole. "Stock Payment" means, with respect to any person, (a) the declaration or payment by such person, either in cash or in property, of any dividend on (except, in the case of New Holdings, dividends payable solely in Qualified Capital Stock of New Holdings), or the making by such person or any of its subsidiaries of any other distribution in respect of, such person's Qualified Capital Stock or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), or (b) the redemption, repurchase, retirement or other acquisition for value by 24 120 such person or any of its subsidiaries, directly or indirectly, of such person's Qualified Capital Stock (and, in the case of a Subsidiary, Qualified Capital Stock of New Holdings) or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than exchangeable or convertible Indebtedness of such person), other than, in the case of New Holdings, through the issuance in exchange therefor solely of Qualified Capital Stock of New Holdings, provided, however, that in the case of a Subsidiary, the term "Stock Payment" shall not include any such payment with respect to its Capital Stock or warrants, rights or options to purchase or acquire shares of any class of its Capital Stock that are owned solely by New Holdings or a wholly owned Subsidiary. "Subordinated Indebtedness" means Indebtedness of New Holdings that is subordinated in right of payment to the New Discount Debentures, including Indebtedness under the Seller Debentures. "subsidiary" of any person means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly, owned by such person, by one or more subsidiaries of such person or by such person and one or more subsidiaries of such person or (ii) a partnership in which such person or a subsidiary of such person is, at the date of determination, a general partner of such partnership, but only if such person or its subsidiary is entitled to receive more than 50% of the assets of such partnership upon its dissolution, or (iii) any other person (other than a corporation or a partnership) in which such person, a subsidiary of such person or such person and one or more subsidiaries of such person, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such person. "Subsidiary" means any subsidiary of New Holdings. "Term Loans" means the term loan facility under the Credit Agreement and any agreement governing Indebtedness incurred to refund, replace or refinance any borrowings outstanding under such facility or under any prior refunding, replacement or refinancing thereof (in each case, in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions). "The Yucaipa Companies" means The Yucaipa Companies, a California general partnership, or any successor thereto which is an Affiliate of Ronald W. Burkle or his Permitted Transferees and which has been established for the sole purpose of changing the form of The Yucaipa Companies from that of a partnership to that of a limited liability company or any other form of entity which is not materially adverse to the rights of the Holders under the Indenture. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (y) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding principal amount of such Indebtedness. "wholly-owned Subsidiary" means any Subsidiary all of the shares of Capital Stock of which (other than directors' qualifying shares) are at the time directly or indirectly owned by New Holdings. "Yearly Period" means each fiscal year of New Holdings; provided that the first Yearly Period shall begin on the Issue Date and shall end on January 28, 1996. 25 EX-3.4.1 5 AMENDED AND RESTATED BYLAWS OF FOOD 4 LESS HOLDING 1 EXHIBIT 3.4.1 RESTATED BYLAWS OF FOOD 4 LESS HOLDINGS, INC. 2 RESTATED BYLAWS OF FOOD 4 LESS HOLDINGS, INC. TABLE OF CONTENTS
Page ---- ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Annual Meeting of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 3. Quorum; Adjourned Meetings and Notice Thereof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 4. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 5. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 7. Notice of Stockholder's Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 8. Maintenance and Inspection of Stockholder List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 9. Stockholder Action by Written Consent Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1. The Number of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 4. Effect of Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 5. Place of Directors' Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 6. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 7. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 9. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 10. Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 11. Committees of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 12. Minutes of Committee Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 13. Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 14. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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Page ---- ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 1. Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2. Election of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 3. Subordinate Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4. Compensation of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 5. Term of Office; Removal and Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6. Action With Respect to Securities Owned by the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 7. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 8. President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 9. Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 10. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 11. Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 12. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 13. Assistant Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE V CERTIFICATES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 1. Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 2. Signatures on Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3. Statement of Stock Rights, Preferences, Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 4. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 5. Transfers of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 6. Fixing Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE VI GENERAL PROVISIONS - DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 1. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2. Payment of Dividends; Directors' Duties . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3. Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 4. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 6. Manner of Giving Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 7. Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 8. Annual Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE VII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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Page ---- Section 1. Amendment by Directors or Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
iii 5 RESTATED BYLAWS OF FOOD 4 LESS HOLDINGS, INC. ARTICLE I OFFICES Section 1. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders shall be held at any place either within or outside the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. Section 2. The annual meeting of stockholders shall be held each year on a date and a time designated by the Board of Directors. At each annual meeting directors shall be elected and any other proper business may be transacted. Section 3. A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, shall constitute a quorum for the transaction of business except as otherwise provided 6 by law, by the Certificate of Incorporation, or by these Bylaws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat. Section 4. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes, or the Certificate of Incorporation, or these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 5. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. All proxies must be filed with the Secretary of the corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Each 2 7 stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the corporation on the record date set by the Board of Directors as provided in Article V, Section 6 hereof. All elections shall be had and all questions decided by a plurality vote. Section 6. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the President and shall be called by the President or the Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding, and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 7. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 8. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and 3 8 showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 9. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this Section 9 to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation by delivery to its registered office in 4 9 Delaware, its principal place of business or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole Board shall be nine (9). The directors need not be stockholders. Except as provided in Section 2 of this Article, the directors shall be elected at the annual meeting of the stockholders (or any special meeting of the stockholders called for the purpose of electing directors) and each director elected shall hold office until his successor is elected and qualified; provided, however, that except as otherwise provided for in that certain Stockholders Agreement dated as of April __, 1995 of the corporation (the "Stockholders Agreement") or restricted by the Certificate of Incorporation or by law, any director or the entire Board of Directors may be removed, either with or without cause, from the Board of Directors at any meeting of stockholders by a majority of the stock represented and entitled to vote thereat. Section 2. Except as provided for in the Stockholders Agreement, vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. The directors 5 10 so chosen shall hold office until the next annual election of directors and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then, except as provided for in the Stockholders Agreement, an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The property and business of the corporation shall be managed by or under the direction of its Board of Directors, and in a manner consistent with the requirements of Section 5.2 of the Stockholders Agreement, as long as such agreement remains effective and enforceable. Except as provided in the Stockholders Agreement, in addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 4. Notwithstanding anything to the contrary contained herein, election, renewal and filling of vacancies on the Board of Directors shall be effected in accordance with the terms and provisions set forth in Article V of the Stockholders Agreement, as long as such agreement remains effective and enforceable. 6 11 MEETINGS OF THE BOARD OF DIRECTORS Section 5. The directors may hold their meetings and have one or more offices, and keep the books of the corporation outside of the State of Delaware. Section 6. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Section 7. Special meetings of the Board of Directors may be called by the President on forty-eight hours' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the President or the Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director; in which case special meetings shall be called by the President or Secretary in like manner or on like notice on the written request of the sole director. Section 8. At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation, by these Bylaws or by the Stockholders Agreement. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. Section 9. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the 7 12 Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 10. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. COMMITTEES OF DIRECTORS Section 11. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, including an audit committee and an executive committee (as provided for in Section 5.1 of the Stockholders Agreement), each such committee to consist of one or more of the directors of the corporation, and having authority to take such action as set forth in Section 5.1 of the Stockholders Agreement, as long as such agreement remains effective and enforceable. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the Stockholders Agreement and in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the 8 13 business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Section 12. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. INDEMNIFICATION Section 14(a). The corporation shall indemnify to the maximum extent permitted by law any person who was or is a party or is threatened to be made a party to any 9 14 threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of 10 15 the corporation and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (c) To the extent that a director or officer of the corporation shall be successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under paragraphs (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses, including attorneys' fees, incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or 11 16 proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Section 14. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 14 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) The Board of Directors may authorize, by a vote of a majority of a quorum of the Board of Directors, the corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 14. (h) For the purposes of this Section 14, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers so that any person who is or was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director 12 17 or officer of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this Section 14, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include service as a director or officer of the corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 14. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 14 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE IV OFFICERS Section 1. OFFICERS. The officers of this corporation shall be chosen by the Board of Directors and shall include a Chairman of the Board of Directors or a President, or both, and a Secretary. The corporation may also have at the discretion of the Board of Directors such other officers as are desired, including a Vice-Chairman of the 13 18 Board of Directors, a Chief Executive Officer, a Treasurer, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 hereof. In the event there are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 2. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the corporation. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. Section 6. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President and any 14 19 such officer may, in the name of and on behalf of the Corporation, take all such action not otherwise prohibited by the Stockholders Agreement as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. CHAIRMAN OF THE BOARD Section 7. The Chairman of the Board, if such an officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article IV. PRESIDENT Section 8. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall be an ex-officio member of all committees and shall have the general powers and duties of management usually vested in the office of President and Chief 15 20 Executive Officer of corporations, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. VICE PRESIDENTS Section 9. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors. SECRETARY AND ASSISTANT SECRETARY Section 10. The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for the standing committees when required by the Board of Directors. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or these Bylaws. He shall keep in safe custody the seal of the corporation, and when authorized by the Board, affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 11. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no 16 21 such determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. TREASURER AND ASSISTANT TREASURER Section 12. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the corporation, in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 13. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, or if there be no such determination, the Assistant Treasurer designated by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the 17 22 Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE V CERTIFICATES OF STOCK Section 1. Every holder of stock of the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer of the corporation, certifying the number of shares represented by the certificate owned by such stockholder in the corporation. Section 2. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 3. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the 18 23 corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. LOST, STOLEN OR DESTROYED CERTIFICATES Section 4. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFERS OF STOCK Section 5. Upon surrender to the corporation, or the transfer agent of the corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 19 24 FIXING RECORD DATE Section 6. FIXING RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 7. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. ARTICLE VI GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, 20 25 in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve. CHECKS Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. NOTICES Section 6. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or 21 26 stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. Section 7. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ANNUAL STATEMENT Section 8. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VII AMENDMENTS Section 1. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the Certificate of 22 27 Incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws. 23 EX-4.6.2 6 FIRST SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.6.2 SENIOR DISCOUNT NOTES DUE 2004, SERIES A SENIOR DISCOUNT NOTES DUE 2004, SERIES B ------------------------ FIRST SUPPLEMENTAL INDENTURE DATED AS OF , 1995 TO INDENTURE DATED AS OF DECEMBER 15, 1992 ------------------------ FOOD 4 LESS HOLDINGS, INC. AND UNITED STATES TRUST COMPANY OF NEW YORK TRUSTEE This FIRST SUPPLEMENTAL INDENTURE to the Indenture (as defined below) (the "First Supplemental Indenture") is dated as of , 1995, and is made by and among Food 4 Less Holdings, Inc., a California corporation (the "Company") and United States Trust Company of New York (the "Trustee"). RECITALS A. Pursuant to an Indenture dated December 15, 1992 (the "Indenture") between the Company and the Trustee, the Company issued $103,600,000 principal amount (at maturity) of its 15.25% Senior Discount Notes due 2004. B. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. C. The Company has entered into a definitive Agreement and Plan of Merger whereby the Company's subsidiary Food 4 Less Supermarkets, Inc. will be merged with and into Ralphs Supermarkets, Inc. ("RSI"), and immediately thereafter Ralphs Grocery Company ("RGC"), which is a wholly-owned subsidiary of RSI, will merge with and into RSI and RSI will change its name to Ralphs Grocery Company (together, the "Merger"). D. In order to permit the Merger under the Indenture, the Company must amend or supplement Section 5.01 thereof which limits the ability of the Company to consolidate or merge with any other person unless certain conditions are satisfied. In addition, in connection with the Merger and the cash tender offer made to Holders of the Securities precedent thereto, the Company desires to eliminate substantially all of the restrictive covenants in the Indenture. The primary purpose of this First Supplemental Indenture is to permit the Merger and to eliminate substantially all of the restrictive covenants in the Indenture. E. Section 9.02 of the Indenture provides that the Company, when authorized by a Board Resolution, and the Trustee, together with the written consent of the Holder or Holders of not less than a majority in aggregate principal amount (at maturity) of the outstanding Securities, may amend or supplement the Indenture, including Section 5.01 and the other sections thereof set forth below, or the Securities. F. The Company, having been duly authorized by a Board Resolution, and the Trustee, having received 2 an Opinion of Counsel that the execution of this First Supplemental Indenture is authorized and permitted by the Indenture and having received an Officer's Certificate of the Company certifying that Holders of not less than a majority in aggregate principal amount (at maturity) of the outstanding Securities have consented (and not theretofore revoked) to the amendments and supplements set forth below, execute and deliver this First Supplemental Indenture pursuant to Article 9 of the Indenture. G. All the conditions and requirements necessary to make this First Supplemental Indenture, when duly executed and delivered, a valid, binding agreement, enforceable in accordance with its terms, have been performed and fulfilled. NOW, THEREFORE, it is agreed as follows: 1. Pursuant to Section 9.02 of the Indenture and having received the requisite consents required thereby, the Indenture is amended as follows: a. The covenant entitled "Limitation on Restricted Payments", set forth in Section 4.03 of the Indenture, is hereby deleted in its entirety. b. The covenant entitled "Limitation on Transactions with Affiliates" set forth in Section 4.11 of the Indenture, is hereby deleted in its entirety. c. The covenant entitled "Limitation on Incurrences of Additional Indebtedness", set forth in Section 4.12 of the Indenture, is hereby deleted in its entirety. d. The covenant entitled "Limitation on Liens", set forth in Section 4.13 of the Indenture, is hereby deleted in its entirety. e. The covenant entitled "Limitation on Change of Control", set forth in Section 4.14 of the Indenture, is hereby deleted in its entirety. f. The covenant entitled "Limitation on Proceeds of Public Offering Sale", set forth in Section 4.15 of the Indenture, is hereby deleted in its entirety. g. The covenant entitled "Limitation on Disposition of Assets", set forth in Section 4.16 of the Indenture, is hereby deleted in its entirety. h. The covenant entitled "Limitation on Sale of Stock of Subsidiaries", set forth in Section 4.17 of the Indenture, is hereby deleted in its entirety. i. Section 5.01(a)(2) of the Indenture under the covenant entitled "When Company May Merge, Etc.", is hereby deleted in its entirety. j. The following definition is hereby added to Section 1.01 of the Indenture: "The New Credit Facility" means the senior bank facility pursuant to which Bankers Trust Company has agreed, subject to certain conditions, to provide up to $1,075 million of financing under the Loan Agreement dated , 1995. k. The following sentence is hereby added to the definition of "Loan Documents", set forth in Section 1.01 of the Indenture: "The New Credit Facility shall be deemed to constitute a refinancing of the Loan Documents." 2. This First Supplemental Indenture shall be effective as of the date hereof upon consummation of the Merger. 3. This instrument may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute the instrument by signing such counterpart. 2 3 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be signed and acknowledged by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto duly affixed and attested, all as of the day and year first above written. FOOD 4 LESS HOLDINGS, INC. [Seal] Attest: _________________________________ By: _________________________________ Its: UNITED STATES TRUST COMPANY OF NEW YORK [Seal] Attest: _________________________________ By: _________________________________ Its:
3 EX-4.6.3 7 SECOND SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.6.3 SENIOR DISCOUNT NOTES DUE 2004, SERIES A SENIOR DISCOUNT NOTES DUE 2004, SERIES B ------------------------ SECOND SUPPLEMENTAL INDENTURE DATED AS OF , 1995 TO INDENTURE DATED AS OF DECEMBER 15, 1992 ------------------------ FOOD 4 LESS HOLDINGS, INC. (A DELAWARE CORPORATION) AS SUCCESSOR BY MERGER TO FOOD 4 LESS HOLDINGS, INC. (A CALIFORNIA CORPORATION) AND UNITED STATES TRUST COMPANY OF NEW YORK TRUSTEE This SECOND SUPPLEMENTAL INDENTURE to the Indenture (as defined below) (the "Second Supplemental Indenture") is dated as of , 1995, and is made by and among Food 4 Less Holdings, Inc., a Delaware corporation ("New Holdings"), as successor by merger to Food 4 Less Holdings, Inc., a California corporation (the "Company"), and United States Trust Company of New York (the "Trustee"). RECITALS A. Pursuant to an Indenture dated December 15, 1992 (the "Indenture") between the Company and the Trustee, the Company issued $103,600,000 principal amount (at maturity) of its 15.25% Senior Discount Notes due 2004. B. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. C. Pursuant to the Agreement and Plan of Merger dated September 14, 1994, as amended, the Company merged with and into New Holdings (the "Merger"). D. The Merger was a transaction subject to the requirements of Section 5.01 of the Indenture. Section 5.02 of the Indenture provides that upon any merger subject to Section 5.01 thereof, the successor person into which the Company is merged shall succeed to and be substituted for, and may exercise every right and power of the Company under the Indenture with the same effect as if such successor person had been named as the Company therein. Section 5.02 also provides that when a successor corporation assumes all of the obligations of the Company under the Indenture and under the Securities, and agrees to be bound thereby, the predecessor shall be released from such obligations. The sole purpose of this Second Supplemental Indenture is to allow New Holdings, as the successor person to the Company in the Merger, to assume the obligations of the Company under the Indenture. E. The Company, being duly authorized by a Board Resolution, and the Trustee are authorized to execute and deliver this Second Supplemental Indenture. 4 2 F. All the conditions and requirements necessary to make this Second Supplemental Indenture, when duly executed and delivered, a valid, binding agreement, enforceable in accordance with its terms, have been performed and fulfilled. NOW, THEREFORE, it is agreed as follows: 1. Pursuant to Section 5.02, New Holdings, as the successor person into which the Company has been merged in the Merger subject to Section 5.01, hereby succeeds to and is substituted for, and may exercise every right and power of the Company under the Indenture with the same effect as if New Holdings had been named as the Company therein. New Holdings hereby assumes all of the obligations of the Company under the Indenture and under the Securities and agrees to be bound thereby. In accord with Section 5.02, the Company is released from such obligations. 2. This Second Supplemental Indenture shall be effective as of the date hereof upon consummation of the Merger. 3. This instrument may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute the instrument by signing such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be signed and acknowledged by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto duly affixed and attested, all as of the day and year first above written.
