-----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, IowcovI+wRgScsB+2/WACCAJsaxnrx0xQ7h8EPsKgXvuAUeDJNKj+Dm/SXx+zBmz 8kXprRFw+XAq02jNTaa/NA== 0000950150-95-000288.txt : 19950512 0000950150-95-000288.hdr.sgml : 19950512 ACCESSION NUMBER: 0000950150-95-000288 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19950511 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: 95536837 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: 95536838 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. 2 TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1995 REGISTRATION NO. 33-86356 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ POST-EFFECTIVE AMENDMENT NO. 2 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. [FOOD 4 LESS LOGO] [RALPHS LOGO] OFFER TO PURCHASE FOR CASH AND 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 JUNE 9, 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 12, 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 May 10, 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"), $16.4 million of which is anticipated to be drawn at closing. - The issuance of up to $295 million of New F4L Senior Notes pursuant to the Senior Note Public Offering. - The issuance of up to $200 million of New RGC Notes pursuant to the Subordinated Note Public Offering. - The issuance of preferred stock in a private placement by New Holdings to a group of investors (the "New Equity Investors") led by Apollo Advisors, L.P. (on behalf of one or more managed entities) or its affiliates and designees ("Apollo") and including affiliates of BT Securities Corporation ("BT Securities"), CS First Boston Corporation ("CS First Boston") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and other institutional investors, yielding cash proceeds of $140 million pursuant to the New Equity Investment. Concurrently with the New Equity Investment, the New Equity Investors will purchase outstanding shares of New Holdings capital stock from a stockholder of New Holdings for a purchase price of $57.8 million. See "Description of Capital Stock -- New Equity Investment." - The 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). This presentation assumes the use of the maximum amount of cash proceeds that could be necessary to consummate the Merger (if holders representing more than 49.9% of the outstanding principal amount of Old RGC Notes tender into the RGC Offers in exchange for New RGC Notes, rather than for cash (i.e. the RGC Minimum Exchange is exceeded), the non-cash sources and cash uses would be correspondingly adjusted). Although management believes such assumptions are reasonable under the circumstances, actual sources and uses may differ from those set forth below depending upon the outcome of the 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)....... 16.4 Purchase Old RGC Notes(k)......... 226.8 New F4L Senior Notes(c)......... 295.0 Purchase Discount Notes........... 83.9 New RGC Notes(d)................ 200.0 Repay Ralphs 1992 Credit New Equity Investment(e)........ 140.0 Agreement......................... 255.1 New Discount Debentures(f)...... 59.0 Repay F4L Credit Agreement........ 161.5 Pay Accrued Interest(l)........... 29.3 EAR Related Payments(m)........... 22.8 Repay Mortgage Indebtedness(n).... 191.5 Purchase New Holdings Common Stock(o)........................ 3.7 Fees and Expenses(p).............. 109.9 -------- -------- Total Cash Sources........... $1,460.4 Total Cash Uses................... $1,460.4 ======== ======== NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes(g)......... $ 140.0 Old F4L Senior Notes Exchanged.... $ 140.0 Assumed Old F4L Senior Notes.... 35.0 Assumed Old F4L Senior Notes...... 35.0 New F4L Senior Subordinated Old F4L Senior Subordinated Notes Notes........................ 116.0 Exchanged......................... 116.0 Assumed Old F4L Senior Assumed Old F4L Senior Subordinated 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(p).............. 22.5 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt......................... 166.8 Debt.............................. 166.8 Seller Debentures(i)............ 131.5 Purchase RSI Common Stock(i)...... 150.0 -------- -------- Total Non-Cash Sources....... $ 884.8 Total Non-Cash Uses............... $ 884.8 ======== ========
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) term loans in the aggregate amount of up to $750 million, comprised of a $375 million tranche with a six year term (the "Tranche A Loan"), a $125 million tranche with a seven year term (the "Tranche B Loan"), a $125 million tranche with an eight year term (the "Tranche C Loan"), and a $125 million tranche with a nine year term (the "Tranche D Loan," and, together with the Tranche A Loan, Tranche B Loan and Tranche C Loan, the "New Term Loans"); and (ii) a $325 million revolving credit facility (the "New Revolving Facility"). The New Term Loans and the New Revolving Facility are referred to collectively as the "New Credit Facility." The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. See "Description of the New Credit Facility." 6 16 (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. (c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. (d) Represents New RGC Notes issued pursuant to the Subordinated Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering. It is not anticipated that the amount of New RGC Notes offered pursuant to the Subordinated Note Public Offering will be reduced below $100 million principal amount. (e) Does not include the $10 million equity contribution by Ralphs management. See note (m) below. Concurrently with the New Equity Investment, certain existing stockholders of New Holdings (formerly stockholders of FFL), including affiliates of George Soros, will sell outstanding shares of New Holdings stock to CLH Supermarket Corp. ("CLH"), a corporation owned by certain Yucaipa partners, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million (which represents the same price per share as will be paid in the New Equity Investment). In connection with the New Equity Investment, the New Equity Investors will contribute the common stock so acquired to New Holdings in consideration for newly-issued preferred shares. See "Description of Capital Stock -- New Equity Investment." (f) Represents $100 million initial accreted value of New Discount Debentures, $59 million of which will be issued for cash, $18.5 million of which will be issued to the RSI stockholders as Merger consideration and $15 million, $5 million and $2.5 million of which will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing. (g) Represents New F4L Senior Notes issued pursuant to the F4L 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) Represents the purchase of shares of New Holdings common stock from stockholders who have exercised statutory dissenters' rights in connection with the FFL Merger. There are no other shares subject to statutory dissenters' rights. (p) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of $5 million to be paid to BT Securities and commitment fees of $5 million to be paid to Apollo, upon closing of the Merger. Of such amounts, $15 million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT Securities' $5 million fee will be paid through the issuance of New Discount Debentures in lieu of cash. Such New Discount Debentures will be contributed by them to the partnership that will acquire all of the New Discount Debentures. Yucaipa anticipates that it in turn will pay a cash fee of approximately $3.5 million to Soros Fund Management in consideration for advisory services which Soros Fund Management has rendered since 1991. See "Certain Relationships and Related Transactions -- Food 4 Less 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 FOOD 4 LESS RALPHS ----------- ------ [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 June 9, 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.................................................. 224.3 122.5 Non-cash.............................................. 47.8 27.4 Amortization of debt issuance costs................... 13.4 6.9 -------- -------- Total interest expense................................... 