FOOD 4 LESS HOLDINGS, INC. (a Delaware corporation) [Seal] Attest: _____________________________________ ___________________________________________ By: Its: UNITED STATES TRUST COMPANY OF NEW YORK [Seal] Attest: ______________________________________ By: _______________________________________ Its:
5 EX-4.10.2 8 AMENDMENT NO. 2 TO BANK COMMITMENT LETTER 1 EXHIBIT 4.10.2 April 26, 1995 Food 4 Less Supermarkets, Inc. c/o The Yucaipa Companies 10000 Santa Monica Boulevard Fifth Floor Los Angeles, California 90067 Attention: Mr. Ronald W. Burkle Mr. Patrick Graham Re: Acquisition of Ralphs Supermarkets, Inc. Gentlemen: You have advised us that Food 4 Less Supermarkets, Inc. ("F4L"), a wholly-owned subsidiary of Food 4 Less Holdings, Inc. ("F4L Holdings"), proposes to acquire (the "Acquisition") all of the outstanding capital stock of Ralphs Supermarkets, Inc. ("RSI"). RSI owns all of the issued and outstanding capital stock of Ralphs Grocery Company ("RG"). Prior to the Acquisition, Food 4 Less, Inc. ("FFL") will merge with F4L Holdings, its wholly-owned subsidiary (the "FFL Merger"), with F4L Holdings being the surviving corporation (such surviving corporation being referred to herein as "Holdings"), and, immediately following the FFL Merger, Holdings will merge with its newly-formed wholly-owned subsidiary incorporated in Delaware, with such subsidiary being the surviving corporation (such surviving corporation being referred to herein as "New Holdings"; the merger of Holdings with and into New Holdings, together with the FFL Merger, being referred to herein as the "Holdings Mergers"). The Acquisition will be consummated by merging RSI with and into F4L with RSI being the surviving corporation (the "RSI Merger"). Upon consummation of the RSI Merger, RG will be merged with and into RSI with RSI being the surviving corporation (the "RGC Merger"; the RSI Merger and the RGC Merger are hereinafter collectively referred to as the "Mergers"). Upon the consummation of the Holdings Mergers and the Mergers, all of F4L's current subsidiaries will initially be direct or indirect wholly-owned subsidiaries of RSI and RSI will be a wholly-owned subsidiary of New Holdings which will be controlled, directly or indirectly, by an affiliate of The Yucaipa Companies ("Yucaipa"). We are pleased to confirm that Bankers Trust Company ("Bankers Trust") is prepared to commit to provide all of the senior bank financing which is required to consummate the 2 Acquisition, the Mergers and related transactions on the terms and conditions described in this letter up to a maximum aggregate amount of $1,075 million. Bankers Trust welcomes the opportunity to continue its relationship with the F4L companies. Bankers Trust's long-term experience with each of F4L and RG, currently as a Co-Agent and the Agent on their existing bank credit agreements, respectively, provides strong support for its willingness and ability to provide the senior bank financing described herein. The senior bank facilities will consist of a term loan facility of up to $750 million (the "Term Loan Facility") and a six year revolving credit facility of up to $325 million with a $150 million sublimit for letters of credit (the "Revolving Credit Facility"; the Term Loan Facility and the Revolving Credit Facility are hereinafter collectively referred to as the "Bank Facilities"). Based on the assumptions described below, we propose that the Term Loan Facility will consist of a six year Tranche A Loan of up to $375 million, a seven year Tranche B Loan of up to $125 million, an eight year Tranche C Loan of up to $125 million and a nine year Tranche D Loan of up to $125 million. We reserve the right to propose changes in the actual amount, maturity and amortization of each such tranche, however, in the event those assumptions are not met, including the successful consummation of certain consent solicitations and exchange and purchase offers with respect to the existing F4L and RG debt securities described below, or if we determine that to do so would enhance the successful syndication of the Bank Facilities. With respect to the existing public debt securities of F4L, Holdings and RG, you have advised us that F4L currently has outstanding $175 million in aggregate principal amount of 10.45% Senior Notes due April 15, 2000 (the "10.45% Senior Notes") and $145 million in aggregate principal amount of 13.75% Senior Subordinated Notes due June 15, 2001 (the "13.75% Subordinated Notes"); that Holdings currently has outstanding $103.6 million in aggregate face amount ($71.3 million in estimated accreted value at closing) of 15.25% Senior Discount Notes, Series B due December 15, 2004 (the "15.25% Discount Notes"; the 10.45% Senior Notes, the 13.75% Subordinated Notes and the 15.25% Discount Notes are hereinafter collectively referred to as the "Existing F4L Debt Securities"); and that RG currently has outstanding $150 million in aggregate principal amount of 9% Senior Subordinated Notes due April 1, 2003 (the "9% Subordinated Notes") and $300 million in aggregate principal amount of 10-1/4% Senior Subordinated Notes due July 15, 2002 (the "10-1/4% Subordinated Notes"; the 9% Subordinated Notes and the 10-1/4% Subordinated Notes are hereinafter collectively referred to as the "Existing RG Debt Securities"). To consummate the Acquisition, the Holdings Mergers and the Mergers as proposed, you have advised us of the following: 2 3 1. F4L and Holdings intend to undertake consent solicitations with respect to the Existing F4L Debt Securities to obtain the necessary amendments to the terms of the Existing F4L Debt Securities, including such covenants in the indentures pursuant to which the Existing F4L Debt Securities have been issued as may be mutually agreed upon, to permit the Acquisition, the Holdings Mergers, the Mergers and related transactions to occur as described herein. With respect to the 15.25% Discount Notes, you have advised us that you intend to offer to purchase for cash such securities at an aggregate price which does not exceed $85.3 million, in part from the proceeds of the issuance by New Holdings in a private placement of not less than $100 million in initial accreted value of 13-5/8% Senior Discount Debentures due 2005 (the "New Holdings Discount Debentures"). The New Holdings Discount Debentures will not mature or amortize prior to the date which is 10 years and 1 month from the consummation of the Acquisition (the "Closing Date") and will accrete at a rate of 13-5/8% from the date of original issuance for not less than 5 years, such that the aggregate principal amount of the New Holdings Discount Debentures shall be $193,300,000 at maturity. From and after five years following the date of original issuance, the New Holdings Discount Debentures may bear cash interest at a rate of 13-5/8% per annum. In addition, (i) F4L will issue (x) new Senior Notes due 2004 (the "New F4L Senior Notes"), and make a cash payment in an aggregate amount to be mutually agreed upon, in exchange for an equivalent principal amount of its 10.45% Senior Notes and (y) new senior subordinated notes due 2005 (the "New F4L 13.75% Subordinated Notes"), and make a cash payment in an aggregate amount to be mutually agreed upon, in exchange for an equivalent principal amount of its 13.75% Subordinated Notes. The amount of (i) the New F4L Senior Notes and the 10.45% Senior Notes outstanding at any time will not exceed $470 million in aggregate principal amount and (ii) the New F4L 13.75% Subordinated Notes and the 13.75% Subordinated Notes outstanding at any time will not exceed $145 million in aggregate principal amount. The offer to purchase, consent solicitations and exchange offers described in this paragraph 1 are collectively referred to herein as the "F4L Solicitations". 2. You intend (i) to offer to exchange the Existing RG Debt Securities for an equivalent principal amount (but in no event less than $225 million) of new Senior Subordinated Notes due 2005 (the "F4L Senior Subordinated Notes") to be issued by F4L and a cash payment in an aggregate amount to be mutually agreed upon, (ii) to purchase for cash an amount of Existing RG Debt Securities equal to the amount of Existing RG Debt Securities which are not exchanged for F4L Senior Subordinated Notes as described in clause (i) above, but in no event shall such amount 3 4 exceed $225 million and (iii) to solicit certain consents with respect to the Existing RG Debt Securities. The offers and solicitation described in clauses (i), (ii) and (iii) are collectively referred to herein as the "RG Solicitations"). Following the consummation of the Mergers, it is anticipated that RSI will make an offer to purchase (the "Change of Control Offer") any then outstanding Existing RG Debt Securities in accordance with the provisions of the indentures governing such securities at a purchase price of 101% of the principal amount thereof plus accrued interest thereon, and RSI will utilize a portion of the Tranche A Term Loan Facility to finance such redemption. The aggregate principal amount of the Existing RG Debt Securities and the F4L Senior Subordinated Notes outstanding at any time will not exceed $650 million; provided that if more than $225 million principal amount of Existing RG Debt Securities is exchanged for F4L Senior Subordinated Notes pursuant to the RG Solicitations, the amount of proceeds of the Public Offering or the Term Loan Facility shall be reduced on a dollar-for-dollar basis. 3. In order to provide a portion of the financing to consummate the Acquisition and the other transactions contemplated thereby, F4L is offering (i) up to $295 million principal amount of additional New F4L Senior Notes and (ii) up to $200 million principal amount of additional F4L Senior Subordinated Notes in a public offering (the "Public Offering") registered under the Securities Act of 1933, as amended. The proceeds of (v) the Term Loan Facility, (w) approximately $12.7 million of the Revolving Credit Facility, (x) the Public Offering, (y) the New Holdings Discount Debentures, together with (z) not less than $10 million in cash contributions to New Holdings invested by the management of RG (in the form of a cancellation of their rights to receive certain cash payments at closing), and not less than $140 million in other cash contributions to New Holdings (the "Equity Contributions"), will be used (i) to pay a $375.9 million cash purchase price for the RSI common stock, (ii) to refinance certain existing bank indebtedness of RG of approximately $255.1 million, (iii) to refinance certain existing bank indebtedness of F4L of approximately $161.5 million, (iv) to repay in full the approximately $175 million in principal amount of outstanding real estate mortagages of RG (the "Mortgage Debt") plus accrued interest and premiums thereon, (v) to pay up to $22.8 million in equity appreciation rights of RSI, (vi) to make cash payments to purchase Existing RG Debt Securities in the RG Solicitations and the Change of Control Offer, (vii) to repay in full the principal amount of the 15.25% Discount Notes plus accrued interest and premiums thereon in an aggregate amount not to exceed $85.3 million and (viii) to pay approximately $157 million in fees, expenses, premiums, accrued interest and other costs in 4 5 connection with the Acquisition, the Holdings Mergers, the Mergers, the F4L Solicitations, the RG Solicitations, the prepayment of the Mortgage Debt and the related transactions. You have also advised us that in addition to the $375.9 million in cash to be paid for the RSI common stock, the shareholders of RSI will receive $131.5 million in initial principal amount of New Holdings 13-5/8% Senior Subordinated Pay-In-Kind Debentures Due 2007 (the "Seller Debentures") and $18.5 million in initial accreted value of New Holdings Discount Debentures, to the effect that, following the Closing Date, there will be outstanding $131.5 million principal amount of Seller Debentures and $100 million initial accreted value of New Holdings Discount Debentures. The Seller Debentures will not mature or amortize prior to the twelfth anniversary of the Closing Date and will pay interest through the issuance of additional Seller Debentures for not less than five years following the Closing Date. The RSI common stock purchased with the proceeds of the Equity Contributions and in consideration of the issuance of the Seller Debentures shall be contributed as equity capital to F4L by New Holdings. The Bank Facilities as described in this letter and on Annex A attached hereto assume (i) that the F4L Solicitations and RG Solicitations are obtained on terms that are satisfactory to you and to Bankers Trust, (ii) that the New F4L Senior Notes and the F4L Senior Subordinated Notes issued in the Public Offering are issued on terms that are satisfactory to you and to Bankers Trust, (iii) that not less than 80% of the 10.45% Senior Notes and of the 13.75% Subordinated Notes are exchanged for the additional New F4L Senior Notes and the New F4L 13.75% Subordinated Notes, respectively, (iv) that not less than 50% of the 9% Subordinated Notes and the 10-1/4% Subordinated Notes are exchanged for F4L Senior Subordinated Notes, (v) that the Mortgage Debt is repaid in full and (vi) that the 15.25% Discount Notes are repaid in full. In the event that such assumptions are not accurate, we reserve the right to suggest alternative financing structures, including without limitation, modifying the amounts, maturities and amortization of the Term Loan Facility. Upon consummation of the Acquisition and the Mergers, total other indebtedness for borrowed money of RSI and its subsidiaries expected to be outstanding will not exceed $166.9 million in aggregate principal amount, including approximately $145.1 million in capital lease obligations and approximately $21.8 million in mortgage debt and all other indebtedness. Upon consummation of such Acquisition and the Mergers, the remaining portion of the Revolving Credit Facility will be available to be used by RSI (as the surviving corporation in the Mergers) to provide for the working capital requirements and other corporate purposes of RSI and its subsidiaries and the Letter of Credit Facility will be available to be used for commercial letters of credit and standby letters of credit for RSI and its subsidiaries. 5 6 Bankers Trust intends to arrange for other banks, financial institutions and other "accredited investors" (as defined in Securities and Exchange Commission regulations; each such bank, financial institution and accredited investor, including Bankers Trust, being a "Lender" and collectively, the "Lenders") to provide a portion of the Bank Facilities and Bankers Trust will act as agent for the Lenders (in such capacity, the "Administrative Agent"). Certain of the terms of each of the Bank Facilities are set forth in Annex A attached hereto (the "Term Sheet"). We have reviewed certain historical and pro forma financial statements of RSI and F4L and their respective subsidiaries and met with representatives of F4L and with members of management of F4L and we are pleased to advise you that the results of our business and financial due diligence investigation of RSI and F4L and their respective subsidiaries to date are satisfactory. However, Bankers Trust's commitment to provide the financings described in this letter is subject to our continuing satisfaction that there has not occurred a material adverse change in the business, operations, condition (financial and otherwise) and prospects of RSI and F4L and their respective subsidiaries, our continuing satisfaction with the structure of the Acquisition, including the tax, accounting and legal consequences thereof, and the satisfaction of the conditions to be set forth in the definitive documentation relating to the Bank Facilities including, without limitation, those conditions set forth in the Term Sheet. It is understood that you (and your advisors) will continue to fully cooperate with Bankers Trust with respect to its ongoing due diligence analysis and review (including, but not limited to, by providing adequate access to the records and management of RSI and F4L and their respective subsidiaries). In the event that such ongoing due diligence review discloses information relating to conditions or events not previously disclosed to us or relating to new information or additional developments concerning conditions or events previously disclosed to us which we believe may have a material adverse effect on the condition (financial or otherwise), assets, properties, business or prospects of RSI and F4L and their respective subsidiaries, taken as a whole, or any such conditions set forth in such definitive documentation are not satisfied, we may, in our sole discretion, suggest alternative financing amounts or structures that ensure adequate protection for the Lenders or decline to participate in the proposed financing. F4L hereby represents and covenants that based on its review and analysis, to its knowledge (a) all information, other than Projections (as defined below), which has been or is hereafter made available to Bankers Trust or the Lenders by F4L or RSI or any of their representatives in connection with the transactions contemplated hereby (the "Information") has been reviewed and analyzed by F4L in connection with the performance of its own due diligence and is, or in the case of Information 6 7 made available after the date hereof will be, complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in light of the circumstances under which such statements were or are made, not materially misleading and (b) all financial projections concerning RSI and F4L and their respective subsidiaries that have been or are hereafter made available to Bankers Trust or the Lenders by RSI or F4L or any of their representatives in connection with the transactions contemplated hereby (the "Projections") have been or, in the case of Projections made available after the date hereof, will be prepared in good faith based upon reasonable assumptions (it being understood that the Projections are subject to significant uncertainties and contingencies, many of which are beyond the control of F4L and/or RSI, and that no assurance can be given that such Projections will be realized). F4L agrees to supplement the Information and the Projections from time to time until the Closing Date so that the representation and warranty made in the preceding sentence is correct on the Closing Date. In arranging and syndicating the Bank Facilities, Bankers Trust will be using and relying on the Information and the Projections without independent verification thereof. The representations and covenants contained in this paragraph shall remain effective until a definitive financing agreement is executed and thereafter the representations contained herein shall be superseded by those contained in such definitive financing agreement. The reasonable costs and expenses (including the reasonable fees and expenses of counsel to Bankers Trust, reasonable professional fees of consultants and other experts and reasonable out-of-pocket expenses of Bankers Trust, including without limitation syndication expenses) arising in connection with the preparation, execution and delivery of this letter and the definitive financing agreements and the syndication of the Bank Facilities shall be for the account of F4L. F4L further agrees to indemnify and hold harmless each of the Lenders (including Bankers Trust) and each director, officer, employee and affiliate thereof (each an "indemnified person") from and against any losses, claims, damages, liabilities or other expenses to which a Lender or such indemnified persons may become subject, insofar as such losses, claims, damages, liabilities (or actions or other proceedings commenced or threatened in respect thereof) or other expenses arise out of or in any way relate to the Acquisition, the Holdings Mergers, the Mergers and related transactions, or any of the statements contained in this letter or relating to the extension of the financing contemplated by this letter, or any use or intended use of the proceeds of any of the loans and other extensions of credit contemplated by this letter, and to reimburse each of the Lenders and each indemnified person for any reasonable legal or other expenses incurred in connection with investigating, defending or participating in any such investigation, litigation or other proceeding (whether or 7 8 not such Lender or any such person is a party to any investigation, litigation or proceeding out of which any such expenses arise); provided, however, that the indemnity contained herein shall not apply to the extent that such losses, claims, damages, liabilities or other expenses result from the gross negligence or willful misconduct of such Lender or indemnified person. The obligations to indemnify each Lender and such indemnified persons and pay such legal and other expenses shall remain effective until a definitive financing agreement is executed and thereafter the indemnification and expense reimbursement obligations contained herein shall be superseded by those contained in such definitive financing agreement. Neither Bankers Trust nor any other Lender shall be responsible or liable to any other party or any other person for consequential damages which may be alleged as a result of this letter. In connection with the services to be provided hereunder by Bankers Trust, Bankers Trust may employ the services of its affiliates, including, without limitation, BT Securities Corporation. Bankers Trust may share with such affiliates, and such affiliates may share with Bankers Trust, any information concerning F4L and RSI; provided that Bankers Trust and such affiliates agree to hold any non-public information confidential in accordance with their respective customary policies relating to non-public information. Any such affiliate so employed (and its directors, officers, employees and affiliates) shall be entitled to all of the benefits afforded to Bankers Trust hereunder. This letter is confidential and shall not be disclosed by you to any person other than your accountants, attorneys and, to the extent approved by Bankers Trust, other advisors, and to RSI and its attorneys and, to the extent approved by Bankers Trust, other advisors, and then only on a confidential basis and in connection with the Acquisition, the Mergers and the related transactions contemplated herein. Additionally, you may make such disclosures of this letter as are required by law or judicial process or as may be required or appropriate in response to any summons or subpoena or in connection with any litigation. This letter supersedes any prior letters from Bankers Trust with respect to the subject matter hereof including without limitation our letters dated August 25, 1994, November 14, 1994 and January 6, 1995. Our offer will terminate on April 28, 1995, unless on or before that date you sign and return an enclosed counterpart of this letter together with an executed copy of the accompanying letter concerning certain fee arrangements. The Bank Facilities referred to herein shall in no event be available unless the Acquisition and related transactions have been consummated on or prior to the earlier of (x) the date on which the Agreement and Plan of Merger dated as of September 14, 1994, as amended on January 12, 1995, February 24, 1995 and April 26, 1995 by and 8 9 among FFL, F4L Holdings, F4L, RSI and the Selling Stockholders (as defined therein) is terminated in accordance with Article XI thereof and (y) June 30, 1995. This letter agreement shall be construed in accordance with the internal laws of the State of New York. This letter agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 9 10 ANNEX A FOOD 4 LESS SUPERMARKETS, INC. SUMMARY OF TERMS BANK FACILITIES The following summarizes certain terms for a senior bank term loan facility and a senior bank revolving credit facility to be utilized in connection with the proposed acquisition of Ralphs Supermarkets, Inc. by Food 4 Less Supermarkets, Inc. All terms defined in the financing letter to which this Annex A is attached and not otherwise defined herein shall have the same meanings when used herein. I. THE BANK FACILITIES Borrower: Food 4 Less Supermarkets, Inc. ("F4L") will be the borrower under the Term Loan Facility and will borrow approximately $12.7 million under the Revolving Credit Facility; in connection with the consummation of the Acquisition, F4L will be merged with and into Ralphs Supermarkets, Inc. ("RSI") with RSI being the surviving corporation (the "RSI Merger") and RSI will assume all obligations of F4L in respect of the Bank Facilities; upon consummation of the RSI Merger, Ralphs Grocery Company ("RG") will be merged with and into RSI, with RSI being the surviving corporation; after such mergers, RSI will change its name to "Ralphs Grocery Company" ("Company") and additional extensions of credit under the Term Loan Facility and the Revolving Credit Facility will be incurred by Company. The Lenders: Bankers Trust and a syndicate of banks, financial institutions and other accredited investors (the "Lenders"). Co-Agents for the Bankers Trust and such other Lenders as may be Lenders: mutually agreed upon by Bankers Trust and F4L (the "Co-Agents"). Co-Arrangers for Such Lenders as may be mutually agreed upon by the Lenders: Bankers Trust and F4L (the "Co-Arrangers"). Administrative Bankers Trust (in such capacity, the "Administrative Agent for the Agent"). Lenders: Type and Amount: The Bank Facilities shall consist of the Term 1 11 Loan Facility and the Revolving Credit Facility. Term Loan Facility. The Term Loan Facility will consist of Tranche A Loans, Tranche B Loans, Tranche C Loans and Tranche D Loans. The Lenders' commitments to lend the Tranche A Loans, the Tranche B Loans, the Tranche C Loans and the Tranche D Loans will terminate immediately upon the consummation of the Acquisition; provided that a portion of the Tranche A Term Loan Facility may be available for up to 91 days after the Closing Date to purchase the Existing RG Debt Securities in the event that any Change of Control Offer is required to be made for such securities. Tranche A Loans. The Tranche A Loans will mature on the date six years from the Closing Date and be in an original principal amount of up to $375 million. If the amount of the Existing RG Debt Securities exchanged in the RG Solicitations exceeds $225 million, then the amount available for borrowing under the Term Loan Facility shall be reduced, on a dollar-for-dollar basis, to the extent that the amount of proceeds from the Public Offering is not reduced from $495 million. The Tranche A Loans will be required to be amortized, commencing in the fifteenth month after the Closing Date, in quarterly installments in aggregate annual amounts of $45 million in the second year; $75 million in the third year; $80 million in the fourth year; $85 million in the fifth year; and $90 million in the sixth year; provided that in the event that less than $375 million of the Tranche A Loans are utilized, the annual amounts of amortization payments set forth above shall be reduced on a pro rata basis. Tranche B Loans. The Tranche B Loans will mature on the date seven years from the Closing Date and be in an original principal amount of up to $125 million. The Tranche B Loans will be required to be amortized in equal quarterly installments in aggregate annual amounts of $1.25 million for the first six years and $117.5 million in the seventh year. Tranche C Loans. The Tranche C Loans will mature on the date eight years from the 2 12 Closing Date and be in an original principal amount of up to $125 million. The Tranche C Loans will be required to be amortized in equal quarterly installments in aggregate annual amounts of $1.25 million for the first seven years and $116.25 million in the eighth year. Tranche D Loans. The Tranche D Loans will mature on the date nine years from the Closing Date and be in an original principal amount of up to $125 million. The Tranche D Loans will be required to be amortized in equal quarterly installments in aggregate annual amounts of $1.25 million for the first eight years and $115 million in the ninth year. The amounts, amortization payments and maturities of the Term Loan Facility are subject to modification in the event that various financing transactions are not consummated on mutually agreeable terms as described in "Certain Conditions Precedent to Initial Funding--Seller Debentures and New Holdings Discount Debentures;--Issuance of F4L Senior Subordinated Notes;--Public Offering;--F4L Solicitations" below, or Bankers Trust believes that such modification would enhance the successful syndication of the Bank Facilities. Revolving Credit Facility. The Revolving Credit Facility will mature on the same date as the Tranche A Loan and be in an amount of up to $325 million under which working capital loans may be made and commercial or standby letters of credit in the maximum aggregate amount of up to $150 million may be issued. Up to $30 million of the Revolving Credit Facility will be available as a swingline facility. Use of Proceeds: The proceeds of (without duplication) (u) the Term Loan Facility, (v) approximately $12.7 million of the Revolving Credit Facility, (w) up to $495 million from the Public Offering, (x) the issuance of up to $450 million of F4L Senior Subordinated Notes, (y) the issuance of not less than $100 million initial accreted value of New Holdings Discount Debentures, together with (z) not less than $10 million in cash contributions invested by the RG management (in the form of a cancellation of 3 13 their rights to receive certain cash payments at closing), and not less than $140 million in proceeds from the issuance of preferred stock, a portion of which shall be contributed by New Holdings to F4L as common equity shall be used as follows: 1. to pay the cash component of the purchase price for the stock of RSI of approximately $375.9 million; the remaining purchase price will be paid through the issuance of $131.5 million in initial principal amount of the Seller Debentures by New Holdings and $18.5 million initial accreted value of New Holdings Discount Debentures; 2. to refinance approximately $255.1 million of existing bank indebtedness of RG and approximately $161.5 million of existing bank indebtedness of F4L; 3. to exchange up to $450 million (but in no event less than $225 million) principal amount of Existing RG Debt Securities for F4L Senior Subordinated Notes plus a cash payment, and to purchase Existing RG Debt Securities in the RG Solicitations or in any Change of Control Offer (provided that the aggregate outstanding principal amount of F4L Senior Subordinated Notes and Existing RG Debt Securities shall not exceed $650 million at any time); provided further that if more than $225 million pricipal amount of Existing RG Debt Securities is exchanged for F4L Senior Subordinated Notes pursuant to the RG Solicitations, the amount of proceeds of the Public Offering or the Term Loan Facility shall be reduced on a dollar-for-dollar basis; 4. to repay in full the approximately $175 million in principal amount of the Mortgage Debt; 5. to pay up to $22.8 million in RSI equity appreciation rights; 6. to repay in full the principal amount of the 15.25% Discount Notes plus accrued interest and premiums thereon in an 4 14 aggregate amount not to exceed $85.3 million; and 7. to pay up to $157 million of fees, expenses, premiums, accrued interest and other costs associated with the Acquisition and the Mergers, the Bank Facilities, the F4L Solicitations, the RG Solicitations, the Public Offering, the Change of Control Offer, if any, the prepayment of the Mortgage Debt and the related transactions described herein. A portion of the Tranche A Term Loan Facility, equal to the principal amount of Existing RG Debt Securities not exchanged or purchased in the RG Solicitations, but in no event to exceed $225 million, may be available in a single draw as soon as practicable (but not later than 91 days) after the Closing Date to purchase any such Existing RG Debt Securities tendered in any Change of Control Offer. The Revolving Credit Facility will be available to provide for the working capital requirements and general corporate purposes of Company and its subsidiaries and to issue commercial letters of credit and standby letters of credit to support workers' compensation contingencies and for other corporate purposes to be agreed upon. Security: All extensions of credit to Company and guaranties of subsidiaries of Company will be secured by all personal property of Company and its subsidiaries, including a pledge of the stock of all subsidiaries of Company (other than the stock of Bell Markets, Inc.). The guaranty of New Holdings will be secured by a pledge of the stock of F4L and, upon consummation of the merger of F4L into RSI, RSI. In an abundance of caution, the Bank Facilities shall also be secured by first priority liens on all unencumbered real property fee interests of Company and its subsidiaries and Company and its subsidiaries shall use their reasonable economic efforts to provide the Lenders with a first priority lien on all unencumbered leasehold interests of Company and its subsidiaries. 5 15 To effect liens securing the Bank Facilities, F4L and its subsidiaries (and, upon consummation of the Mergers, Company and its subsidiaries) shall execute and deliver to Administrative Agent all security agreements, financing statements, deeds of trust, mortgages and other documents and instruments as are necessary to grant a first priority perfected security interest in and lien upon all their respective properties, subject to customary permitted liens to be agreed upon. Negative pledge on all assets of Company and its subsidiaries, subject to exceptions to be agreed upon. Guarantors: New Holdings and all active subsidiaries of F4L (and, upon consummation of the Mergers, all active subsidiaries of Company). The aggregate assets and revenues of inactive subsidiaries that are not guarantors shall be de minimis in amount. Interest Rates: All amounts outstanding under the Bank Facilities shall bear interest, at Company's option, as follows: A. With respect to the Tranche A Loans and loans made under the Revolving Credit Facility: (i) at the Base Rate plus 1.50% per annum; or (ii) at the reserve adjusted Euro-Dollar Rate plus 2.75% per annum. B. With respect to the Tranche B Loans: (i) at the Base Rate plus 2.00% per annum; or (ii) at the reserve adjusted Euro-Dollar Rate plus 3.25% per annum. C. With respect to the Tranche C Loans: (i) at the Base Rate plus 2.50% per annum; or (ii) at the reserve adjusted Euro-Dollar Rate plus 3.75% per annum. 6 16 D. With respect to the Tranche D Loans: (i) at the Base Rate plus 2.75% per annum; or (ii) at the reserve adjusted Euro-Dollar Rate plus 4.00% per annum. The foregoing interest rates on the Tranche A Loans and the Revolving Credit Facility and the fees payable under the Revolving Credit Facility on letters of credit, will be reduced in increments of 0.25% per annum (but not more than .50% per annum for all such reductions in the aggregate) after the Term Loan Facility has been reduced by such amounts, and during such times as the ratio of EBITDA (to be defined) to cash interest expense for the four most recently concluded fiscal quarters exceeds such ratios, as are mutually agreed upon. Loans outstanding under the swingline facility shall bear interest at the Base Rate plus 1.00% per annum (subject to adjustment as described in the preceding paragraph) and, solely for the purposes of calculating the commitment fee, such outstanding loans shall not constitute usage of the Revolving Credit Facility. As used herein, the terms "Base Rate" and "reserve adjusted Euro-Dollar Rate" shall have meanings customary and appropriate for financings of this type, and the basis for calculating accrued interest and the interest periods for loans bearing interest at the reserve adjusted Euro-Dollar Rate shall be customary and appropriate for financings of this type. After the occurrence of a default, interest shall accrue at a rate equal to the rate on loans bearing interest at the rate determined by reference to the Base Rate plus an additional two percentage points (2.00%) per annum and shall be payable on demand. Interest Quarterly for Base Rate Loans; on the last day of Payments: selected interest periods (which shall be 1, 2, 3 and 6 months) for Euro-Dollar Loans (and at the end of every three months, in the case of interest periods of longer than three months); and upon prepayment, in each case 7 17 payable in arrears and computed on the basis of a 360-day year. Interest Rate Within 120 days of the Closing Date, Company will Protection: obtain interest rate protection by interest rate swaps, caps or other agreements satisfactory to Administrative Agent against increases in interest rates with respect to a notional amount equal to not less than one-third of the Term Loans outstanding on the Closing Date for a period of not less than two years. Letter of Credit The fees payable on the standby letters of credit Fees: shall be equal to the sum of (i) an amount, to be shared by all Lenders pro rata, equal to the applicable margin over the reserve adjusted Euro-Dollar Rate under the Revolving Credit Facility (as the same may be adjusted) plus (ii) an additional .25% per annum to be retained by the Lender issuing the standby letter of credit. The fees payable on the commercial letters of credit shall be equal to the sum of (i) an amount, to be shared by all Lenders pro rata, equal to the applicable margin over the reserve adjusted Euro-Dollar Rate under the Revolving Credit Facility (as the same may be adjusted) minus 1.00% per annum plus (ii) an additional .25% per annum to be retained by the Lender issuing the commercial letter of credit. Fees on all letters of credit shall be based upon the amount available for drawing under such outstanding letters of credit. Commitment Fees: Commitment fees equal to .50% per annum times the undrawn portion of the Tranche A Term Loan Facility shall accrue from the Closing Date to the date of drawing thereof or the date of termination of such undrawn commitment (which shall be no later than 91 days after the Closing Date) and shall be payable upon such drawing or termination. Commitment fees equal to .50% per annum times the daily average unused portion of the Revolving Credit Facility shall accrue from the Closing Date and shall be payable quarterly in arrears and at maturity. Voluntary The Bank Facilities may be prepaid in whole or in Prepayments: part without premium or penalty (Euro-Dollar Rate Loans prepayable only on the last days of related interest periods) and the 8 18 Lenders' commitments relative thereto reduced or terminated upon such notice and in such amounts as may be agreed upon. Voluntary prepayments of the Term Loan Facility shall be applied ratably among Tranche A Loans, Tranche B Loans, Tranche C Loans and Tranche D Loans and shall be applied to scheduled amortization payments pro rata. Mandatory Company shall make the following mandatory Prepayments: prepayments (subject to certain basket amounts to be negotiated in the definitive financing agreements): 1. prepayments in the amount of all of the net after-tax cash proceeds of the sale or other disposition of any property or assets of Company or its subsidiaries, other than net cash proceeds of sales or other dispositions of inventory or obsolete equipment in the ordinary course of business, reinvestment of the proceeds from the sale of any store in like assets within 9 months of such sale and the sale/leaseback of any store within 6 months of the completion of such store and other exceptions to be negotiated, payable no later than the third Business Day following the date of receipt or other date such payment becomes due; 2. prepayments in the amount of the net cash proceeds received from the issuance of certain debt securities of New Holdings or its subsidiaries with exceptions to be agreed upon, payable no later than the first Business Day following the date of receipt; 3. prepayments in an amount equal to 50% (the "Equity Repayment Amount"), of the net cash proceeds received from the issuance of equity securities of New Holdings, payable no later than the first Business Day following the date of receipt; provided that a portion of the Equity Repayment Amount may be used to redeem, retire or repurchase other indebtedness of New Holdings or Company in an amount to be mutually agreed upon; 9 19 4. prepayments in the amount of all proceeds received from any pension plan reversion, payable upon receipt; and 5. prepayments in an amount equal to 75% (the "Cash Flow Repayment Amount") of excess cash flow (to be defined), payable within 100 days of fiscal year-end; provided that a portion of the Cash Flow Repayment Amount may be used to redeem, retire or repurchase other indebtedness of New Holdings or Company in an amount to be mutually agreed upon. All mandatory prepayments shall be applied ratably between Tranche A Loans, Tranche B Loans, Tranche C Loans and Tranche D Loans and to scheduled amortization payments of the Tranche A Loans, Tranche B Loans, Tranche C Loans and Tranche D Loans pro rata. Mandatory prepayments allocated to the Tranche B Loans, Tranche C Loans and Tranche D Loans will be used to make an offer for such Loans and, to the extent not accepted by the holders of such Loans, 50% may be retained by Company and the remaining 50% will be applied to the prepayment of the Tranche A Loans. Clean-Down: Loans outstanding under the Revolving Credit Facility shall be reduced to $75 million for not less than 30 consecutive days during each consecutive twelve-month period. Representations Customary and appropriate, including without Warranties: limitation due organization and authorization, financial and condition, no material adverse changes, title to properties, liens, litigation, payment of taxes, no material adverse agreements, employee benefit plans, environmental liabilities and full disclosure. Covenants: Customary and appropriate affirmative and negative covenants, including but not limited to financial covenants related to minimum fixed charge coverage, minimum EBITDA, maximum leverage (to be defined as the ratio of total debt to EBITDA) and minimum net worth. Other covenants will include financial reporting, compliance with laws, limitations on other indebtedness, liens, investments, guarantees, restricted junior payments (dividends, redemptions and payments on subordinated debt), prepayment or repurchase of other 10 20 indebtedness (other than from the proceeds of Equity Repayment Amounts and Cash Flow Repayment Amounts or from the proceeds of certain refinancing indebtedness as mutually agreed upon), mergers and acquisitions, sales of assets, cash capital expenditures, leases, transactions with affiliates and other provisions customary and appropriate for financings of this type, including exceptions and baskets to be mutually agreed upon. Events of Customary and appropriate, including without Default: limitation failure to make payments when due, defaults under other agreements or instruments of indebtedness, noncompliance with covenants, breaches of representations and warranties, bankruptcy, judgments in excess of specified amounts, impairment of security interests in collateral, invalidity of guarantees, and "changes of control" (to be defined in a mutually agreed upon manner). II. CONDITIONS TO LOANS Certain Conditions precedent to the initial funding of the Conditions Bank Facilities will include, without limitation, the Precedent to following: Initial Funding: 1. Satisfactory Bank Documentation. The definitive documentation evidencing the Bank Facilities (the "Definitive Financing Documents") shall be prepared by counsel to Bankers Trust and shall be in form and substance satisfactory to Bankers Trust and Lenders. 2. Structure and Other Related Documentation. The tax, accounting and legal aspects of the structure utilized to consummate the Acquisition, the Holdings Mergers, the Mergers and the financings and other transactions related thereto and the definitive documentation evidencing such transactions shall be in form and substance satisfactory to Bankers Trust and Lenders. 3. New Equity. Prior to or concurrently with the Closing Date, New Holdings shall have received cash contributions of not less than $10 million contributed by the RG management (in the form of a cancellation of their rights to receive 11 21 certain cash payments), plus not less than $140 million in proceeds from the issuance of preferred stock to new equity investors, a portion of the proceeds of which shall be used to purchase RSI common stock in connection with the Acquisition, which common stock shall be contributed to the equity capital of F4L. The terms and conditions of the preferred stock issued by New Holdings, including the type and amount of dividend payments and any redemption provisions, shall be satisfactory to Bankers Trust; provided that such preferred stock shall not be subject to any mandatory redemption and no payments of cash dividends shall be required thereon. 4. Seller Debentures and New Holdings Discount Debentures. Prior to or concurrently with the Closing Date, New Holdings shall have issued (i) the Seller Debentures in the aggregate initial principal amount of $131.5 million and (ii) the New Holdings Discount Debentures in the initial accreted value of $100 million. The Seller Debentures may not mature, and amortization payments may not be made on the Seller Debentures, prior to the twelfth anniversary of the Closing Date. The New Holdings Discount Debentures, may not mature, and amortization payments may not be made on the New Holdings Discount Debentures, prior to the date which is 10 years and 1 month from the Closing Date. Interest shall be payable on the Seller Debentures through the issuance of additional Seller Debentures until the fifth anniversary of the Closing Date and thereafter may be paid in cash. The New Holdings Discount Debentures will accrete at a rate of 13-5/8% from the date of original issuance for not less than 5 years and thereafter interest may be paid on the New Holdings Discount Debentures in cash. The Seller Debentures and the New Holdings Discount Debentures shall be structurally subordinate to the Bank Facilities and may not be secured or guaranteed. The interest rate, covenants, defaults, subordination terms, remedies and all other terms of the Seller Debentures and 12 22 the New Holdings Discount Debentures shall be satisfactory to Bankers Trust and Lenders and shall be consistent with the terms of the F4L Senior Subordinated Notes. In addition, without limitation of the foregoing, Bankers Trust and Lenders shall be satisfied with the appropriateness of the definition of a "Change of Control" contained in the Seller Debentures and the New Holdings Discount Debentures in light of all of the relevant circumstances on the Closing Date, including the equity ownership of Yucaipa and its affiliates and the other major shareholders and the terms of all shareholder agreements. Bankers Trust has reviewed a draft dated September 1, 1994 of the Indenture pursuant to which the Seller Debentures are to be issued and except for provisions of the Indenture which are not yet completed and subject to our satisfaction with such consistency and such matters related to a Change of Control, the terms of such Indenture are satisfactory to Bankers Trust. The RSI common stock purchased for cash and in consideration of the issuance of the Seller Debentures and the New Holdings Discount Debentures shall be contributed to the equity capital of F4L by New Holdings. 