285.5 156.8 Net loss(a).............................................. (119.5) (67.3) Ratio of earnings to fixed charges(b).................... -- -- BALANCE SHEET DATA (END OF PERIOD): Working capital.................................................................. $ 18.4 Total assets..................................................................... 3,096.2 Total debt....................................................................... 2,228.8 Stockholders' equity............................................................. 52.5 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 $119.5 million and $67.3 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. Net earnings (loss) includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses and interest expense, of $29.2 million, $31.2 million, $36.9 million, $36.3 million, and $20.0 million, for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, the 52 weeks ended January 31, 1993, the 52 weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995, respectively. Included in the 52 weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995 are reduced employer contributions of $11.8 million and $12.7 million, respectively, related to union health and welfare benefit plans. (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(d).................................... (10.1 ) (9.6 ) (33.8 ) (31.2 ) (11.5 ) (5.7) (14.3) Ratio of earnings to fixed charges(e).......... --(e ) --(e ) --(e ) --(e ) --(e ) --(e) --(e) BALANCE SHEET DATA (end of period)(f): Working capital surplus (deficit).............. $ (40.5 ) $ 13.7 $ (66.3 ) $ (19.2 ) $ (54.9 ) $ (14.9) $ (44.8) Total assets................................... 574.7 980.0 998.5 957.8 980.1 969.6 984.6 Total debt(g).................................. 360.7 558.9 525.3 588.3 576.9 576.2 615.9 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(h)............... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8 Capital expenditures........................... 36.4 34.7 60.3 53.5 57.5 20.4 39.0 Stores open at end of period................... 115 259 249 248 258 249 266 EBITDA (as defined)(i)......................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4 EBITDA margin(j)............................... 5.3 % 5.0 % 3.5 % 3.9 % 5.0 % 4.9% 4.9%
- --------------- (a) Operating data for the 52 weeks ended June 29, 1991 include the results of Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha Beta's sales for the two weeks ended June 29, 1991 were $59.2 million. (b) Operating data for the 52 weeks ended June 25, 1994 include the results of the Food Barn stores, which were not material, from March 29, 1994, the date of the Food Barn acquisition. (c) Interest expense includes non-cash charges related to the amortization of deferred financing costs of $4.1 million for the 53 weeks ended June 30, 1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June 26, 1993, $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks ended January 7, 1995. (d) Net loss includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses, and interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9 million, $25.7 million, $24.8 million, and $14.9 million for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended, June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995, respectively. Included in the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995 are reduced employer contributions of $8.1 million, $2.8 million and $13.7 million, respectively, related to union health and welfare benefit plans. (e) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of loss before provision for income taxes and extraordinary charges plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred debt financing costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994 and the 28 weeks ended January 8, 1994 and 18 28 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. (f) 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. (g) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. (h) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994, and for the 28 weeks ended January 8, 1994 and January 7, 1995, depreciation and amortization includes amortization of excess of cost over net assets acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and $4.2 million, respectively. (i) "EBITDA," as defined and presented historically by Holdings, 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." (j) 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 $2,228.8 million and $52.5 million, respectively, and the Company would have had an additional $169.4 million available to be borrowed under the New Revolving Facility. In addition, as of January 7, 1995, after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), scheduled payments under operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been $125.0 million. On the same pro forma basis, for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995, New Holdings' earnings before fixed charges would have been inadequate to cover fixed charges by $119.5 million and $67.3 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 $2,812.2 million, excluding letters of credit, and the Company would have had $169.4 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 DUE TO REDUCED TRADING MARKET FOR 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 $119.5 million and $67.3 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, $16.4 million of which is anticipated to be drawn at closing. - The issuance of up to $295 million of New F4L Senior Notes pursuant to the Senior Note Public Offering. - The issuance of up to $200 million of New RGC Notes pursuant to the Subordinated Note Public Offering. - The issuance of preferred stock in a private placement by New Holdings to a group of investors led by Apollo and including affiliates of BT Securities, CS First Boston and DLJ and other institutional investors, yielding cash proceeds of $140 million pursuant to the New Equity Investment. Concurrently 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). This presentation assumes the use of the maximum amount of cash proceeds that could be necessary to consummate the Merger (if holders representing more than 49.9% of the outstanding principal amount of Old RGC Notes tender into the RGC Offers in exchange for New RGC Notes, rather than for cash (i.e. the RGC Minimum Exchange is exceeded), the non-cash sources and cash uses would be correspondingly adjusted). Although management believes such assumptions are reasonable under the circumstances, actual sources and uses may differ from those set forth below depending upon the outcome of the 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)......... 16.4 Purchase Old RGC Notes(k)......... 226.8 New F4L Senior Notes(c)........... 295.0 Purchase Discount Notes........... 83.9 Repay Ralphs 1992 Credit New RGC Notes(d).................. 200.0 Agreement......................... 255.1 New Equity Investment(e).......... 140.0 Repay F4L Credit Agreement........ 161.5 New Discount Debentures(f)........ 59.0 Pay Accrued Interest(l)........... 29.3 EAR Related Payments(m)........... 22.8 Repay Mortgage Indebtedness(n).... 191.5 Purchase New Holdings Common Stock(o).......................... 3.7 Fees and Expenses(p).............. 109.9 -------- -------- Total Cash Sources........... $1,460.4 Total Cash Uses................... $1,460.4 ======== ======== NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes(g)........... $ 140.0 Old F4L Senior Notes Exchanged.... $ 140.0 Assumed Old F4L Senior Notes...... 35.0 Assumed Old F4L Senior Notes...... 35.0 New F4L Senior Subordinated Old F4L Senior Subordinated Notes Notes........................... 116.0 Exchanged......................... 116.0 Assumed Old F4L Senior Assumed Old F4L Senior Subordinated 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(p).............. 22.5 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt............................ 166.8 Debt.............................. 166.8 Seller Debentures(i).............. 131.5 Purchase RSI Common Stock(i)...... 150.0 -------- -------- Total Non-Cash Sources....... $ 884.8 Total Non-Cash Uses............... $ 884.8 ======== ========