5. Issuance of F4L Senior Subordinated Notes. Not less than 50% of the 9% Subordinated Notes and of the 10-1/4% Subordinated Notes shall have been tendered for exchange as a result of the RG Solicitations and F4L shall have obtained all such consents and amendments as may be required to permit the Acquisition, the Holdings Mergers, the Mergers, the borrowings under the Bank Facilities and the related transactions to occur as described herein, the terms and conditions of such consents to be in form and substance satisfactory to Bankers Trust and Lenders. Prior to or concurrently with the Closing Date, F4L shall have issued not less than $225 million of F4L Senior Subordinated Notes in exchange for a like principal amount of Existing RG Debt Securities and an aggregate cash payment in an amount to be 13 23 mutually agreed upon. The F4L Senior Subordinated Notes shall be unsecured and shall have no scheduled principal payments payable prior to the tenth anniversary of the Closing Date. The interest rate, covenants, defaults, subordination provisions, remedies and all other terms of the F4L Senior Subordinated Notes shall be satisfactory to Bankers Trust and Lenders. All such negative covenants and defaults shall be less restrictive than those contained in the Definitive Financing Documents. The aggregate principal amount of the F4L Senior Subordinated Notes and the Existing RG Debt Securities shall not exceed $650 million outstanding at any time; provided that if more than $225 million principal amount of Existing RG Debt Securities is exchanged for F4L Senior Subordinated Notes pursuant to the RG Solicitations, the amount of proceeds of the Public Offering or the Term Loan Facility shall be reduced on a dollar-for-dollar basis. 6. Public Offering. Prior to or concurrently with the Closing Date, F4L shall have received cash proceeds of (i) not less than $200 million from the Public Offering of F4L Senior Subordinated Notes and (ii) not less than $295 million from the Public Offering of New F4L Senior Notes, in each case, the proceeds of which shall be applied to the purposes specified under "Use of Proceeds" above; provided that either or both of such amounts may be reduced if the amount of Existing RG Debt Securities exchanged in the RG Solicitations exceeds $225 million. The terms and conditions of the F4L Senior Subordinated Notes issued on the Public Offering shall be as described under "Issuance of F4L Senior Subordinated Notes" above. The terms and conditions of the New F4L Senior Notes issued in the Public Offering shall be as described under "F4L Solicitations" below. 7. Payment of Purchase Price. Concurrently with the Closing Date, New Holdings shall have acquired 100% of the capital stock 14 24 of RSI at a purchase price not to exceed a payment of $525.9 million, comprised of a $375.9 million cash payment and the issuance of $131.5 million of Seller Debentures and $18.5 million initial accreted value of New Holdings Discount Debentures by New Holdings, not including any refinancing or assumption of existing indebtedness as described below. Upon consummation of the Acquisition, the Holdings Mergers and the Mergers, all shares of the capital stock of Company shall be owned by New Holdings and Yucaipa shall, directly or indirectly, control New Holdings. 8. Discharge of Bank Indebtedness. Concurrently with the Acquisition, all existing bank indebtedness of RG in the approximate aggregate principal amount of $255.1 million and of F4L and its subsidiaries in the approximate aggregate principal amount of $161.5 million shall be repaid in full and all commitments thereunder shall have been terminated. 9. F4L Solicitations. Prior to or concurrently with the Closing Date, F4L shall have issued additional New F4L Senior Notes and the New F4L 13.75% Subordinated Notes in exchange for not less than 80% of the 10.45% Senior Notes and the 13.75% Subordinated Notes and an aggregate cash payment to be mutually agreed upon, and Holdings and F4L shall have obtained all such consents and amendments as may be required to permit the Acquisition, the Holdings Mergers, the Mergers, the borrowings under the Bank Facilities and the related transactions to occur as described herein, the terms and conditions of such consents to be in form and substance satisfactory to Bankers Trust and Lenders. The New F4L Senior Notes and the New F4L 13.75% Subordinated Notes shall be unsecured and shall have no scheduled principal payments prior to 2004 and 2005, respectively. The interest rate, covenants, defaults, remedies, subordination provisions (in the case of the New F4L 13.75% Subordinated Notes) and all other terms 15 25 of the New F4L Senior Notes and New F4L 13.75% Subordinated Notes shall be satisfactory to Bankers Trust and Lenders. All such negative covenants and defaults shall be less restrictive than those contained in the Definitive Financing Documents. The aggregate principal amount of the 10.45% Senior Notes and the New F4L Senior Notes shall not exceed $470 million at any time outstanding, and the aggregate principal amount of the 13.75% Subordinated Notes and the New F4L 13.75% Subordinated Notes shall not exceed $145 million at any time outstanding. F4L shall otherwise be in compliance with its obligations under the indentures pursuant to which the 10.45% Senior Notes and the 13.75% Subordinated Notes have been issued. 10. Mortgage Debt and Other Obligations. Prior to or concurrently with the Closing Date, RG shall have repaid in full the Mortgage Debt. Company and its subsidiaries may remain liable with respect to obligations relating to existing indebtedness in the approximate aggregate principal amount of $166.9 million, including approximately $145.1 million in existing capital lease obligations and approximately $21.8 million in mortgage debt and all other indebtedness, all such matters to be on terms and conditions and in form and substance satisfactory to Bankers Trust and Lenders. RSI and its subsidiaries shall have obtained all such consents, waivers, amendments, approvals and the like as may be required under the existing contracts and agreements of such persons to permit the borrowing under the Bank Facilities, the Acquisition, the Holdings Mergers, the Mergers and all related transactions and shall otherwise be in compliance in all material respects with their respective obligations under such agreements. 11. Security. The Administrative Agent, for the benefit of Lenders, shall have been granted a perfected security interest in all assets to the extent described above under the heading "Security". 16 26 12. Title Insurance. The Administrative Agent shall have received satisfactory assurances that an ALTA title insurance policy insuring the interest of the Administrative Agent for the benefit of Lenders in certain of the real property securing the Bank Facilities will be available in form and substance satisfactory to Bankers Trust. 13. Appraisals. Upon request of Bankers Trust or Lenders, the Administrative Agent shall have received appraisals in form, scope and substance reasonably satisfactory to Bankers Trust and satisfying the requirements of any applicable laws and regulations concerning the real property security. 14. Environmental Matters. Bankers Trust and Lenders shall have received reports and other information in form, scope and substance satisfactory to Bankers Trust and Lenders concerning environmental liabilities of F4L, RG and their respective subsidiaries. 15. No Material Adverse Change. Other than with respect to such information as is disclosed in the filing on Form 10Q made on July 17, 1994 with respect to RSI and its subsidiaries, there shall have occurred no material adverse change in the condition (financial or otherwise), business, assets, liabilities, properties, results of operations or prospects of F4L, RG and their respective subsidiaries, individually and taken as a whole, since June 25, 1994, in the case of Holdings and its subsidiaries, and January 30, 1994, in the case of RSI and its subsidiaries. 16. No Disruption of Financial and Capital Markets. There shall have been no material adverse change after the date hereof to the syndication markets for credit facilities similar in nature to the Bank Facilities and there shall not have occurred and be continuing a material disruption of or material adverse change in financial, banking or capital markets that would have an 17 27 adverse effect on such syndication market, in each case as determined by Bankers Trust in its sole discretion. 17. Financial Statements. Bankers Trust and Lenders shall have received the unaudited financial statements for F4L, RG and their respective subsidiaries for most recently ended fiscal periods. If unaudited, Bankers Trust and Lenders may review such unaudited financial statements with the independent certified public accountants for F4L and the cost of such review shall be for the account of F4L. 18. Due Diligence. The results of Bankers Trust's business and financial due diligence investigations, and any supplemental business or financial due diligence that Bankers Trust reasonably determines has become necessary, shall be satisfactory in all respects to Bankers Trust. Bankers Trust and Lenders shall also have received any information reasonably necessary to conduct such due diligence. Bankers Trust completed such due diligence by October 14, 1994. 19. Solvency. Bankers Trust and Lenders shall have received a solvency opinion from a nationally recognized valuation firm satisfactory to Bankers Trust and a certificate from the chief financial officer of F4L in form and substance satisfactory to Bankers Trust and Lenders, supporting the conclusions that, after giving effect to the Acquisition, the Mergers and related transactions, Company will not be insolvent or will not be rendered insolvent by the indebtedness incurred in connection therewith, or be left with unreasonably small capital with which to engage in its businesses or have incurred debts beyond its ability to pay such debts as they mature. 20. Customary Closing Documents. All documents required to be delivered under the Definitive Financing Documents, including customary legal opinions, corporate records and documents from 18 28 public officials and officers' certificates, shall have been delivered. Conditions to All The conditions to all borrowings will include Borrowings: requirements relating to prior written notice of borrowing, the accuracy of representations and warranties, and the absence of any default or potential event of default, and will otherwise be customary and appropriate for financings of this type. III. MISCELLANEOUS Syndication: A syndicate of financial institutions will be arranged by Bankers Trust. RG and F4L shall cooperate with Bankers Trust in the syndication of the Bank Facilities (including, but not limited to, participation in meetings with Lenders and assisting in the preparation of a Confidential Information Memorandum and other materials to be used in connection with such syndication) and shall provide and cause its advisors to provide all information reasonably deemed necessary by Bankers Trust to complete a successful syndication. RG and F4L also agree to assist in coordinating Bankers Trust's primary syndication efforts with those of other financings contemplated by RG and F4L in this transaction. The Lenders may assign all or, in an amount of not less than $5 million, any part of their share of the Bank Facilities to affiliates or one or more banks or other entities that are eligible assignees (to be described in the loan documentation) which, in the case of assignments made by Lenders other than Bankers Trust, are acceptable to Administrative Agent and Company, such consent not to be unreasonably withheld, and upon such assignment, such affiliate, bank or entity shall become a Lender for all purposes of the loan documentation; provided that assignments made to affiliates and other Lenders shall not be subject to the $5 million minimum assignment requirement. Lenders will have the right to sell participations, subject to customary limitations on voting rights, in their share of the Bank Facilities. Requisite Requisite Lenders shall mean Lenders holding in the Lenders: aggregate 51% of the commitments under the Bank Facilities. 19 29 Taxes, Reserve All payments are to be made free and clear of any Requirements & taxes (other than franchise taxes and taxes on Indemnities: overall net income), imposts, assessments, withholdings, or other deductions whatsoever. Foreign lenders shall furnish to Administrative Agent (for delivery to Company) appropriate certificates or other evidence of exemption from U.S. federal tax withholding. Company is to indemnify the Lenders against all increased costs of capital resulting from reserve requirements or otherwise imposed, in each case subject to customary increased costs, capital adequacy and similar provisions to the extent not taken into account in the calculation of the Base Rate or the Euro-Dollar Rate. Governing Law and Company will submit to the non-exclusive jurisdiction Jurisdiction: and venue of the federal and state courts of the State of New York and will waive any right to trial by jury. New York law shall govern loan documentation. Bankers Trust's O'Melveny & Myers. Counsel: 20 30 We appreciate having been given the opportunity by you to be involved in this transaction and we look forward to continuing our relationship with the F4L companies in the future. Very truly yours, BANKERS TRUST COMPANY By: __________________________ Title: _______________________ AGREED AND ACCEPTED THIS ___ day of April, 1995 FOOD 4 LESS SUPERMARKETS, INC. By:_____________________ Title:__________________ S-1 EX-12.1 9 STATEMENTS REGARDING COMPUTATIONS OF RATIOS 1 EXHIBIT 12.1 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(A) (DOLLAR IN THOUSANDS) (UNAUDITED)
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED FEBRUARY 3, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, 1991 1992 1993 1994 1995 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes, cumulative effect of change in accounting and extraordinary item...................... $(25,529) $(27,734) $ 2,792 $ 30,317 $ 32,118 Add: Portion of rents representative of the interest factor.......................... 12,936 15,135 17,745 19,218 19,467 Capitalized interest....................... 915 510 1,074 740 325 Interest expense........................... 128,477 130,206 125,611 108,755 112,651 -------- -------- -------- -------- -------- Earnings as adjusted....................... $116,799 $118,117 $147,222 $159,030 $164,561 ======== ======== ======== ======== ======== Fixed charges: Interest expense........................... 128,477 130,206 125,611 108,755 112,651 Capitalized interest....................... 915 510 1,074 740 325 Portion of rents representative of the interest factor.......................... 12,936 15,135 17,745 19,218 19,467 -------- -------- -------- -------- -------- Total fixed charges........................ $142,328 $145,851 $144,430 $128,713 $132,443 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges........... --(b) --(b) 1.02 1.24 1.24 ======== ======== ======== ======== ========
- --------------- (a) The ratio of earnings to fixed charges has been computed based upon net earnings (loss) before income taxes, extraordinary item and fixed charges. Fixed charges consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of debt discount and expense and one-third of rental expense (the proportion deemed representative of the interest factor). (b) Earnings before income taxes and fixed charges were insufficient to cover fixed charges for the periods ended February 3, 1991 and February 2, 1992 by $25,529 and $27,734, respectively. Page 1 of 2 2 EXHIBIT 12.1 FOOD 4 LESS HOLDINGS, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS) (UNAUDITED)
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED JUNE 25, JUNE 30, 1990 JUNE 29, 1991 JUNE 27, 1992 JUNE 26, 1993 1994 ------------------ ------------------ ------------------ ------------------ -------- FIXED FIXED FIXED FIXED EARNINGS CHARGES EARNINGS CHARGES EARNINGS CHARGES EARNINGS CHARGES EARNINGS -------- ------- -------- ------- -------- ------- -------- ------- -------- Loss before provision for income taxes and extraordinary charges..... $(9,106 ) $ -- $(3,387 ) $ -- $(25,555) $ -- $(29,818) $ -- $(8,767) Add: Fixed charges: Interest expense including amortization of deferred financing costs.............................. 50,789 50,789 50,084 50,084 70,211 70,211 73,614 73,614 77,017 Interest factor in rent expense(1)... 3,814 3,814 6,523 6,523 15,569 15,569 14,835 14,835 16,596 -------- ------- -------- ------- -------- ------- -------- ------- -------- $45,497 $54,603 $53,220 $56,607 $ 60,225 $85,780 $ 58,631 $88,449 $84,846 ======= ======= ======= ======= ======== ======= ======== ======= ======= Ratio of earnings to fixed charges... -- -- -- -- -- ======= ======= ======== ======== ======= Deficiency of earnings to cover fixed charges............................ $ 9,106 $ 3,387 $ 25,555 $ 29,818 8,767 ======= ======= ======== ======== ======= 28 WEEKS ENDED 28 WEEKS ENDED JANUARY 8, 1994 JANUARY 7, 1995 ------------------ ------------------ FIXED FIXED FIXED CHARGES EARNINGS CHARGES EARNINGS CHARGES ------- -------- ------- -------- ------- Loss before provision for income taxes and extraordinary charges..... $ -- $(5,042 ) $ -- $(13,772) $ -- Add: Fixed charges: Interest expense including amortization of deferred financing costs.............................. 77,017 41,583 41,583 43,228 43,228 Interest factor in rent expense(1)... 16,596 8,667 8,667 10,158 10,158 ------- -------- ------- -------- ------- $93,613 $45,208 $50,250 $ 39,614 $53,386 ======= ======= ======= ======== ======= Ratio of earnings to fixed charges... -- -- ======= ======== Deficiency of earnings to cover fixed charges............................ $ 5,042 $ 13,772 ======= ========
- --------------- (1) Calculated as one-third of minimum rent expense (see note 4 in the audited financial statements):
1990 1991 1992 1993 ------- ------- ------- ------- Minimum rent......................... $11,443 $19,570 $46,706 $44,504 Interest factor...................... /3 /3 /3 /3 ------- ------- ------- ------- $ 3,814 $ 6,523 $15,569 $14,835 ======= ======= ======= ======= 28 WEEKS ENDED 28 WEEKS ENDED 1994 JANUARY 8, 1994 JANUARY 7, 1995 ------- ------------------ ------------------ Minimum rent......................... $49,788 $26,002 $30,473 Interest factor...................... /3 /3 /3 ------- ------ ------ $16,596 $ 8,667 $10,158 ======= ======= =======
Page 2 of 2 EX-23.1 10 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULES Board of Directors and Stockholders Ralphs Supermarkets, Inc.: The audits referred to in our report dated March 9, 1995, included the related financial statement schedule as of January 30, 1994 and January 29, 1995, and for each of the fiscal years in the three-year period ended January 29, 1995, included in the registration statement. This financial statement schedule is the responsibility of Ralphs management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the headings "Summary Historical Financial Data of Ralphs," "Selected Historical Financial Data of Ralphs" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Los Angeles, California April 25, 1995 EX-23.2 11 CONSENT OF ARTHUR ANDERSON LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Los Angeles, California April 21, 1995 EX-99.1 12 LETTER OF TRANSMITTAL AND CONSENT 1 EXHIBIT 99.1 CONSENT AND LETTER OF TRANSMITTAL TO TENDER AND TO CONSENT TO CERTAIN INDENTURE AMENDMENTS WITH RESPECT TO THE 15.25% SENIOR DISCOUNT NOTES DUE 2004 OF FOOD 4 LESS HOLDINGS, INC. PURSUANT TO THE OFFER TO PURCHASE AND SOLICITATION STATEMENT DATED MAY 2, 1995 THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 30, 1995, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY ONLY BE WITHDRAWN AND CONSENTS MAY ONLY BE REVOKED UNDER THE CIRCUMSTANCES DESCRIBED HEREIN AND IN THE OFFER TO PURCHASE AND SOLICITATION STATEMENT. TO THE DEPOSITARY: BANKERS TRUST COMPANY By Hand Delivery or Overnight Courier: Facsimile Transmission: By Mail: Bankers Trust Company (212) 250-6275 Corporate Trust & Agency Group (212) 250-3290 Bankers Trust Company Reorganization Department Confirm by Telephone: Corporate Trust & Agency Group Receipt & Delivery Window (212) 250-6270 Reorganization Department 123 Washington St., First Floor P.O. Box 1458 New York, NY 10006 Church Street Station New York, NY 10008-1458
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS LETTER VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS CONSENT AND LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS CONSENT AND LETTER OF TRANSMITTAL IS COMPLETED. - -------------------------------------------------------------------------------- DESCRIPTION OF DISCOUNT NOTES - ------------------------------------------------------------------------------------------------------------------------------ You must consent to the Proposed Amendments with respect to the Discount Notes tendered hereby. The tender of Discount Notes hereby will constitute a Consent to the Proposed Amendments with respect to such Discount Notes. If you are not the registered holder of your Discount Notes, you must either have the Discount Notes registered in your name or have the registered holder sign the form of consent herein or obtain a valid proxy from the registered holder of such Discount Notes to tender them. - ------------------------------------------------------------------------------------------------------------------------------ CERTIFICATE(S) TENDERED (ATTACH ADDITIONAL SCHEDULE IF NECESSARY) - ------------------------------------------------------------------------------------------------------------------------------ (1) (2) (3) AGGREGATE NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) PRINCIPAL (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) CERTIFICATE AMOUNT APPEAR(S) ON DISCOUNT NOTES) NUMBER(S)(*) TENDERED(**) - ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ TOTAL: - ------------------------------------------------------------------------------------------------------------------------------ * Need not be completed by Book-Entry Holders (see below). ** If you wish to accept the Offer with respect to any Discount Notes you must tender all of such Discount Notes beneficially owned by you.