- --------------- (a) Food 4 Less has accepted a commitment letter from Bankers Trust pursuant to which Bankers Trust has agreed, subject to certain conditions, to provide the Company up to a maximum aggregate amount of $1,075 million of financing under the New Credit Facility. It is anticipated that the New Credit Facility will be syndicated to a number of financial institutions for whom Bankers Trust will act as agent. The New Credit Facility will provide for (i) the New Term Loans in the aggregate amount of up to $750 million, comprised of the $375 million Tranche A Loan, the $125 million Tranche B Loan, the $125 million Tranche C Loan, and the $125 million Tranche D Loan and (ii) the $325 million New Revolving Facility. The Tranche A Loan may not be fully 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 27 37 letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New Revolving Facility at closing, in replacement of existing letters of credit, primarily to satisfy the State of California's requirements relating to workers compensation self-insurance. (c) Represents New F4L Senior Notes issued pursuant to the Senior Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New F4L Senior Notes being offered pursuant to the Senior Note Public Offering. (d) Represents New RGC Notes issued pursuant to the Subordinated Note Public Offering. If Food 4 Less receives tenders in excess of the RGC Minimum Exchange in the RGC Offers, Food 4 Less may elect to decrease the amount of New RGC Notes being offered pursuant to the Subordinated Note Public Offering. It is not anticipated that the amount of New RGC Notes offered pursuant to the Subordinated Note Public Offering will be reduced below $100 million principal amount. (e) Does not include the $10 million equity contribution by Ralphs management. See note (m) below. Concurrently with the New Equity Investment, certain existing stockholders of New Holdings (formerly stockholders of FFL), including affiliates of George Soros, will sell outstanding shares of New Holdings stock to CLH, which in turn will sell such shares to the New Equity Investors for an aggregate purchase price of $57.8 million (which represents the same price per share as will be paid in the New Equity Investment). In connection with the New Equity Investment, the New Equity Investors will contribute the common stock so acquired to New Holdings in consideration for newly-issued preferred shares. See "Description of Capital Stock -- New Equity Investment." (f) Represents $100 million initial accreted value of New Discount Debentures, $59 million of which will be issued for cash, $18.5 million of which will be issued to the RSI stockholders as Merger consideration and $15 million, $5 million and $2.5 million of which will be issued to Yucaipa, BT Securities and Apollo, respectively, in satisfaction of fees otherwise payable by the Company and New Holdings in connection with the Merger and the Financing. (g) Represents New F4L Senior Notes issued pursuant to the F4L 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) Represents the purchase of shares of New Holdings common stock from stockholders who have exercised statutory dissenters' rights in connection with the FFL Merger. There are no other shares subject to statutory dissenters' rights. (p) Includes advisory fees of $19 million to be paid to Yucaipa, other fees of $5 million to be paid to BT Securities and commitment fees of $5 million to be paid to Apollo upon 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)..................................................... 54.5 Other indebtedness............................................................ 129.3 New F4L Senior Notes(c)....................................................... 435.0 Old F4L Senior Notes.......................................................... 35.0 New RGC Notes(d).............................................................. 425.5 New F4L Senior Subordinated Notes............................................. 116.0 Old F4L Senior Subordinated Notes............................................. 29.0 New Discount Debentures (initial accreted value).............................. 100.0 Seller Debentures............................................................. 131.5 -------- Total long-term debt.................................................. 2,202.0 -------- 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................................................................ (5.9) -------- Total stockholders' equity................................................. 52.5 -------- 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(m)................................... 469.1 388.8 (36.4)(a) 833.1 8.1 (b) 1.4 (d) 1.6 (e) 0.5 (f) Amortization of excess cost over net assets acquired...................................... 11.0 7.7 10.7 (g) 29.4 Provision for restructuring..................... 2.4 0.0 -- 2.4 -------- -------- ------- -------- Operating income........................... 150.9 72.8 (40.4) 183.3 Other expenses: Interest expense -- cash(l)................... 93.2 57.0 74.1 (h) 224.3 Interest expense -- non-cash(l)............... 9.4 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(n)............................. 29.1 (8.8) (139.8) (119.5) Income tax expense (benefit).................... (108.0) 2.7 105.3 (i) -- -------- -------- ------- -------- Net earnings (loss)(j)..................... $ 137.1 $ (11.5) $(245.1) $ (119.5) ======== ======== ======= ======== Ratio of earnings to fixed charges(k)(l)... 1.2x -- -- ======== ======== ========
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(m).................................. 254.7 199.2 (18.7)(a) 442.1 4.4 (b) 1.3 (d) 0.9 (e) 0.3 (f) Amortization of excess cost over net assets acquired..................................... 5.9 4.2 5.8 (g) 15.9 Provision for restructuring.................... 0.0 5.1 -- 5.1 -------- -------- ------- -------- Operating income.......................... 78.5 29.0 (17.6) 89.9 Other expenses: Interest expense -- cash(l).................. 53.2 31.6 37.7 (h) 122.5 Interest expense -- non-cash(l).............. 4.9 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(n)............................ 16.4 (13.8) (69.9) (67.3) Income tax expense (benefit)................... 0.0 0.5 (0.5)(i) 0.0 -------- -------- ------- -------- Net earnings (loss)(j).................... $ 16.4 $ (14.3) $ (69.4) $ (67.3) ======== ======== ======= ======== Ratio of earnings to fixed charges(k)(l)........................... 1.2x -- -- ======== ======== ========
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:
52 WEEKS 28 WEEKS ENDED ENDED JUNE 25, JANUARY 7, 1994 1995 ------------- --------------- Historical interest expense -- cash........................................... $150.2 $ 84.8 ------ ------ Plus: Interest on borrowings under: New Credit Facility....................................................... 79.8 42.9 New F4L Senior Notes...................................................... 33.2 17.9 New RGC Notes............................................................. 48.9 26.4 Other bank fees........................................................... 3.5 1.9 Other debt................................................................ 2.0 1.8 Less: Interest on borrowings under: Old bank term loans: Ralphs.................................................................. (21.3) (13.7) Food 4 Less............................................................. (11.5) (6.9) Old RGC Notes............................................................. (43.9) (23.6) Other debt................................................................ (16.6) (9.0) ------ ------ Pro forma adjustment........................................................ 74.1 37.7 ------ ------ Pro forma interest expense -- cash............................................ $224.3 $122.5 ====== ====== Historical 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 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 and sales targets, 34 44 (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 $119.5 million and $67.3 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............ $224.3 $224.9 $225.4 $226.0 $122.5 $122.8 $123.1 $123.4 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)........................ 119.5 120.2 120.8 121.5 67.3 67.7 68.0 68.4 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) Pro forma combined selling, general and administrative expenses for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 include reduced employer contributions of $25.8 million and $20.5 million, respectively, related to union health and welfare benefit plans. (n) The pro forma combined loss before income tax provision for the 52 weeks ended June 25, 1994 and the 28 weeks ended January 7, 1995 includes reductions in self insurance reserves of $26.4 million and $21.5 million, respectively. (o) "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." 35 45 The following table presents a reconciliation of pro forma EBITDA (as defined):
52 WEEKS ENDED 28 WEEKS ENDED JUNE 25, 1994 JANUARY 7, 1995 -------------- -------------- Historical EBITDA: Ralphs EBITDA............................................................ $228.1 $126.0 EBITDA margin(1)....................................................... 8.4% 8.5% Food 4 Less EBITDA....................................................... $130.5 $ 69.4 EBITDA margin.......................................................... 5.0% 4.9% Less: Pro Forma Adjustments(2)............................................. $(16.1) $ (6.1) ------ ------ Pro Forma EBITDA........................................................... $342.5 $189.3 ====== ====== Pro Forma EBITDA margin.................................................. 6.8% 6.8% ====== ======
(1) EBITDA margin represents EBITDA (as defined) as a percentage of sales. (2) Reflects primarily EBITDA (as defined) associated with closed or divested stores and the adjustments referred to in notes (e) and (f) above. 36 46 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................................. 883.0 590.0 729.0 (o) 2,202.0 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..................... 1,482.7 988.7 572.3 3,043.7 -------- ------- ------- -------- 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) (5.9) (3.7)(x) -------- ------- ------- -------- Total stockholders' equity(y)......... 27.2 (4.1) 29.4 52.5 -------- ------- ------- -------- Total liabilities and stockholders' equity.............................. $1,509.9 $ 984.6 $ 601.7 $3,096.2 ======== ======= ======= ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 37 47 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) Reflects gross proceeds received from (i) the New Term Loans, (ii) the New Revolving Facility, (iii) the 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.................................................................... 54.5 New F4L Senior Notes...................................................................... 295.0 New RGC Notes............................................................................. 200.0 New Equity Investment..................................................................... 140.0 New Discount Debentures................................................................... 59.0 Purchase Discount Notes................................................................... (83.9) Purchase RSI Common Stock................................................................. (375.9) Repay Ralphs 1992 Credit Agreement........................................................ (297.4) Repay F4L Credit Agreement................................................................ (174.4) Purchase Old RGC Notes.................................................................... (226.8) Pay EAR liability......................................................................... (17.8) Loan to affiliate......................................................................... (5.0) Repay other Ralphs debt................................................................... (188.9) Purchase New Holdings Common Stock........................................................ (3.7) Accrued Interest.......................................................................... (14.8) Fees and Expenses......................................................................... (109.9) ------- Pro forma adjustment.............................................................. $ 0.0 =======
(b) Reflects the elimination of Ralphs historical LIFO reserve ($17.4 million) and the write-up of merchandise inventory ($22.5 million); both to reflect current estimated selling prices less costs of disposal and a reasonable profit allowance for the selling effort of the acquiring company. (c) Reflects the estimated write-up to fair value of Ralphs property, plant and equipment as of the date of the Merger. (d) Reflects estimated restructuring charge associated with closing 29 Food 4 Less conventional supermarkets or warehouse stores and converting 5 Food 4 Less conventional supermarkets to warehouse stores. Pursuant to the settlement agreement with the State of California, 24 Food 4 Less stores (as well as 3 Ralphs stores) must be closed by December 31, 1995. See "Business -- California Settlement Agreement." Although not required by such settlement agreement, an additional 5 under-performing stores selected by the Company also are scheduled to be closed by December 31, 1995. The restructuring charge consists of write-downs of property, plant and equipment ($22.8 million), write-off of the Alpha Beta trademark ($8.6 million), write-off of other assets ($4.3 million), lease termination expenses ($3.1 million) and miscellaneous expense accruals ($1.6 million). The expected cash payments to be made in connection with the restructuring charge total $7.1 million. It is expected that such cash payments will be made by December 31, 1995. The estimated restructuring charge will be recorded as an expense once the Merger is completed. No additional expenses are expected to be incurred in future periods in connection with these closings. Food 4 Less has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. (e) Reflects the anticipated closing of 3 Ralphs stores. (f) Reflects the excess of costs over the fair value of the net assets of Ralphs acquired in connection with the Merger ($866.8 million) and the elimination of Ralphs historical excess of costs over the fair value of the net assets acquired ($365.4 million). The purchase price and preliminary calculation of the excess of cost over the net book value of assets acquired is as follows: Purchase price: Purchase of outstanding common equity.................................................. $525.9 Fees and expenses...................................................................... 55.8 ------ Total purchase price................................................................... $581.7 ------ Purchase price is financed by: Seller Debentures...................................................................... $131.5 New Discount Debentures................................................................ 18.5 New Equity Investment.................................................................. 140.0 New borrowings......................................................................... 291.7 ------ $581.7 ======
Preliminary calculation of purchase price allocated to assets and liabilities based on management's estimate of fair values as of January 29, 1995: Cash................................................................................... $ 35.1 Receivables............................................................................ 43.6 Inventories............................................................................ 261.3 Other current assets................................................................... 19.8 Property, fixtures and equipment....................................................... 782.7 Beneficial lease rights................................................................ 49.2 Goodwill............................................................................... 866.8 Other assets........................................................................... 18.0 Current liabilities.................................................................... (424.8) Obligations under capital leases....................................................... (89.1) Long-term debt......................................................................... (806.6) Other non-current liabilities.......................................................... (174.3) ------- $ 581.7 =======
38 48
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.................................................................... 54.5 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.......................................................... $ 729.0 =======