- -------------------------------------------------------------------------------- 2 The undersigned acknowledges receipt of the Offer to Purchase and Solicitation Statement dated May 2, 1995 (as the same may be amended or supplemented from time to time, the "Offer to Purchase"), of Food 4 Less Holdings, Inc. ("Holdings"), relating to (i) the offer (the "Offer") by Holdings, upon the terms and subject to the conditions set forth in the Offer to Purchase and in this Consent and Letter of Transmittal and the instructions hereto (the "Letter of Transmittal"), to holders of its 15.25% Senior Discount Notes due 2004 (the "Discount Notes") to purchase for $785.00 in cash plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date (the "Cash Consideration") for each $1,000 principal amount (at maturity) of Discount Notes accepted for purchase and(ii) the solicitation (the "Solicitation") of consents (the "Consents") from holders of the Discount Notes ("Noteholders") to the proposed amendments (the "Proposed Amendments") to the indenture under which the Discount Notes were issued (the "Discount Note Indenture") (as described in the Offer to Purchase under the captions "The Proposed Amendments" and "Appendix A -- Description of the Discount Notes). Holders of Discount Notes who desire to accept the Offer will be required to consent to the Proposed Amendments with respect to such Discount Notes. The tender of Discount Notes under this Letter of Transmittal will constitute such consent. Noteholders who do not tender Discount Notes pursuant to the Offer will not be eligible to consent to the Proposed Amendments. Each Noteholder who desires to accept the Offer with respect to any Discount Notes must tender all of such Noteholders' Discount Notes. Capitalized terms used in this Letter of Transmittal but not defined herein have the respective meanings given them in the Offer to Purchase. Unless otherwise indicated, references herein to the Offer shall be deemed to include the Solicitation. THE OFFER AND THE SOLICITATION ARE NOT BEING MADE TO (NOR WILL THE SURRENDER OF DISCOUNT NOTES FOR PURCHASE BE ACCEPTED FROM OR ON BEHALF OF) NOTEHOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE OFFER OR THE SOLICITATION WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX BELOW This Letter of Transmittal is to be used (i) if Discount Notes are to be physically delivered herewith or (ii) if delivery of Discount Notes is to be made by book-entry transfer to the account maintained by the Depositary at the Depository Trust Company ("DTC"), the Midwest Securities Trust Company ("MSTC") or the Philadelphia Securities Depository Trust Company ("PDTC") (collectively, the "Book-Entry Transfer Facilities") pursuant to the procedures set forth in the Offer to Purchase under the caption "The Offer to Purchase and Solicitation -- Procedures for Tendering and Consenting." Delivery of documents to a Book-Entry Transfer Facility does not constitute delivery to the Depositary. If certificates for Discount Notes are not immediately available or cannot be delivered along with other required documents to the Depositary or the procedure for book-entry transfer cannot be completed on or prior to the Expiration Date, the Noteholder may tender such Discount Notes according to the guaranteed delivery procedures set forth in the Offer to Purchase under the caption "The Offer to Purchase and Solicitation -- Guaranteed Delivery Procedure." See Instruction 2 herein. Noteholders who wish to tender their Discount Notes pursuant to the Offer and consent to the Proposed Amendments must complete the box entitled "DESCRIPTION OF DISCOUNT NOTES" and sign below. 2 3 METHOD OF DELIVERY - -------------------------------------------------------------------------------- / / CHECK HERE IF CERTIFICATES FOR TENDERED DISCOUNT NOTES ARE ENCLOSED HEREWITH. / / CHECK HERE IF TENDERED DISCOUNT NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE SOLICITATION AGENT WITH A BOOK-ENTRY TRANSFER FACILITY SPECIFIED ABOVE AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ------------------------------------ Name of Book-Entry Transfer Facility: / / DTC / / MSTC / / PDTC Account Number: ---------------------------------------------------- Transaction Code Number: ------------------------------------------- / / CHECK HERE IF TENDERED DISCOUNT NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE SOLICITATION AGENT AND COMPLETE THE FOLLOWING: Name of Registered Holder(s) of Discount Notes: -------------------- Window Ticket Number (if any): ------------------------------------- Date of Execution of Notice of Guaranteed Delivery: ---------------- Name of Eligible Institution which Guaranteed Delivery: ------------ If delivered by a Book-Entry Transfer Facility, check box of Book-Entry Transfer Facility: / / DTC / / MSTC / / PDTC Account Number: --------------------------------------------------------- Transaction Code Number: ------------------------------------------------ - -------------------------------------------------------------------------------- 3 4 PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Consent and Tender of Discount Notes Upon the terms and subject to the conditions contained in the Offer to Purchase and this Letter of Transmittal, the undersigned hereby Consents to the Proposed Amendments with respect to the Discount Notes indicated above and tenders to Holdings the Discount Notes indicated above. Tendering Noteholders will be deemed to have Consented to the Proposed Amendments with respect to all Discount Notes tendered. Subject to and effective upon acceptance for purchase of the Discount Notes tendered herewith, the undersigned hereby sells, assigns and transfers to or upon the order of Holdings all right, title and interest in and to, and any and all claims in respect of or arising or having arisen as a result of the undersigned's status as a holder of, all Discount Notes tendered hereby. The undersigned hereby appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Discount Notes with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to (a) deliver certificates for such Discount Notes, or transfer ownership of such Discount Notes on the account books maintained by DTC, MSTC or PDTC, together, in any such case, with all accompanying evidences of transfer and authenticity, to or upon the order of Holdings, (b) present such Discount Notes for transfer on the register, (c) deliver the Consent contained herein to Holdings and the trustee (the "Trustee") under the Discount Note Indenture and (d) receive all benefits and otherwise exercise all right of beneficial ownership of such Discount Notes all in accordance with the terms of the Offer. The undersigned hereby represents and warrants that the undersigned accepts the terms and conditions contained in the Offer to Purchase and this Letter of Transmittal, owns the Discount Notes tendered hereby within the meaning of Rule 10b-4 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), has full power and authority to tender, sell, assign and transfer the Discount Notes tendered hereby and that Holdings will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by the Depositary or Holdings to be necessary or desirable to complete the sale, assignment and transfer of the Discount Notes tendered. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Tenders of Discount Notes pursuant to the Offer may be withdrawn and Consents may be revoked, subject to the procedures described in the Offer to Purchase under "The Offer to Purchase and Solicitation -- Withdrawal of Tenders and Revocation of Consents," and under Instruction 3 herein, at any time until the "Consent Date," which shall be such time as the Requisite Consents (as defined under Instruction 3 herein) with respect to the Discount Notes have been received and the Supplemental Indenture (as defined) has been executed. Thereafter, such tenders may be withdrawn and Consents may be revoked if the Offer is terminated without any Discount Notes being accepted for purchase thereunder. Holdings shall be deemed to have accepted for purchase, and to have purchased validly tendered and not properly withdrawn Discount Notes in the Offer when, as and if Holdings has given oral or written notice thereof to the Depositary. Upon receipt of the Requisite Consents from holders of Discount Notes, Holdings will certify in writing to the Trustee that the Requisite Consents to the adoption of the Proposed Amendments have been received with respect to the Discount Notes. Except as set forth under Instruction 2 herein and in the Offer to Purchase under "The Offer to Purchase and Solicitation -- Guaranteed Delivery Procedure," Consents from tendering holders of Discount Notes will not be counted towards determining whether Holdings has received the Requisite Consents unless Holdings is prepared to accept the tender of Discount Notes to which such Consents relate. In addition, Consents with respect to Discount Notes will not be counted if the tender of such Discount Notes is defective, unless Holdings waives such defect. After receipt by the Trustee of, among other things, certification by Holdings that the Requisite Consents have been received, Holdings and the Trustee will execute a supplemental indenture to evidence the adoption of the Proposed Amendments (a "Supplemental Indenture"). Upon the acceptance by Holdings of the Requisite Consents from holders of Discount Notes and the execution of the Supplemental Indenture, such Supplemental Indenture will immediately become effective. Although the Proposed Amendments relating to the Discount Notes will become effective upon certification that the Requisite Consents from holders of the Discount Notes have been received, such Proposed Amendments will not be operative until Holdings has accepted for purchase all Discount Notes validly tendered and not withdrawn. Holdings will not be obligated to pay the Cash Consideration pursuant to the Offer unless, among other things, the Requisite Consents to the adoption of the Proposed Amendments have been received. The withdrawal of Discount Notes in accordance with the procedures set forth in the Offer to Purchase under "The Offer to Purchase and Solicitation -- Withdrawals of 4 5 Tenders and Revocation of Consents," and under Instruction 3 herein, will effect a revocation of the related Consents. Any valid revocation of Consents will automatically render the prior tender of the Discount Notes to which such Consents relate defective and Holdings will have the right, which it may waive, to reject such tender as invalid and ineffective. The undersigned recognizes that, under certain circumstances set forth in the Offer to Purchase, Holdings may not be required to accept any of the Discount Notes tendered (as described in the Offer to Purchase under the caption "The Offer to Purchase and Solicitation -- Conditions"). Discount Notes not accepted for purchase or that are withdrawn will be returned to the undersigned at the address set forth above unless otherwise indicated under "SPECIAL DELIVERY INSTRUCTIONS" below. Unless otherwise indicated under "SPECIAL PAYMENT INSTRUCTIONS" or "SPECIAL DELIVERY INSTRUCTIONS" below, the Depositary will deliver the Cash Consideration (and, if applicable, return Discount Notes for any principal amount of Discount Notes not accepted for purchase) to the undersigned at the address set forth above. The undersigned understands that holders who tender Discount Notes by book-entry transfer ("Book-Entry Holders") may request that any Discount Notes not accepted for purchase be returned by crediting the account maintained by DTC, MSTC or PDTC as such Book-Entry Holders may designate by ranking an appropriate entry under the box entitled "SPECIAL PAYMENT INSTRUCTIONS" below. The undersigned recognizes that Holdings has no obligation pursuant to "SPECIAL PAYMENT INSTRUCTIONS" to transfer any Discount Notes from the name of the registered holder thereof if Holdings does not accept for purchase any of such Discount Notes. See Instruction 5. The undersigned understands that tenders of Discount Notes pursuant to any one of the procedures described under "The Offer to Purchase and Solicitation -- Procedures for Tendering and Consenting" in the Offer to Purchase and in the instructions hereto will constitute a binding agreement between the undersigned and Holdings in accordance with the terms and subject to the conditions of the contained in the Offer to Purchase and this Letter of Transmittal. 5 6 THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF DISCOUNT NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED SUCH DISCOUNT NOTES, CONSENTED TO THE PROPOSED AMENDMENTS WITH RESPECT TO SUCH DISCOUNT NOTES AND MADE CERTAIN REPRESENTATIONS AS DESCRIBED HEREIN AND IN THE PROSPECTUS. ONLY REGISTERED HOLDERS OF DISCOUNT NOTES ARE ENTITLED TO CONSENT TO THE PROPOSED AMENDMENTS. IF THE UNDERSIGNED IS NOT THE REGISTERED HOLDER OF THE DISCOUNT NOTES TENDERED PURSUANT HERETO, THE UNDERSIGNED MUST EITHER HAVE THE DISCOUNT NOTES REGISTERED IN THE UNDERSIGNED'S NAME OR HAVE THE REGISTERED HOLDER SIGN THE FORM OF CONSENT APPEARING BELOW OR A VALID PROXY. PLEASE SIGN HERE (See Instructions 1 and 4 and the following paragraph) X ----------------------------------------------------------------------- X ----------------------------------------------------------------------- Signature(s) of Owner(s) Date Area Code and Telephone Number: ---------------------------------------------- This Letter of Transmittal must be signed by the Registered Holder(s) of Discount Notes as their name(s) appear(s) on certificates for Discount Notes or, if tendered by a participant in one of the Book-Entry Transfer Facilities, exactly as such participant's name appears on a security position listing as the owner of Discount Notes, or by person(s) authorized to become Registered Holder(s) by endorsement and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 4. Name(s): ---------------------------------------------------------------- ---------------------------------------------------------------- Please Type or Print Capacity: --------------------------------------------------------------- Address: ---------------------------------------------------------------- (Including Zip Code) SIGNATURE GUARANTEE (If required by Instruction 4) Signature(s) Guaranteed by an Eligible Institution: --------------------------------------------- (Authorized Signature) --------------------------------------------- (Title) --------------------------------------------- (Name of Firm) Dated: ------------------------------------------------------------------ - -------------------------------------------------------------------------------- Please indicate (by marking the appropriate box provided below) whether the beneficial holder(s) of the Discount Notes tendered herewith is a(n): / / Bank / / Pension or Profit-Sharing Trust / / Savings Institution / / Dealer / / Trust Company / / Foundation / / Insurance Company / / Corporation / / Investment Company / / Other Financial or Institutional Investor / / Individual Address of beneficial holder(s): --------------------------------------- ------------------------------------------ 6 7 IF THIS LETTER OF TRANSMITTAL IS SIGNED BY A HOLDER OF DISCOUNT NOTES WHO IS NOT THE REGISTERED HOLDER THEREOF, THEN THE REGISTERED HOLDER MUST SIGN THE FOLLOWING CONSENT OR A VALID PROXY: Pursuant to the Offer and the Solicitation of Consents to the Proposed Amendments, the undersigned hereby consents to the Proposed Amendments with respect to the Discount Notes tendered hereby and with respect to the Discount Note Indenture. This consent shall not be deemed to be effective if the above-described Discount Notes are not accepted for purchase pursuant to the Offer. X ------------------------------------------------------------------------ Signature of Registered Holder X ------------------------------------------------------------------------ Signature of Registered Holder (if more than one) Dated: ------------------------------------------------------------------- (Must be signed by the Registered Holder(s) as name(s) appear(s) on the certificates for Discount Notes. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 4.) Name(s): ----------------------------------------------------------------- ----------------------------------------------------------------- Please Type or Print Capacity: ---------------------------------------------------------------- Address: ---------------------------------------------------------------- (Including Zip Code) SIGNATURE GUARANTEE (If required by Instruction 4) Signature(s) Guaranteed by an Eligible Institution: ---------------------------------------------- (Authorized Signature) ---------------------------------------------- (Title) ---------------------------------------------- (Name of Firm) Dated: ------------------------------------------------------------------- 7 8 SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if certificates for Discount Notes not accepted for payment and/or the check for the Cash Consideration are to be issued in the name of someone other than the person who submits this Letter of Transmittal or issued to an address different from that shown in the box entitled "DESCRIPTION OF DISCOUNT NOTES" above in this Letter of Transmittal or if Discount Notes are to be returned by credit to an account maintained by DTC, MSTC or PDTC. ISSUE TO: Name -------------------------------------------------------------------------- (Please Print) Address ----------------------------------------------------------------------- - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (Include Zip Code) - ------------------------------------------------------------------------------ (Social Security Number or Employer Identification Number) A correct taxpayer identification number must also be provided on the Substitute Form W-9 included herein. CREDIT UNACCEPTED DISCOUNT NOTES TENDERED BY BOOK-ENTRY TRANSFER TO THE: / / DTC / / MSTC or / / PDTC (check one) account set forth below: - ------------------------------------------------------------------------------ (DTC, MSTC or PDTC Account Number) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if certificates evidencing Discount Notes for amounts not accepted for payment and/or the check for the Cash Consideration are to be sent to someone other than the person who submits this Letter of Transmittal at an address other than that shown in the box entitled "DESCRIPTION OF DISCOUNT NOTES" above in this Letter of Transmittal. MAIL TO: Name -------------------------------------------------------------------------- (Please Print) Address ----------------------------------------------------------------------- - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (Include Zip Code) 8 9 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER AND THE SOLICITATION 1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. Certificates for Discount Notes, or any book-entry transfer into the Depositary's account at DTC, MSTC or PDTC of Discount Notes tendered electronically, as well as a properly completed Letter of Transmittal, including a valid and unrevoked Consent or facsimile(s) thereof, duly executed by the registered holder thereof with any required signature guarantee(s), and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth herein on or prior to 12:00 Midnight, New York City time, on the Expiration Date of the Offer and the Solicitation, except as otherwise provided in Instruction 2, "Guaranteed Delivery Procedures." Tenders of Discount Notes into the Offer will be accepted only in principal amounts equal to $1,000 (at maturity) or integral multiples thereof. The method of delivery of this Letter of Transmittal, certificates for Discount Notes and any other required documents is at the election and risk of the tendering Noteholder, and except as otherwise provided below, the delivery will be deemed made when actually received by the Depositary. Instead of effecting delivery by mail, it is recommended that tendering Noteholders use an overnight or hand delivery service. If Discount Notes are sent by mail, registered mail, with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to assure timely delivery. No documents should be sent to Holdings, the Information Agent, the Dealer Managers, or the Trustee. If the person signing this Letter of Transmittal is not the registered holder of the securities tendered hereby, then such person must either have the securities hereby registered in such person's name or obtain from the registered holder and submit to the Depositary the form of consent of the registered holder to the Proposed Amendments appearing above or a valid proxy. All questions as to the validity, form, eligibility (including time of receipt), acceptance, withdrawal and revocation of tendered Discount Notes and delivered Consents to the Proposed Amendments will be resolved by Holdings, whose determination will be final and binding. Holdings reserves the absolute right to reject any or all tenders and withdrawals of Discount Notes and deliveries and revocations of Consents to the Proposed Amendments that are not in proper form or the acceptance of which would, in the opinion of Holdings or counsel for Holdings, be unlawful. Holdings also reserves the right to waive any irregularities or conditions of tender, consent or proxy as to particular Discount Notes. Holdings interpretation of the terms and conditions of the Offer (including the instructions in this Letter of Transmittal) will be final and binding. Unless waived, any irregularities in connection with tenders and withdrawals of Discount Notes and revocations of Consents to the Proposed Amendments must be cured within such time as Holdings shall determine. Neither Holdings nor the Depositary shall be under any duty to give notification of defects in such tenders, withdrawals, deliveries or revocations or shall incur any liability for failure to give such notification. Tenders and withdrawals of Discount Notes and deliveries and revocations of Consents to the Proposed Amendments will not be deemed to have been made until such irregularities have been cured or waived. Any Discount Notes received by the Depositary that are not properly tendered or delivered and to which the irregularities have not been cured or waived will be returned by the Depositary to the tendering Noteholders unless otherwise provided in this Letter of Transmittal as soon as practicable following the Expiration Date. None of Holdings, the Depositary, the Information Agent, the Dealer Managers or any other person shall be obligated to give notification of defects or irregularities in any tender, or shall incur any liability for failure to give any such notification. 2. GUARANTEED DELIVERY PROCEDURES. If a registered holder of Discount Notes desires to tender such Discount Notes and consent to the Proposed Amendments, and such holder's Discount Notes are not immediately available, or if time will not permit such holder's Discount Notes or any other required documents to be delivered to the Depositary prior to 12:00 Midnight, New York City time, on the Expiration Date, then such Discount Notes may nevertheless be tendered for purchase and Consents may be effected if all of the following guaranteed delivery procedure conditions are met: (i) the tender for purchase and Consent is made by or through an Eligible Institution; (ii) prior to 12:00 Midnight, New York City time, on the Expiration Date, the Depositary receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) substantially in the form provided by Holdings herewith, that contains a signature guaranteed by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery, unless such tender is for the account of an Eligible Institution (in which case no signature guarantee shall be required), and 9 10 sets forth the name and address of the holder of Discount Notes and the principal amount of Discount Notes tendered for purchase, states that the tender is being made thereby and guarantees that, within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, this Letter of Transmittal (or facsimile thereof), properly completed and duly executed, together with the Discount Notes and any required signature guarantees and any other documents required by this Letter of Transmittal, will be deposited by the Eligible Institution with the Depositary; and (iii) all tendered Discount Notes, or a confirmation of a book-entry transfer of such Discount Notes into the Depositary's applicable account at a Book-Entry Transfer Facility, as well as this Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, and all other documents required by this Letter of Transmittal, shall be received by the Depositary within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. The YELLOW Notice of Guaranteed Delivery provided herewith shall be used in connection with tenders of Discount Notes. Notwithstanding any other provision hereof, the purchase of Discount Notes pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of certificates for such Discount Notes and this Letter of Transmittal (or facsimile thereof) in respect thereof, properly completed and duly executed, together with any required signature guarantees and any other documents required by the Offer to Purchase and this Letter of Transmittal. 3. CONSENT TO PROPOSED AMENDMENTS; WITHDRAWAL OF TENDERS; REVOCATION OF CONSENTS. A valid Consent to the adoption of the Proposed Amendments may be given only by the registered holder of Discount Notes or his or her attorney-in-fact. Noteholders will not be able to validly tender unless they Consent to the Proposed Amendments. Noteholders not tendering Discount Notes pursuant to the Offer will not be eligible to Consent to the Proposed Amendments. Tendering holders who sign this Letter of Transmittal and tender any Discount Notes shall be deemed to have Consented to the Proposed Amendments with respect to such Discount Notes tendered. Tenders of Discount Notes pursuant to the Offer may be withdrawn and Consents may be revoked at any time until the "Consent Date," which shall be such time as the Requisite Consents (Consents of holders representing at least a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates) have been delivered by Holdings to the Trustee and the Supplemental Indenture has been executed. Thereafter, such tenders may be withdrawn and Consents may be revoked if the Offer is terminated without any Discount Notes being accepted for purchase thereunder. The withdrawal of Discount Notes prior to the Consent Date in accordance with the procedures set forth hereunder will effect a revocation of the related Consent. Any valid revocation of Consents will automatically render the prior tender of the Discount Notes to which such Consents relate defective and Holdings will have the right, which it may waive, to reject such tender as invalid and ineffective. Any holder of Discount Notes who has tendered Discount Notes or who succeeds to the record ownership of Discount Notes in respect of which such tenders or Consents previously have been given may withdraw such Discount Notes or revoke such Consents prior to the Consent Date by delivery of a written notice of withdrawal or revocation, subject to the limitations described herein. To be effective, a written telegraphic, telex or facsimile transmission (or delivered by hand or by mail) notice of withdrawal of a tender or revocation of a Consent must (i) be timely received by the Depositary at one of its addresses set forth on the front cover hereof or prior to the time provided herein with respect to the Discount Notes, (ii) specify the name of the person having tendered the Discount Notes to be withdrawn or as to which Consents are revoked, the principal amount of such Discount Notes to be withdrawn and, if certificates for Discount Notes have been tendered, the name of the registered holder(s) of such Discount Notes as set forth in such certificates, if different from that of the person who tendered such Discount Notes, (iii) identify the Discount Notes to be withdrawn or to which the notice of revocation relates and (iv)(a) be signed by the holder in the same manner as the original signature on this Letter of Transmittal or Notice of Guaranteed Delivery (as the case may be) by which such Discount Notes were tendered (including any required signature guarantees) or (b) be accompanied by evidence satisfactory to Holdings and the Depositary that the holder withdrawing such tender or revoking such Consents has succeeded to beneficial ownership of such Discount Notes. If certificates representing Discount Notes to be withdrawn or Consents to be revoked have been delivered or otherwise identified to the Depositary, then the name of the registered holder and the serial numbers of the particular certificate evidencing the Discount Notes to be withdrawn or Consents to be revoked and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution, except in the case of Discount Notes tendered by an Eligible Institution (in which case no signature guarantee shall be required), must also be so furnished to the Depositary as aforesaid prior to the physical release of the certificates for the withdrawn Discount Notes. If Discount Notes have been tendered or if Consents have been delivered pursuant to the procedures for book-entry transfer as set forth herein, any notice of withdrawal or revocation of a Consent must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Discount Notes. 10 11 Holdings reserves the right to contest the validity of any revocation. A purported notice of revocation which is not received by the Depositary in a timely fashion will not be effective to revoke a Consent previously given. Any permitted withdrawals of tenders of Discount Notes and revocation of Consents may not be rescinded, and any Discount Notes properly withdrawn will thereafter be deemed not validly tendered and any Consents revoked will be deemed not validly delivered for purposes of the Offer or the Solicitation; provided, however, that withdrawn Discount Notes may be retendered and revoked Consents may be redelivered by again following one of the appropriate procedures described herein at any time prior to 12:00 Midnight, New York City time, on the Expiration Date. If Holdings shall decide to decrease the amount of Discount Notes being sought in the Offer or to increase or decrease the consideration offered to the Discount Noteholders, and if, at the time that notice of such increase or decrease is first published, sent or given to Discount Noteholders in the manner specified in the Offer to Purchase, the Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth Business Day from and including the date that such notice is first so published, sent or given the Offer will be extended for such purposes until the expiration of such period of ten Business Days. As used in the Offer to Purchase, "Business Day" has the meaning set forth in Rule 14d-1 (and applicable to Regulation 14E) under the Exchange Act. In addition, if the Offer or the Solicitation is amended in a manner determined by Holdings to constitute a material adverse change to the Discount Noteholders, Holdings promptly will disclose such amendment in a public announcement and will extend the Offer or the Solicitation for a period deemed by it to be adequate to permit the Discount Noteholders to properly deliver or withdraw their Discount Notes and give or revoke Consents. If Holdings extends the Offer, is delayed in its acceptance for purchase of Discount Notes or is unable to purchase Discount Notes pursuant to the Offer, for any reason, then, without prejudice to Holdings' rights under the Offer, the Depositary may, subject to applicable law, retain tendered Discount Notes on behalf of Holdings, and such Discount Notes may not be withdrawn (subject to Rule 14e-1 under the Exchange Act, which requires that Holdings deliver the consideration offered or return the Discount Notes deposited by or on behalf of the Noteholders promptly after the termination or withdrawal of the Offer), except to the extent that tendering holders are entitled to withdrawal rights as described herein. All questions as to the validity, form and eligibility (including the time of receipt) of notices of withdrawal or revocations of Consents will be determined by Holdings, whose determination will be final and binding on all parties. None of Holdings, the Depositary, the Dealer Managers, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or revocation of Consent or incur any liability for failure to give any such notification. 4. SIGNATURES ON THIS LETTER OF TRANSMITTAL, AND ENDORSEMENTS; GUARANTEE OF SIGNATURE. If this Letter of Transmittal is signed by the registered holder(s) of the Discount Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the certificate(s) without alteration or any change whatsoever. If any of the Discount Notes tendered hereby are registered in the names of two or more joint owners, all owners must sign this Letter of Transmittal. If any tendered Discount Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal and any other required documents as there are different names in which the Discount Notes are registered. If tendered Discount Notes are registered in the name of a person other than the person signing this Letter of Transmittal, the tendered Discount Notes must be endorsed or accompanied by appropriate bond powers, signed by the registered holder or holders of the Discount Notes transmitted hereby or separate bond powers are required, with signatures guaranteed in either case. If this Letter of Transmittal or any certificate or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and proper evidence satisfactory to Holdings of their authority so to act must be submitted. Endorsements on certificates of Discount Notes or signatures on bond powers required by this Instruction 4 must be guaranteed by an Eligible Institution. All signatures on this Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Discount Notes tendered or withdrawn, as the case may be, pursuant thereto are tendered (i) by a registered holder(s) (which term, for purposes of this Letter of Transmittal, shall include any participant in DTC, MSTC or PDTC whose name appears on a security position listing as the owner of Discount Notes) of Discount Notes who has not completed the box entitled "SPECIAL PAYMENT INSTRUCTIONS" or "SPECIAL DELIVERY INSTRUCTIONS" on this Letter of Transmittal or (ii) for the account of an Eligible 11 12 Institution. If Discount Notes are registered in the name of a person other than the signer of this Letter of Transmittal or a notice of withdrawal, as the case may be, or if payment is to be made or certificates for Discount Notes not purchased are to be issued or returned to a person other than the registered holder, then the Discount Notes must be endorsed by the registered Noteholder(s), or be accompanied by a written instrument or instruments of transfer or exchange in form satisfactory to Holdings duly executed by the registered Noteholder(s), with such signatures guaranteed by an Eligible Institution. In the event that signatures on this Letter of Transmittal (or other document) are required to be guaranteed, such guarantee must be by a firm that is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. (the "NASD") or by a commercial bank or trust company having an office in the United States (each of the foregoing being an "Eligible Institution"). 5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering Noteholders should indicate, in the applicable box, the name and address to which the Cash Consideration and/or Discount Notes for principal amounts not accepted for purchase are to be issued, sent or paid, if different from the name and address of the person submitting this Letter of Transmittal. In the case of issuance or payment in a different name, the tax identification number of the person named must also be indicated and a Substitute Form W-9 for such recipient must be completed. See Instruction 6. If no such instructions are given, the Cash Consideration and/or Discount Notes not accepted for purchase will be sent to the name and address of the person signing this Letter of Transmittal or, at Holdings' option, by crediting the account at DTC, MSTC or PDTC designated above in the box entitled "SPECIAL PAYMENT INSTRUCTIONS." 6. SUBSTITUTE FORM W-9. The tendering Noteholder is required to provide the Depositary (as payor) with his or her correct taxpayer identification number ("TIN") on the Substitute Form W-9 included in this Letter of Transmittal. In the case of a tendering Noteholder who has completed the box entitled "SPECIAL PAYMENT INSTRUCTIONS" above, however, the correct TIN on Form W-9 should be provided for the recipient of the securities and/or payment delivered pursuant to such instructions. Failure to provide the information on the form will cause the Depositary to withhold 31% of any payments made to the tendering Noteholder or such recipient, as the case may be, until such information is received. See "IMPORTANT TAX INFORMATION" below. 7. TRANSFER TAXES. Holdings will pay all transfer taxes, if any, applicable to the purchase of Discount Notes pursuant to the Offer. If, however, the Cash Consideration and/or Discount Notes not accepted for purchase are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Discount Notes, or if tendered Discount Notes are to be registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the purchase of Discount Notes pursuant to Offer, then the amount of any such transfer tax (whether imposed on the registered holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of such tax or exemption therefrom is not submitted, then the amount of such transfer tax will be deducted from the Cash Consideration and/or otherwise payable to such tendering holder. EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THIS LETTER OF TRANSMITTAL. 8. WAIVER OF CONDITIONS. Holdings reserves the absolute right to amend in any respect or waive any of the specified conditions in the Offer and the Solicitation in the case of any Discount Notes tendered. 9. MUTILATED, LOST, STOLEN OR DESTROYED DISCOUNT NOTES. If a Noteholder desires to tender Discount Notes pursuant to the Offer, but any such Discount Note has been mutilated, lost, stolen or destroyed, such holder should write to or telephone the Trustee under the Discount Note Indenture, at the address listed below, concerning the procedures for obtaining replacement certificates for such Discount Note, arranging for indemnification or any other matter that requires handling by the Trustee: United States Trust Company of New York 114 West 47th Street New York, New York 10036-1532 Attention: Corporate Trust Department (212) 852-1000