(p) Reflects payments with respect to a portion of the Ralphs EAR liability ($17.8 million) and the issuance of New Holdings stock options in consideration of the cancellation of the remaining Ralphs EAR liability ($10.0 million). See "Executive Compensation -- Equity Appreciation Rights Plan." No future compensation expense will be recorded as the cancellation of certain EAR liabilities ($10.0 million) in consideration for the issuance of New Holdings stock options is deemed to reflect fair value. (q) Reflects a reserve for Ralphs unfunded defined benefit pension plan, determined as the difference between the projected benefit obligation of the 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) Represents the purchase of shares of New Holdings common stock from stockholders who have exercised statutory dissenters' rights in connection with the FFL Merger. There are no other shares subject to statutory dissenters' rights. (y) The unaudited pro forma combined balance sheet as of January 7, 1995 does not include certain one-time non-recurring costs related to (i) severance payments under certain employment contracts with Food 4 Less management totaling $1.4 million that are subject to change of control provisions and the achievement of earnings and sales targets, (ii) costs related to the integration of the Company's operations which are estimated to be $50.0 million (includes an estimated $12.0 million related to termination and severance costs) over a three-year period, (iii) other costs related to warehouse closures, which costs are not presently determinable or (iv) any contingent liability to reimburse Yucaipa in the event it incurs a loss on the resale of $10 million of the Seller Debentures. 39 49 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)(f)............................... $ (51.4) $ (41.2) $ (76.1) $ 138.4 $ 32.1 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges(g)................ -- (g) -- (g) 1.02x 1.24x 1.24x BALANCE SHEET DATA (end of period): Working capital surplus (deficit).................... $ (93.9) $ (114.2) $ (122.0) $ (73.0) $ (119.5) Total assets......................................... 1,406.4 1,357.6 1,388.5 1,483.7 1,509.9 Total debt(h)........................................ 986.1 941.9 1,029.8 998.9 1,018.5 Redeemable stock..................................... 3.0 3.0 -- -- -- Stockholders' equity (deficit)....................... (16.0) (57.2) (133.3) 5.1 27.2 OTHER DATA: Depreciation and amortization(i)..................... $ 75.2 $ 76.6 $ 76.9 $ 74.5 $ 76.0 Capital expenditures................................. 87.6 50.4 102.7 62.2 64.0 Stores open at end of period......................... 150 158 159 165 173 EBITDA (as defined)(j)............................... $ 207.0 $ 225.8 $ 227.3 $ 230.2 $ 230.2 EBITDA margin(k)..................................... 7.4% 7.8% 8.0% 8.4% 8.4%
- --------------- (a) Includes provision for post retirement benefits other than pensions of $2.2 million, $2.6 million, $3.3 million, $3.4 million and $2.6 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. (b) Provisions for restructuring are charges for expenses relating to closing of Ralphs central bakery operation. The charge reflected the complete write-down of the bakery building, machinery and equipment, leaseholds, related inventory and supplies, and providing severance pay to terminated employees. These charges were $7.1 million and $2.4 million for the 52 weeks ended January 31, 1993 and the 52 weeks ended January 30, 1994, respectively. Provision for tax indemnification payments to Federated were $10.0 million for the 52 weeks ended February 2, 1992. (c) Interest expense includes non-cash charges related to the amortization of deferred debt issuance costs of $4.1 million for the 53 weeks ended February 3, 1991, $5.0 million for the 52 weeks ended February 2, 1992, $5.5 million for the 52 weeks ended January 31, 1993, $6.5 million for the 52 weeks ended January 30, 1994 and $6.1 million for the 52 weeks ended January 29, 1995, respectively. (d) Loss on disposal of assets was $6.4 million, $13.0 million, $2.6 million, $1.9 million and $0.8 million for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, respectively. The 52 weeks ended February 2, 1992 includes approximately $12.2 million representing a reserve against losses related to the closing of three stores. Provision for legal settlement was $7.5 million for the 52 weeks ended January 31, 1993. Provision for earthquake losses was $11.0 million for the 52 weeks ended January 30, 1994. This represents reserve for losses, net of anticipated insurance recoveries, resulting from the January 17, 1994 Southern California earthquake. 40 50 (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) Net earnings (loss) includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses and interest expense, of $29.2 million, $31.2 million, $36.9 million, $36.3 million, and $20.0 million, for the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, the 52 weeks ended January 31, 1993, the 52 weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995, respectively. Included in the 52 weeks ended January 30, 1994 and the 52 weeks ended January 29, 1995 are reduced employer contributions of $11.8 million and $12.7 million, respectively, related to union health and welfare benefit plans. (g) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary items and fixed charges before capitalized interest. "Fixed charges" consist of interest expense (including amortization of self-insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended February 3, 1991 and the 52 weeks ended February 2, 1992 by $25.5 million and $27.7 million, respectively. (h) Total debt includes long-term debt, current maturities of long-term debt, short-term debt and capital lease obligations. (i) For the 53 weeks ended February 3, 1991, the 52 weeks ended February 2, 1992, January 31, 1993, January 30, 1994 and January 29, 1995, depreciation and amortization includes amortization of the excess of cost over net assets acquired of $11.0 million, $11.0 million, $11.0 million, $11.0 million and $11.0 million, respectively. (j) "EBITDA," as defined and presented historically by RGC, represents earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provisions for Equity Appreciation Rights, provision for tax indemnification payments to Federated, provision for postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses, a one-time charge for Teamsters Union sick pay benefits, transition expense and gains and losses on disposal of assets. EBITDA is a widely accepted financial indicator of a company's ability to service debt. However, EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of Ralphs' operating performance or as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (k) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 41 51 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 (f) 4.8 (g) -- -- -- -- -------- -------- -------- -------- -------- --------- -------- Net loss(e)................................ $ (10.1) $ (9.6) $ (33.8) $ (31.2) $ (11.5) $ (5.7) $ (14.3) ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges(h)...... -- (h) -- (h) -- (h) -- (h) -- (h) -- (h) -- (h) BALANCE SHEET DATA (end of period)(i): Working capital surplus (deficit).......... $ (40.5) $ 13.7 $ (66.3) $ (19.2) $ (54.9) $ (14.9) $ (44.8) Total assets............................... 574.7 980.0 998.5 957.8 980.1 969.6 984.6 Total debt(j).............................. 360.7 558.9 525.3 588.3 576.9 576.2 615.9 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(k)........... $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 30.4 $ 30.8 Capital expenditures....................... 36.4 34.7 60.3 53.5 57.5 20.4 39.0 Stores open at end of period............... 115 259 249 248 258 249 266 EBITDA (as defined)(l)..................... $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 69.1 $ 69.4 EBITDA margin(m)........................... 5.3% 5.0% 3.5% 3.9% 5.0% 4.9% 4.9%