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Offer to Purchase and this Letter of Transmittal, may be directed to the Information Agent, D.F. King & Co., Inc., (800) 669-5550. 12 13 IMPORTANT TAX INFORMATION GENERAL Under federal income tax law, a holder whose tendered Discount Notes are accepted for purchase is required to provide the Depositary with such holder's correct taxpayer identification number on the Substitute Form W-9 included in this Letter of Transmittal. If such holder is an individual, the taxpayer identification number is his or her social security number. If the Depositary is not provided with the correct taxpayer identification number or adequate basis for exemption, the holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such holder in exchange for tendered Discount Notes may be subject to backup withholding. Certain holders of Discount Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, that holder must submit a statement, signed under penalties of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. WHAT NUMBER TO GIVE TO EXCHANGE AGENT The holder is required to give the Depositary the social security number or employer identification number of the registered holder of the Discount Notes. If the certificates for Discount Notes are registered in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. 13 14 TO BE COMPLETED BY ALL TENDERING HOLDERS OF DISCOUNT NOTES (SEE INSTRUCTION 6) - ------------------------------------------------------------------------------------------------------- PAYOR'S NAME: BANKERS TRUST COMPANY - ------------------------------------------------------------------------------------------------------- SUBSTITUTE Social Security Number FORM W-9 PART 1 - PLEASE PROVIDE YOUR TAX ------------------------------- PAYER IDENTIFICATION NUMBER IN OR DEPARTMENT OF THE TREASURY THE BOX AT THE RIGHT AND CERTIFY INTERNAL REVENUE SERVICE BY SIGNING AND DATING BELOW. Employer Identification Number PAYOR'S REQUEST FOR TAXPAYER -------------------------------- IDENTIFICATION NUMBER (TIN) ----------------------------------------------------------------------- PART II -- For Payees exempt from backup withholding, see the Important Tax Information above and Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 enclosed herewith and complete as instructed therein. - ------------------------------------------------------------------------------------------------------- CERTIFICATIONS -- Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or a Taxpayer Identification Number has not been issued to me and either (a) I have mailed or delivered an application to receive a Taxpayer Identification Number to the appropriate Internal Revenue Service Center or Social Security Administration office or (b) I intend to mail or deliver an application in the near future). (I understand that if I do not provide a Taxpayer Identification Number to the payer, 31% of all reportable payments made to me thereafter will be withheld until I provide a number to the payer and that, if I do not provide my Taxpayer Identification Number within sixty (60) days, such retained amounts shall be remitted to the Internal Revenue Service ("IRS") as backup withholding. (2) I am not subject to backup withholding either because I have not been notified by the IRS that I am subject to backup withholding as a result of a failure to report all interest or dividends or the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTION -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you were no longer subject to backup withholding, do not cross out item (2). (Also see the IMPORTANT TAX INFORMATION above.) - ------------------------------------------------------------------------------------------------------- Name ------------------------------------------------------------------------------------------------ (Please Print) Address --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- (Including Zip Code) Signature Date --------------------------------------------------- ---------------------------------- - -------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS. IMPORTANT: This Letter of Transmittal or a facsimile thereof (together with Discount Notes and all other required documents) must be received by the Depositary on or prior to the Expiration Date. Your bank or broker can assist you in completing this form. The Instructions included in this Letter of Transmittal must be followed. Requests for assistance or additional copies of the Offer to Purchase or this Letter of Transmittal may be obtained from the Information Agent at the address or telephone numbers set forth below. The Information Agent for the Offer and the Solicitation is: D.F. KING & CO., INC. Call Toll Free: (800) 669-5550 77 Water Street New York, NY 10005 (212) 269-5550 (collect) 14 EX-99.2 13 NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY TO TENDER AND TO CONSENT TO CERTAIN INDENTURE AMENDMENTS WITH RESPECT TO THE 15.25% SENIOR DISCOUNT NOTES DUE 2004 OF FOOD 4 LESS HOLDINGS, INC. PURSUANT TO THE OFFER TO PURCHASE AND SOLICITATION STATEMENT DATED MAY 2, 1995 As set forth in the Offer to Purchase and Solicitation Statement dated May 2, 1995 (as the same may be amended or supplemented from time to time, the "Offer to Purchase") of Food 4 Less Holdings, Inc. ("Holdings"), under the caption "The Offer to Purchase and Solicitation -- Guaranteed Delivery Procedure," and in the accompanying Consent and Letter of Transmittal and Instruction 2 thereto (the "Letter of Transmittal"), this form or one substantially equivalent hereto must be used to (a) accept Holdings' offer (the "Offer"), upon the terms and subject to the conditions set forth in the Offer to Purchase and Letter of Transmittal, to holders of its 15.25% Senior Discount Notes Due 2004 (the "Discount Notes") to purchase for $785.00 in cash plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date (the "Cash Consideration") for each $1,000 principal amount (at maturity) of Discount Notes accepted for purchase and (b) deliver consents pursuant to Holdings' solicitation (the "Solicitation") of consents (the "Consents") from holders of the Discount Notes ("Noteholders") to the proposed amendments (the "Proposed Amendments") to the indenture under which the Discount Notes were issued (the "Discount Note Indenture") (as described in the Offer to Purchase under the captions "The Proposed Amendments" and "Appendix A -- Description of the Discount Notes"), if (i) certificates representing the Discount Notes to be tendered pursuant thereto and with respect to Consents to be delivered are not lost but are not immediately available, (ii) the procedures for book-entry transfer cannot be completed prior to the Expiration Date (as defined below), or (iii) time will not permit all required documents to reach the Depositary prior to the Expiration Date. This form may be delivered by an Eligible Institution by mail or hand delivery or transmitted, via facsimile, to the Depositary as set forth below. All capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the Offer to Purchase. Unless otherwise indicated, references herein to the Offer shall be deemed to include the Solicitation. THE OFFER AND THE SOLICITATION ARE NOT BEING MADE TO (NOR WILL THE SURRENDER OF DISCOUNT NOTES FOR PURCHASE BE ACCEPTED FROM OR ON BEHALF OF) NOTEHOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE OFFER OR THE SOLICITATION WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION. THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 30, 1995 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERED DISCOUNT NOTES MAY ONLY BE WITHDRAWN AND THE CORRESPONDING CONSENTS MAY ONLY BE REVOKED, UNDER THE CIRCUMSTANCES DESCRIBED IN THE OFFER TO PURCHASE AND THE LETTER OF TRANSMITTAL. 2 The Depositary for the Offer is: BANKERS TRUST COMPANY By Hand/Overnight Courier: Facsimile Transmission Number: By Mail: Bankers Trust Company (212) 250-6275 Bankers Trust Company Corporate Trust & Agency Group (212) 250-3290 Corporate Trust & Agency Department Reorganization Department Reorganization Department Receipt & Delivery Window Confirm by Telephone: P.O. Box 1458 123 Washington St., (212) 250-6270 Church Street Station First Floor New York, NY 10008-1558 New York, NY 10006 For Information Call: (800) 669-5550
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tender(s) to Holdings and delivers to Holdings Consents with respect to, upon the terms and subject to the conditions set forth in the Offer to Purchase and the Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of Discount Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Offer to Purchase under the caption "The Offer to Purchase and Solicitation -- Guaranteed Delivery Procedure." Subject to and effective upon acceptance for purchase of the Discount Notes tendered herewith, the undersigned hereby sells, assigns and transfers to or upon the order of Holdings all right, title and interest in and to, and any and all claims in respect of or arising or having arisen as a result of the undersigned's status as a holder of, all Discount Notes tendered hereby. The undersigned authorizes the Depositary to deliver this Notice of Guaranteed Delivery to Holdings and the Trustee as evidence of the undersigned's Consent to the Proposed Amendments with respect to the Discount Notes tendered hereby and as certification that Requisite Consents (as defined in the Offer to Purchase) to the Proposed Amendments with respect to such Discount Notes have been received. In the event of a termination of the Offer the Discount Notes tendered pursuant thereto will be returned to the tendering Noteholder promptly. The undersigned hereby represents and warrants that the undersigned accepts the terms and conditions of the Offer to Purchase and the Letter of Transmittal, owns the Discount Notes tendered hereby within the meaning of Rule 10b-4 under the Securities Exchange Act of 1934, as amended, has full power and authority to tender, sell, assign and transfer the Discount Notes tendered hereby and that Holdings will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by the Depositary or Holdings to be necessary or desirable to complete the sale, assignment and transfer of the Discount Notes tendered. All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. 2 3 - --------------------------------------------------------------------------------
CERTIFICATE NUMBERS PRINCIPAL AMOUNT (IF AVAILABLE) TO BE TENDERED* ------------------------------ ------------------------------ Discount Notes................. ------------------------------ ------------------------------ ------------------------------ ------------------------------ ------------------------------ ------------------------------
- --------------- * Must be in principal amounts equal to $1,000 or integral multiples thereof. - -------------------------------------------------------------------------------- PLEASE SIGN AND COMPLETE Signatures of Registered Holder(s) or Authorized Signatory: - ------------------------------------------------------------ - ------------------------------------------------------------ Name(s) of Registered Holder(s): - ------------------------------------------------------------ - ------------------------------------------------------------ Date: ------------------------------------------------------ Address: ---------------------------------------------------- - ------------------------------------------------------------ Area Code and Telephone No.: If Discount Notes will be delivered by book-entry transfer, check trust company below: / / The Depository Trust Company / / Midwest Securities Trust Company / / Philadelphia Depository Trust Company Transaction Code No.: -------------------------------------- Exchange Agent Account No.: -------------------------------- 3 4 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or a correspondent in the United States, hereby guarantees that, within five New York Stock Exchange trading days from the date of this Notice of Guaranteed Delivery, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), together with certificates representing the Discount Notes tendered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Discount Notes into the Depositary's account at a Book-Entry Transfer Facility, pursuant to the procedure for book-entry transfer set forth in the Offer to Purchase under the caption "The Offer to Purchase and Solicitation -- Procedures for Tendering and Consenting"), and any other required documents will be deposited by the undersigned with the Depositary. Name of Firm: ----------------------------------------- ------------------------------------- Authorized Signature Address: Name: ----------------------------------------- ----------------------------------------- Title: - -------------------------------------------------- ----------------------------------------- Area Code and Telephone No. Date: --------------------- -----------------------------------------
DO NOT SEND DISCOUNT NOTES WITH THIS FORM. ACTUAL SURRENDER OF DISCOUNT NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS. This Notice of Guaranteed Delivery must be signed by the Noteholder(s) exactly as their name(s) appear on certificates for Discount Notes or on a security position listing as the owner of Discount Notes, or by person(s) authorized to become Noteholder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, agent or other person acting in a fiduciary or representative capacity, such person must provide the following information: Name: ---------------------------------------------------- (Please Type or Print) Capacity: ------------------------------------------------- Address: ------------------------------------------------- ------------------------------------------------- (Zip Code) 4 EX-99.3 14 LETTER TO BROKERS, DEALERS, COMMERCIAL BANKS 1 EXHIBIT 99.3 BT SECURITIES CORPORATION CS FIRST BOSTON DONALDSON, LUFKIN & JENRETTE ONE BANKERS TRUST PLAZA LEVERAGED FINANCE DEPARTMENT SECURITIES CORPORATION 130 LIBERTY STREET 55 E. 52ND STREET 140 BROADWAY NEW YORK, NEW YORK 10006 NEW YORK, NEW YORK 10055 NEW YORK, NEW YORK 10005
TO TENDER AND TO CONSENT TO CERTAIN INDENTURE AMENDMENTS WITH RESPECT TO THE 15.25% SENIOR DISCOUNT NOTES DUE 2004 OF FOOD 4 LESS HOLDINGS, INC. PURSUANT TO OFFER TO PURCHASE AND SOLICITATION STATEMENT DATED MAY 2, 1995 THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 30, 1995, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 15.25% SENIOR DISCOUNT NOTES DUE 2004, MAY ONLY BE WITHDRAWN AND THE CORRESPONDING CONSENTS MAY ONLY BE REVOKED UNDER THE CIRCUMSTANCES DESCRIBED IN THE OFFER TO PURCHASE AND SOLICITATION STATEMENT AND THE CONSENT AND LETTER OF TRANSMITTAL. May 2, 1995 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by Food 4 Less, Inc., Food 4 Less Holdings, Inc. ("Holdings"), Food 4 Less Supermarkets, Inc., and its subsidiaries to act as the Dealer Managers in connection with the offer (the "Offer") by Holdings, upon the terms and subject to the conditions set forth in the Offer to Purchase and Solicitation Statement dated May 2, 1995 (as the same may be amended or supplemented from time to time, the "Offer to Purchase") and in the related Consent and Letter of Transmittal and instructions contained therein (the "Letter of Transmittal"), to holders of its 15.25% Senior Discount Notes Due 2004 (the "Discount Notes") to purchase for $785.00 in cash plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date (the "Cash Consideration") for each $1,000 principal amount (at maturity) of Discount Notes accepted for purchase. Holdings is also soliciting (the "Solicitation") consents (the "Consents") from holders of the Discount Notes ("Noteholders") to certain proposed amendments (the "Proposed Amendments") to the indenture under which the Discount Notes were issued (the "Discount Note Indenture") (as described in the Offer to Purchase under the captions "The Proposed Amendments" and "Appendix A -- Description of the Discount Notes"). Upon consummation of the Offer and the Solicitation, Holdings will deliver the Cash Consideration to the holders of Discount Notes whose Discount Notes are accepted by Holdings pursuant to the Offer. Unless otherwise indicated, references herein to the Offer shall be deemed to include the Solicitation. THE OFFER AND THE SOLICITATION ARE NOT BEING MADE TO (NOR WILL THE SURRENDER OF DISCOUNT NOTES FOR PURCHASE BE ACCEPTED FROM OR ON BEHALF OF) NOTEHOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE OFFER OR THE SOLICITATION WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF THE JURISDICTION. 2 Enclosed herewith are copies of the following documents: 1. The Offer to Purchase and Solicitation Statement; 2. The Consent and Letter of Transmittal for your use and for the information of your clients, together with guidelines of the Internal Revenue Service for Certification of Taxpayer Identification Number on Substitute Form W-9 providing information relating to backup federal income tax withholding; 3. Notice of Guaranteed Delivery to be used to accept the Offer and the Solicitation if the Discount Notes and all other required documents cannot be delivered to the Depositary on or prior to the Expiration Date; 4. A form of letter which may be sent to your clients for whose account you hold the Discount Notes in your name or in the name of a nominee, with space provided for obtaining such clients' instructions with regard to the Offer and the Solicitation; and 5. A return envelope addressed to the Depositary. PLEASE NOTE THAT THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 30, 1995 UNLESS EXTENDED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. Holdings will not pay any fees or commissions to any broker or dealer or other person (other than the Dealer Managers) for soliciting tenders of the Discount Notes pursuant to the Offer and the Solicitation. You will be reimbursed for customary mailing and handling expenses incurred by you in forwarding the enclosed materials to your clients. Additional copies of the enclosed documents may be obtained from the Dealer Managers or the Information Agent, at their respective addresses and telephone numbers set forth on the back cover of the enclosed Offer to Purchase. BT SECURITIES CORPORATION CS FIRST BOSTON CORPORATION DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF HOLDINGS, THE DEPOSITARY, THE INFORMATION AGENT OR THE DEALER MANAGERS OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFER OR THE SOLICITATION NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF TRANSMITTAL. EX-99.4 15 LETTER TO CLIENTS 1 EXHIBIT 99.4 TO TENDER AND TO CONSENT TO CERTAIN INDENTURE AMENDMENTS WITH RESPECT TO THE 15.25% SENIOR DISCOUNT NOTES DUE 2004 OF FOOD 4 LESS HOLDINGS, INC. PURSUANT TO THE OFFER TO PURCHASE AND SOLICITATION STATEMENT DATED MAY 2, 1995 THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 30, 1995, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 15.25% SENIOR DISCOUNT NOTES DUE 2004, MAY ONLY BE WITHDRAWN AND THE CORRESPONDING CONSENTS MAY ONLY BE REVOKED UNDER THE CIRCUMSTANCES DESCRIBED IN THE OFFER TO PURCHASE AND SOLICITATION STATEMENT AND THE CONSENT AND LETTER OF TRANSMITTAL. TO OUR CLIENTS: Enclosed for your consideration is the Offer to Purchase and Solicitation Statement dated May 2, 1995 (as the same may be amended or supplemented from time to time, the "Offer to Purchase") and a related form of Consent and Letter of Transmittal and instructions thereto (the "Letter of Transmittal") relating to (i) the offer (the "Offer") by Food 4 Less Holdings, Inc. ("Holdings"), to holders of its 15.25% Senior Discount Notes Due 2004 (the "Discount Notes") to purchase for $785.00 in cash plus accrued cash interest thereon at a rate of 15.25% per annum from and after March 15, 1995 until the Closing Date (the "Cash Consideration") for each $1,000 principal amount (at maturity) of Discount Notes accepted for purchase and (ii) the solicitation (the "Solicitation") of consents (the "Consents") from holders of the Discount Notes ("Noteholders") to certain proposed amendments (the "Proposed Amendments") to the indenture under which the Discount Notes were issued (the "Discount Note Indenture") (as described in the Offer to Purchase under the captions "The Proposed Amendments" and "Appendix A -- Description of the Discount Notes"). Consummation of the Offer and the Solicitation are subject to certain conditions described in the Offer to Purchase under the caption "The Offer to Purchase and Solicitation -- Conditions." Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Offer to Purchase. WE ARE THE REGISTERED HOLDER OF THE DISCOUNT NOTES HELD BY US FOR YOUR ACCOUNT. A TENDER OF ANY SUCH DISCOUNT NOTES AND DELIVERY OF CONSENTS WITH RESPECT THERETO CAN BE MADE ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER DISCOUNT NOTES, OR DELIVER A CONSENT WITH RESPECT TO SUCH DISCOUNT NOTES, HELD BY US FOR YOUR ACCOUNT. Accordingly, we request instructions as to whether you wish us to tender such Discount Notes held by us for your account, and deliver Consents with respect to all of such Discount Notes so tendered, pursuant to the terms and conditions set forth in the Offer to Purchase and the Letter of Transmittal. We urge you to read the Offer to Purchase and the Letter of Transmittal carefully before instructing us to tender your Discount Notes and to deliver Consents with respect to Discount Notes. Unless otherwise indicated, references herein to the Offer shall be deemed to include the Solicitation. Your instructions to us should be forwarded as promptly as possible in order to permit us to tender Discount Notes and deliver Consents with respect to Discount Notes on your behalf in accordance with the provisions of the Offer to Purchase and the Letter of Transmittal. The Offer and the Solicitation will expire at 12:00 Midnight, New York City time, on May 30, 1995. Discount Notes tendered pursuant to the Offer may only be withdrawn and the corresponding Consents delivered pursuant to the Solicitation may only be revoked, under the circumstances and subject to the procedures described in the Offer to Purchase and the Letter of Transmittal. After receipt by the Trustee of, among other 2 things, certification by Holdings that the Requisite Consents with respect to the Discount Notes have been received, Holdings and the Trustee will execute a supplemental indenture to evidence the adoption of the Proposed Amendments relating to the Discount Notes (the "Supplemental Indenture"). Upon the acceptance by Holdings of the Requisite Consents from holders of Discount Notes and the execution of the Supplemental Indenture, such Supplemental Indenture will immediately become effective. Although the Proposed Amendments relating to the Discount Notes will become effective upon certification that the Requisite Consents from holders of the Discount Notes have been received, such Proposed Amendments will not be operative until Holdings has accepted for purchase all Discount Notes validly tendered and not withdrawn. Your attention is directed to the following: 1. The Offer is for the entire aggregate principal amount of the outstanding Discount Notes. 2. The Offer and the Solicitation are not being made to (nor will the surrender of Discount Notes for purchase be accepted from or on behalf of) Noteholders in any jurisdiction in which the making or acceptance of the Offer or the Solicitation would not be in compliance with the laws of such jurisdiction. 3. A holder of Discount Notes who desires to tender into the Offer with respect to any Discount Notes must tender all the Discount Notes beneficially owned by such holder. The tender of Discount Notes pursuant to the Offer will constitute the Consent of such tendering holder to the Proposed Amendments with respect to such Discount Notes. Noteholders who desire to accept the Offer must consent to the Proposed Amendments. Noteholders do not have the option to consent to the Proposed Amendments without tendering into the Offer. 4. The acceptance for purchase of Discount Notes validly tendered and not validly withdrawn and the payment of the Cash Consideration will be made as promptly as practicable after the Expiration Date. Subject to rules promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Holdings, however, expressly reserves the right to delay acceptance of any of the Discount Notes or to terminate the Offer or the Solicitation and not accept for purchase any Discount Notes not theretofore accepted if any of the conditions set forth in the Offer to Purchase under the caption "The Offer to Purchase and Solicitation -- Conditions" shall not have been satisfied or waived by Holdings. Holdings will pay the Cash Consideration for Discount Notes pursuant to the Offer promptly following acceptance of the Discount Notes. 5. Consummation of the Offer and the Solicitation are subject to, among other things, satisfaction or waiver of certain conditions, including (i) the receipt of the Requisite Consents (i.e., Consents from Noteholders representing at least a majority in aggregate principal amount of the outstanding Discount Notes held by persons other than Holdings and its affiliates) on or prior to the Expiration Date, (ii) satisfaction or waiver in Holdings' sole discretion, of all conditions precedent to the Merger, (iii) the prior or contemporaneous successful completion of the Other Debt Financing Transactions (including the Public Offering), (iv) the prior or contemporaneous consummation of the Bank Financing and the New Equity Investment and (v) certain other conditions. See "The Offer to Purchase and Solicitation -- Conditions" in the Offer to Purchase. There can be no assurance that such conditions will be satisfied or waived. Holdings reserves the right to waive certain limitations, to extend, terminate, cancel or otherwise modify or amend the Offer in any respect. 6. Holdings expressly reserves the right, subject to applicable law and the terms of the Offer and to the extent not inconsistent with the terms of the Merger, the Other Debt Financing Transactions, the Bank Financing or the New Equity Investment, (i) to delay acceptance for purchase of any Discount Notes or, regardless of whether such Discount Notes were theretofore accepted for purchase, to delay the purchase of any Discount Notes pursuant to the Offer and to terminate the Offer and not accept for purchase any Discount Notes not theretofore accepted for purchase, upon the failure of any of the conditions to the Offer specified herein to be satisfied, by giving oral or written notice of such delay or termination to the Depositary and (ii) at any time, or from time to time, to amend the Offer in any respect. Except as otherwise provided in the Offer to Purchase, withdrawal rights with respect to Discount Notes tendered pursuant to the Offer will not be extended or reinstated as a result of an extension or amendment of the Offer. The reservation by Holdings of the right to delay acceptance for purchase of Discount Notes is subject to the provisions of Rule 14e-1(c) under the Exchange Act, which requires that Holdings pay the consideration offered or return the Discount Notes deposited by or on behalf of holders thereof promptly after the termination or withdrawal of the Offer. 7. Consummation of the Offer and the effectiveness of the Proposed Amendments may have adverse consequences to non-tendering Noteholders, including that non-tendering Noteholders will no longer be entitled to the benefit of certain of the restrictive covenants currently contained in the Discount Indenture and that the reduced amount of outstanding Discount Notes as a result of the Offer may adversely affect the trading market, liquidity and market price of the Discount Notes. If the Requisite Consents are received and accepted, the Proposed Amendments will be binding on all non-tendering Noteholders. 2 3 8. Any transfer taxes incident to the transfer of Discount Notes from the tendering holder to Holdings will be paid by Holdings, except as provided in the Offer to Purchase and the instructions to the Letter of Transmittal. If you wish to have us tender any Discount Notes held by us for your account, and deliver your Consent to the Proposed Amendments with respect to all of such Discount Notes, please so instruct us by completing, executing and returning to us the instruction form that follows. Any inquiries you may have with respect to the Offer and the Solicitation or requests for additional copies of the Offer to Purchase or any other document should be addressed to D.F. King & Co., Inc., the Information Agent, at one of the addresses or telephone numbers set forth on the back cover of the enclosed Offer to Purchase, or call toll free at 1-800-669-5550. 3 4 INSTRUCTIONS REGARDING THE OFFER AND THE SOLICITATION WITH RESPECT TO THE 15.25% SENIOR DISCOUNT NOTES DUE 2004 AND OF FOOD 4 LESS HOLDINGS, INC. The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Offer and the Solicitation by Holdings. This will instruct you whether to tender the principal amount of Discount Notes indicated below held by you for the account of the undersigned, and to deliver my Consent to the Proposed Amendments with respect to such Discount Notes, pursuant to the terms and conditions set forth in the Offer to Purchase and the Letter of Transmittal.
PRINCIPAL AMOUNT TO BE TENDERED* ---------------------- Discount Notes........................................... ---------------------- (please fill in blank)
* Must be in principal amounts equal to $1,000 or integral multiples thereof. Date: , 1995 --------------------------------- --------------------------------- Signature(s) --------------------------------- --------------------------------- Please print name(s) here --------------------------------- --------------------------------- --------------------------------- Please type or print address --------------------------------- Area Code and Telephone Number --------------------------------- Taxpayer Identification or Social Security Number --------------------------------- My Account Number with You 4 EX-99.5 16 GUIDELINES FOR CERTIFICATION OF TAXPAYER ID (W9) 1 EXHIBIT 99.5 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 WHAT NAME AND NUMBER TO GIVE THE REQUESTER - --------------------------------------------------------- GIVE THE NAME AND FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY NUMBER OF -- - --------------------------------------------------------- 1. Individual The individual 2. Two or more individuals The actual owner of (joint account) the account or, if combined funds, the first individual on the account(1) 3. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 4. a. The usual revocable The grantor- savings trust (grantor is trustee(1) also trustee) b. So-called trust account The actual owner(1) that is not a legal or valid trust under state law 5. Sole proprietorship The owner(3) - --------------------------------------------------------- GIVE THE NAME AND FOR THIS TYPE OF ACCOUNT: EMPLOYER IDENTIFICATION NUMBER OF -- - --------------------------------------------------------- 6. Sole proprietorship The owner(3) 7. A valid trust, estate, or Legal entity(4) pension trust 8. Corporate The corporation 9. Association, club, The organization religious, charitable, educational, or other tax-exempt organization 10. Partnership The partnership 11. A broker or registered The broker or nominee nominee 12. Account with the Department The public entity of Agriculture in the name of a public entity (such as a state or local government, school district, or prison) that receives agricultural program payments
- ------------------------------------------------------------------ 1 List first and circle the name of the person whose number you furnish. 2 Circle the minor's name and furnish the minor's social security number. 3 Show the individual's name. See Item 5 or 6. You may also enter your business name. 4 List first and circle the name of the legal trust, estate, or pension trust. (Do not furnish the identification number of the personal representative or trustee unless the legal entity itself is not designated in the account title.) NOTE: If no name is circled when there is more than one name listed, the number will be considered to be that of the first name listed. ------------------------ INSTRUCTIONS (Section references are to the Internal Revenue Code.) PURPOSE OF FORM. -- A person who is required to file an information return with the Internal Revenue Service (the IRS) must obtain your correct taxpayer identification number (TIN) to report income paid to you, real-estate transactions, mortgage interest you paid, the acquisition or abandonment of secured property, or contributions you made to an individual retirement arrangement (IRA). Use Form W-9 to furnish your correct TIN to the requester (the person asking you to furnish your TIN), and, when applicable, (1) to certify that the TIN you are furnishing is correct (or that you are waiting for a number to be issued), (2) to certify that you are not subject to backup withholding, and (3) to claim exemption from backup withholding if you are an exempt payee. Furnishing your correct TIN and making the appropriate certifications will prevent certain payments from being subject to backup withholding. NOTE: If a requester gives you a form other than a W-9 to request your TIN, you must use the requester's form. HOW TO OBTAIN A TIN. -- If you do not have a TIN, apply for one immediately. To apply, get Form SS-5, Application for a Social Security Card (SSN) (for individuals), from your local office of the Social Security Administration, or Form SS-4, Application for Employer Identification Number (EIN) (for businesses and all other entities) from your local IRS office. Generally, you will then have 60 days to obtain a TIN and furnish it to the requester. If the requester does not receive your TIN within 60 days, backup withholding, if applicable, will begin and continue until you furnish your TIN to the requester. For reportable interest or dividend payments, the payer must exercise one of the following options concerning backup withholding during this 60-day period. Under option (1), a payer must backup withhold on any withdrawals you make from your account after 7 business days after the requester receives this form back from you. Under option (2), the payer must backup withhold on any reportable interest or dividend payments made to your account, regardless of whether you make any withdrawals. The backup withholding under option (2) must begin no later than 7 business days after the requester receives this form back. Under option (2), the payer is required to refund the amounts withheld if your certified TIN is received within the 60-day period and you were not subject to backup withholding during the period. NOTE: Checking the box in Part II on the Substitute Form W-9 means that you have already applied for a TIN or that you intend to apply for one in the near future. As soon as you receive your TIN, complete another Form W-9, include your TIN, sign and date this form, and give it to the requester. (continued on back) 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 WHAT IS BACKUP WITHHOLDING? -- Persons making certain payments to you are required to withhold and pay to the IRS 31% of such payments under certain conditions. This is called "backup withholding." Payments that could be subject to backup withholding include interest, dividends, broker and barter exchange transactions, rents, royalties, nonemployee compensation, and certain payments from fishing boat operators, but do not include real estate transactions. If you give the requester your correct TIN, make the appropriate certifications, and report all your taxable interest and dividends on your tax return, your payments will not be subject to backup withholding. Payments you receive will be subject to backup withholding if: (1) You do not furnish your TIN to the requester, or (2) The IRS notifies the requester that you furnished an incorrect TIN, or (3) You are notified by the IRS that you are subject to backup withholding because you failed to report all your interest and dividends on your tax return (for reportable interest and dividends only), or (4) You fail to certify to the requester that you are not subject to backup withholding under (3) above (for reportable interest and dividend accounts opened after 1983 only), or (5) You fail to certify your TIN. This applies only to reportable interest, dividend, broker, or barter exchange accounts opened after 1983, or broker accounts considered inactive in 1983. Except as explained in (5) above, other reportable payments are subject to backup withholding only if (1) or (2) above applies. Certain payees and payments are exempt from backup withholding and information reporting. See Payees and Payments Exempt From Backup Withholding, below, and Exempt Payees and Payments under Specific Instructions, below, if you are an exempt payee. PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING. -- The following is a list of payees exempt from backup withholding and for which no information reporting is required. For interest and dividends, all listed payees are exempt except Item (9). For broker transactions, payees listed in (1) through (13) and a person registered under the Investment Advisors Act of 1940 who regularly acts as a broker are exempt. Payments subject to reporting under sections 6041 and 6041A are generally exempt from backup withholding only if made to payees described in Items (1) through (7), except that a corporation that provides medical and health care services or bills and collects payments for such services is not exempt from backup withholding or information reporting. Only payees described in Items (2) through (6) are exempt from backup withholding for barter exchange transactions, patronage dividends, and payments by certain fishing boat operators. (1) A corporation. (2) An organization exempt from tax under section 501(a), or an Individual Retirement Plan (IRA), or a custodial account under section 403(b)(7). (3) The United States or any of its agencies or instrumentalities. (4) A state, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities. (5) A foreign government or any of its political subdivisions, agencies, or instrumentalities. (6) An international organization or any of its agencies or instrumentalities. (7) A foreign central bank of issue. (8) A dealer in securities or commodities required to register in the U.S. or a possession of the U.S. (9) A futures commission merchant registered with the Commodity Futures Trading Commission. (10) A real estate investment trust. (11) An entity registered at all times during the tax year under the investment Company Act of 1940. (12) A common trust fund operated by a bank under section 584(a). (13) A financial institution. (14) A middleman known in the investment community as a nominee or listed in the most recent publication of the American Society of Corporation Secretaries, Inc., Nominee List. (15) A trust exempt from tax under section 664 or described in section 4947. Payments of dividends and patronage dividends generally not subject to backup withholding include the following: o Payments to nonresident aliens subject to withholding under section 1441. o Payments to partnerships not engaged in trade or business in the U.S. and that have at least one nonresident partner. o Payments of patronage dividends not paid in money. o Payments made by certain foreign organizations. Payments of interest generally not subject to backup withholding include the following: o Payments of interest on obligations issued by individuals. NOTE: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct TIN to the payer. o Payments of tax-exempt interest (including exempt-interest dividends under section 852). o Payments described in section 6049(b)(5) to nonresident aliens. o Payments on tax-free covenant bonds under section 1451. o Payments made by certain foreign organizations. o Mortgage interest paid by you. Payments that are not subject to information reporting are also not subject to backup withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A, and 6050N, and their regulations. PENALTIES FAILURE TO FURNISH TIN. -- If you fail to furnish your correct TIN to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make a false statement with no reasonable basis that results in no backup withholding, you are subject to a $500 penalty. CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. SPECIFIC INSTRUCTIONS NAME. -- If you are an individual, you must generally provide the name shown on your social security card. However, if you have changed your last name, for instance, due to marriage, without informing the Social Security Administration of the name change please enter your first name, the last name shown on your social security card and your new last name. If you are a sole proprietor, you must furnish your individual name and either your SSN or EIN. You may also enter your business name on the business name line. Enter your name(s) as shown on your social security card and/or as it was used to apply for your EIN on Form SS-4. SIGNING THE CERTIFICATION. -- (1) INTEREST, DIVIDEND, AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE 1984 AND BROKER ACCOUNTS CONSIDERED ACTIVE DURING 1983. -- You are required to furnish your correct TIN, but you are not required to sign the certification. (2) INTEREST, DIVIDEND, BROKER AND BARTER EXCHANGE ACCOUNTS OPENED AFTER 1983 AND BROKER ACCOUNTS CONSIDERED INACTIVE DURING 1983. -- You must sign the certification or backup withholding will apply. If you are subject to backup withholding and you are merely providing your correct TIN to the requester, you must cross out part (2) in the certification before signing the form. (3) REAL ESTATE TRANSACTIONS. -- You must sign the certification. You may cross out part (2) of the certification. (4) OTHER PAYMENTS. -- You are required to furnish your correct TIN, but you are not required to sign the certification unless you have been notified of an incorrect TIN. Other payments include payments made in the course of the requester's trade or business for rents, royalties, goods (other than bills for merchandise), medical and health care services, payments to a nonemployee for services (including attorney and accounting fees), and payments to certain fishing boat crew members. (5) MORTGAGE INTEREST PAID BY YOU, ACQUISITION OR ABANDONMENT OF SECURED PROPERTY, OR IRA CONTRIBUTIONS. -- You are required to furnish your correct TIN, but you are not required to sign the certification. (6) EXEMPT PAYEES AND PAYMENTS. -- If you are exempt from backup withholding, you should complete this form to avoid possible erroneous backup withholding. Enter your correct TIN in Part 1, write "EXEMPT" in the block in Part 2, sign and date the form. If you are a nonresident alien or foreign entity not subject to backup withholding, give the requester a completed FORM W-8, Certificate of Foreign Status. (7) "AWAITING TIN." -- Follow the instructions under How To Obtain a TIN, on page 1, check the box in Part 3 of the Substitute Form W-9 and sign and date the form. SIGNATURE. -- For a joint account, only the person whose TIN is shown in Part 1 should sign this form. PRIVACY ACT NOTICE. -- Section 6109 requires you to furnish your correct TIN to persons who must file information returns with the IRS to report interest, dividends, and certain other income paid to you, mortgage interest you paid, the acquisition or abandonment of secured property, cancellation of debt or contributions you made to an individual retirement arrangement (IRA). The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. You must provide your TIN whether or not you are required to file a tax return. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a TIN to a payer. Certain penalties may also apply. -----END PRIVACY-ENHANCED MESSAGE-----