- --------------- (a) Operating data for the 52 weeks ended June 29, 1991 include the results of Alpha Beta only from June 17, 1991, the date of its acquisition. Alpha Beta's sales for the two weeks ended June 29, 1991 were $59.2 million. (b) Operating data for the 52 weeks ended June 25, 1994 include the results of the Food Barn stores, which were not material, from March 29, 1994, the date of the acquisition of the Food Barn stores. (c) Interest expense includes non-cash charges related to the amortization of deferred financing costs of $4.1 million for the 53 weeks ended June 30, 1990, $5.2 million for the 52 weeks ended June 29, 1991, $6.3 million for the 52 weeks ended June 27, 1992, $4.9 million for the 52 weeks ended June 26, 1993, 42 52 $5.5 million for the 52 weeks ended June 25, 1994, $2.9 million for the 28 weeks ended January 8, 1994 and $3.1 million for the 28 weeks ended January 7, 1995. (d) Represents the recording of a restructuring charge for the write-off of property and equipment in connection with the conversion of 11 conventional format supermarkets to warehouse format stores. (e) Net loss includes a pre-tax provision for self insurance, which is classified in cost of sales, selling, general and administrative expenses, and interest expense of $11.2 million, $15.1 million, $51.1 million, $43.9 million, $25.7 million, $24.8 million, and $14.9 million for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995, respectively. Included in the 52 weeks ended June 25, 1994, the 28 weeks ended January 8, 1994 and the 28 weeks ended January 7, 1995 are reduced employer contributions of $8.1 million, $2.8 million and $13.7 million, respectively, related to union health and welfare plans. (f) Represents an extraordinary charge of $3.7 million (net of related income tax benefit of $2.5 million) relating to the refinancing of certain indebtedness in connection with the Alpha Beta acquisition and the write-off of related debt issuance costs. (g) Represents an extraordinary net charge of $4.8 million reflecting the write-off of $6.7 million (net of related income tax benefit of $2.5 million) of deferred debt issuance costs as a result of the early redemption of a portion of Food 4 Less' term loan facility under the F4L Credit Agreement, partially offset by a $1.9 million extraordinary gain (net of a related income tax expense of $0.7 million) on the replacement of partially depreciated assets following the civil unrest in Los Angeles. (h) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of loss before provision for income taxes and extraordinary charges, plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). Earnings were insufficient to cover fixed charges for the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, 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. (i) 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. (j) Total debt includes long-term debt, current maturities of long-term debt and capital lease obligations. (k) For the 53 weeks ended June 30, 1990, the 52 weeks ended June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994, and the 28 weeks ended January 8, 1994 and January 7, 1995, depreciation and amortization includes amortization of excess of cost over net assets acquired of $5.3 million, $5.3 million, $7.8 million, $7.6 million, $7.7 million, $4.1 million and $4.2 million, respectively. (l) "EBITDA," as defined and presented historically by 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." (m) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 43 53 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 44 54 "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 45 55 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." 46 56 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 along with the ongoing implementation of new computer-controlled programs and labor standards that improved distribution productivity. The ASRS facility can hold substantially more inventory and requires fewer employees to operate than does a conventional warehouse of equal size. This facility has reduced Ralphs' warehousing costs of non-perishable items markedly, enabling it to take advantage of advance buying opportunities and minimize "out-of-stocks." Ralphs engages in forward-buy purchases to take advantage of special prices or to delay the impact of upcoming price increases by purchasing and warehousing larger quantities of merchandise than immediately required. The PSC facility has consolidated the operations of three existing facilities and holds more inventory than the facilities it replaced, thereby reducing Ralphs' warehouse distribution costs. Over the last several years, Ralphs has been implementing modifications in its workers compensation and general liability insurance programs. Ralphs believes that these modifications have resulted in a significant reduction in self-insurance costs for Fiscal 1994. Based on a review of the results of these modifications by Ralphs and its actuaries, adjustments to the accruals for self-insurance costs were made during Fiscal 1994 resulting in a reduction of approximately $18.9 million. Of the total $18.9 million reduction in self-insurance costs, $7.5 million is included in cost of sales and $11.4 million is included in selling, general and administrative expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") decreased $4.0 million or 0.8% from $471.0 million in Fiscal 1993 to $467.0 million in Fiscal 1994. As a percentage of sales, SG&A was 17.2% in Fiscal 1993 and 17.2% in Fiscal 1994. The decrease in SG&A was primarily due to a reduction in contributions to the United Food and Commercial Workers Union ("UFCW") health care benefit plans, due to an excess reserve in these plans, a reduction in self-insurance costs, as discussed above, and the results of cost savings programs instituted by Ralphs. Ralphs is continuing its expense reduction program. The decrease in SG&A was partially offset by several factors including increases in union wage rates, a one-time charge for Teamsters Union sick pay benefits, as discussed above, transition expense relating to the Merger ($1.4 million) and increased rent expense resulting from new stores, including fixture and equipment financing. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. In both Fiscal 1992 and Fiscal 1993 the multi-employer pension plan was deemed to be 47 57 overfunded based upon the collective bargaining agreement then currently in force. During Fiscal 1993 the agreement called for pension benefits which resulted in additional required expense. The UFCW health and welfare benefit plans were overfunded and those employers who contributed to these plans received a pro rata share of excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs' share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder, $12.7 million, was recognized in Fiscal 1994. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. Operating Income Operating income in Fiscal 1994 decreased 4.3% to $145.6 million from $152.1 million in Fiscal 1993. Operating margin, defined as operating income as a percentage of sales, was 5.3% in Fiscal 1994 compared to 5.6% in Fiscal 1993. EBITDA, defined as net earnings before interest expense, income tax expense (benefit), depreciation and amortization expense, provision for postretirement benefits, provision for LIFO expense, gain or loss on disposal of assets, transition expense and a one-time charge for Teamsters Union sick pay benefits, was 8.4% of sales or $230.2 million in Fiscal 1994 and 8.4% of sales or $230.2 million in Fiscal 1993. Net Interest Expense Net interest expense for Fiscal 1994 was $112.7 million versus $108.8 million for Fiscal 1993. Net interest expense increased primarily as a result of increases in interest rates. Included as interest expense during Fiscal 1994 was $97.4 million, representing interest expense on existing debt obligations, capitalized leases and a swap agreement. Comparable interest expense for Fiscal 1993 was $92.8 million. Also included in net interest expense for Fiscal 1994 was $15.3 million representing certain other charges related to amortization of debt issuance costs, self-insurance discounts, lease valuation reserves and other miscellaneous charges (categorized by Ralphs as non-cash interest expense) as compared to $16.0 million for Fiscal 1993. Investment income, which is immaterial, has been offset against interest expense. The continuation of higher interest rates subsequent to the end of Fiscal 1994 has continued to increase interest expense and adversely affect Ralphs' net income. Net Earnings For Fiscal 1994, Ralphs reported net earnings of $32.1 million compared to net earnings of $138.4 million for Fiscal 1993. The decrease in net earnings is primarily the result of decreased operating income, higher interest expense due to increased interest rates, the recognition of $109.1 million of deferred income tax benefit in Fiscal 1993 partially offset by $11.0 million recorded for earthquake losses in Fiscal 1993. Other In February 1994, the Board of Directors of Ralphs authorized a dividend of $10.0 million to be paid to RSI, and the Board of Directors of RSI authorized distribution of this dividend to its shareholders subject to certain restrictive covenants in the instruments governing certain of Ralphs' indebtedness that impose limitations on the declaration or payment of dividends. Ralphs' credit agreement, entered into in 1992 (the "1992 Credit Agreement"), was amended to allow for the payment of the dividend to RSI for distribution to RSI's shareholders. The fee for the amendment was approximately $500,000, which was included in interest expense for the period. The dividend was distributed to the shareholders of RSI in the second quarter of Fiscal 1994. COMPARISON OF RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1994 WITH RALPHS' RESULTS OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 31, 1993. Sales Sales in Fiscal 1993 were $2,730.2 million, a decrease of $113.6 million or 4.0% compared to Fiscal 1992. During Fiscal 1993, Ralphs opened eight new stores, four in Los Angeles County, two in Orange County and 48 58 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, postretirement benefits, the LIFO charge, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, provision for earthquake losses and loss on disposal of assets, improved to $230.2 million or 8.4% of sales in Fiscal 1993 from $227.3 million or 8.0% of sales in Fiscal 1992. Net Interest Expense Net interest expense for Fiscal 1993 was $108.8 million, compared to $125.6 million for Fiscal 1992. The reduction in net interest expense was attributable to the refinancing and defeasance of Ralphs 14% Senior Subordinated Debentures due 2000 (the "14% Debentures") with the proceeds from the issuance of the Old RGC 9% Notes as the final step in a recapitalization plan initiated on July 30, 1992. Cash interest expense 49 59 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. 50 60 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 51 61 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 non-cash restructuring charge for the write-off of property and equipment at the 11 stores of $5.1 million. Interest Expense Interest expense (including amortization of deferred financing costs) was $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 52 62 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 53 63 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 54 64 Credit Facility pursuant to which it will have available up to $750 million of New Term Loans, all of which is anticipated to be drawn at the Closing Date (assuming all Old RGC Notes are tendered into the RGC Offers), and will have available a $325 million New Revolving Facility, of which $16.4 million is anticipated to be drawn at the Closing Date. Food 4 Less will also issue up to $295 million principal amount of New F4L Senior Notes pursuant to the Senior Note Public Offering and will issue up to $200 million principal amount of New RGC Notes pursuant to the Subordinated Note Public Offering. The proceeds from the New Credit Facility and the Public Offerings, together with the $140 million cash proceeds of the New Equity Investment, $59 million cash proceeds of the New Discount Debenture Placement, $41 million in initial accreted value of additional New Discount Debentures issued other than for cash and $131.5 million principal amount of the Seller Debentures, will provide the sources of financing required to consummate the Merger and to repay existing bank debt of approximately $161.5 million at Food 4 Less and $255.1 million at Ralphs, to repay existing mortgage debt of $174.1 million (excluding prepayment fees) at Ralphs and to pay $83.9 million in consideration for the Discount Notes (excluding related fees). Proceeds from the New Credit Facility and the Public Offerings will also be used to pay the cash portions of the 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, to pay up to $109.9 million of fees and expenses of the Merger and the Financing and to pay $3.7 million to purchase shares of New Holdings Common Stock. The Company will also assume certain existing indebtedness of Food 4 Less and Ralphs. Pursuant to the 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 $216.0 million. Pursuant to the New Credit Facility, the New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of $375 million, will have a six-year term; (ii) Tranche B, in the amount of $125 million, will have a seven-year term; (iii) Tranche C, in the amount of $125 million, will have an eight-year term; and, (iv) Tranche D, in the amount of $125 million, will have a nine-year term. The Tranche A Loan may not be fully funded at the Closing Date. The New Credit Facility will provide that the portion of the Tranche A Loan not funded at the Closing Date will be available for a period of 91 days following the Closing Date to fund the Change of Control Offer. The New Term Loans will require quarterly amortization payments aggregating $3.8 million in the first year, $48.8 million in the second year and increasing thereafter. The New Credit Facility will be guaranteed by New Holdings and each of the Company's subsidiaries and secured by liens on substantially all of the unencumbered assets of the Company 55 65 and its subsidiaries and by a pledge of New Holdings' stock in the Company. The New Credit Facility will contain financial covenants which are expected to require, among other things, the maintenance of specified levels of cash flow and stockholder's equity. See "Description of the New Credit Facility." Standard & Poor's has publicly announced that, upon consummation of the Merger, it intends to assign a new rating to the Old RGC Notes. Such new rating assignment, if implemented, would constitute a Rating Decline under the Old RGC Indentures. The consummation of the Merger (which is conditioned on, among other things, successful consummation of the 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 56 66 the proceeds from sale/leaseback transactions, were financed primarily with cash provided by financing activities. The capital expenditures included the costs associated with the conversion of 11 conventional format stores to the Food 4 Less warehouse format. See "Business -- The Merger -- Two Leading Complementary Formats." In January 1995, Food 4 Less entered into an amendment to the F4L Credit Agreement to, among other things, allow for the 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 57 67 protection agreements will be replaced by a new agreement which will be finalized prior to the closing of the Merger. The Company will be exposed to credit loss in the event of nonperformance by the counterparty to the interest rate protection agreement. However, the Company does not anticipate nonperformance by such counterparty. The following details the impact of Ralphs' hedging activity on its weighted average interest rate for each of the last three fiscal years of Ralphs:
WITH WITHOUT HEDGE HEDGE -------- -------- 1992............................................ 10.52% 10.22% 1993............................................ 8.96% 8.96% 1994............................................ 9.37% 9.18%
Due to increasing interest rates under its existing credit facility, Ralphs' interest expense has increased during recent periods and may continue to increase, reducing Ralphs' net income during such periods. The following details the impact of Food 4 Less' hedging activity on its weighted average interest rate for each of the last three fiscal years of Food 4 Less:
WITH WITHOUT HEDGE HEDGE -------- -------- 1992............................................ 10.28% 10.25% 1993............................................ 10.07% 10.03% 1994............................................ 10.10% 10.09%
Effects of Inflation The Company's primary costs, inventory and labor, are affected by a number of factors that are beyond its control, including inflation, availability and price of merchandise, the competitive climate and general and regional economic conditions. As is typical of the supermarket industry, Ralphs and Food 4 Less have generally been able to maintain margins by adjusting their retail prices, but competitive conditions may from time to time render the Company unable to do so while maintaining its market share. 58 68 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. 59 69 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 60 70 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. 61 71 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, 62 72 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. 63 73 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 64 74 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 65 75 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. 66 76 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 67 77 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
68 78 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 69 79 "Food 4 Less" warehouse supermarkets throughout the United States. As of June 25, 1994, there were 158 Food 4 Less warehouse supermarkets in 20 states, including the 61 stores owned or leased and operated by Food 4 Less. Of the remaining 97 stores, Fleming operates three under license, 67 are operated under sublicenses from Fleming and 27 are operated by other licensees. PROPERTIES At October 1, 1994, Ralphs and Food 4 Less operated a total of 429 stores, as set forth in the table below:
NUMBER OF SUPERMARKETS -------------- TOTAL SELLING OWNED LEASED SQUARE FEET SQUARE FEET ----- ------ ----------- ----------- 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 70 80 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 71 81 requirements and waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The waiting period under the HSR Act has expired and on February 2, 1995, the Federal Trade Commission advised Food 4 Less and Ralphs that it had closed its investigation of the Merger. ENVIRONMENTAL MATTERS In January 1991, the California Regional Water Quality Control Board for the Los Angeles Region (the "Regional Board") requested that Ralphs conduct a subsurface characterization of Ralphs' Atwater property. This request was part of an ongoing effort by the Regional Board, in connection with the U.S. Environmental Protection Agency (the "EPA"), to identify contributors to groundwater contamination in the San Fernando Valley. Significant parts of the San Fernando Valley, including the area where Ralphs' Atwater property is located, have been designated federal Superfund sites requiring response actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, because of regional groundwater contamination. On June 18, 1991, the EPA made its own request for information concerning the Atwater property. Since that time, the Regional Board has requested further investigations by Ralphs. Ralphs has conducted the requested investigations and has reported the results to the Regional Board. Approximately 25 companies have entered into a Consent Order (EPA Docket No. 94-11) with the EPA to investigate and design a remediation system for contaminated groundwater beneath an area which includes the Atwater property. Ralphs is not a party to that Consent Order, but is cooperating with requests of the subject companies to allow installation of monitoring or recovery wells on Ralphs' property. On or about May 2, 1995 the EPA mailed a General Notice Letter to 14 parties, including Ralphs as owner and operator of the Atwater property, naming them as additional potentially responsible parties ("PRPs"). As such, Ralphs and the other PRPs may be requested to perform or pay for remediation or oversight costs in connection with the Superfund site. Ralphs is evaluating the implications of this letter to determine an appropriate response. Based upon available information, management does not believe this matter will have a material adverse effect on the Company's financial condition or results of operations. Ralphs has removed underground storage tanks and remediated soil contamination at the Atwater property. In some instances the removals and the contamination were associated with grocery business operations; in others they were associated with prior property users. Although the possibility of other contamination from prior operations or adjacent properties exists at the Atwater property, management does not believe that the costs of remediating such contamination will be material to the Company. Apart from the Atwater property, Ralphs and Food 4 Less have recently had environmental assessments performed on a significant portion of Ralphs' facilities and Food 4 Less' facilities, including warehouse and distribution facilities. Management believes that any responsive actions required at the examined properties as a result of such assessments will not have a material adverse effect on its financial condition or results of operations. Ralphs has incurred approximately $4.5 million in non-recurring capital expenditures for conversion of refrigerants during 1994. Food 4 Less may incur some additional capital expenditures for such conversion. Other than these expenditures, neither Ralphs nor Food 4 Less has incurred material capital expenditures for 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. 72 82 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the persons who are expected to serve as the executive officers and directors of the Company and New Holdings, as successor to Holdings, following the consummation of the Merger, the FFL Merger and the Reincorporation Merger.
YEARS OF SUPERMARKET INDUSTRY SERVICE ---------------------------- NAME AGE POSITION MANAGERIAL POSITIONS TOTAL - ------------------------- --- ----------------------------------- -------------------- ----- Ronald W. Burkle 42 Director and Chairman of the Board 19 24 of New Holdings and the Company Byron E. Allumbaugh 63 Director and Chief Executive 36 36 Officer of New Holdings and the Company George G. Golleher 47 Director and Vice Chairman of New 21 21 Holdings and the Company Alfred A. Marasca 53 Director of the Company and 30 38 President and Chief Operating Officer of New Holdings and the Company Joe S. Burkle 71 Director and Executive Vice 44 48 President of New Holdings and the Company Greg Mays 48 Executive Vice President of New 21 21 Holdings and the Company Terry Peets 50 Executive Vice President of New 18 18 Holdings and the Company Jan Charles Gray 47 Senior Vice President, General 20 31 Counsel and Secretary of New Holdings and the Company Alan J. Reed 48 Senior Vice President and Chief 22 22 Financial Officer of New Holdings and the Company Patrick L. Graham 45 Director of New Holdings and the -- -- Company Mark A. Resnik 47 Director of New Holdings and the -- -- Company
Ronald W. Burkle has been a Director and the Chairman of the Board and Chief Executive Officer of Food 4 Less since its inception in 1989. Mr. Burkle co-founded Yucaipa in 1986 and has served as Director, Chairman of the Board, President and Chief Executive Officer of FFL since 1987 and of Holdings since 1992. From 1986 to 1988, Mr. Burkle was Chairman and Chief Executive Officer of Jurgensen's, a Southern California gourmet food retailer. Before joining Jurgensen's, Mr. Burkle was a private investor in Southern California. Mr. Burkle is the son of Joe S. Burkle. Byron E. Allumbaugh has been Chairman of the Board and Chief Executive Officer of Ralphs since 1976 and a Director since 1988. He also is a Director of the H.F. Ahmanson Company, El Paso Natural Gas Company and Ultramar, Inc. George G. Golleher has been a Director of Food 4 Less since its inception in 1989 and has been the President and Chief Operating Officer of Food 4 Less since January 1990. From 1986 through 1989 Mr. Golleher served as Senior Vice President, Finance and Administration, of The Boys Markets, Inc. Prior to joining The Boys Markets, Inc. in 1984, Mr. Golleher served as Vice President and Chief Financial Officer of Mayfair Markets, Inc. from 1983 to 1984. Alfred A. Marasca has been President, Chief Operating Officer and a Director of Ralphs since February 1994 and he was President from February 1993 to February 1994, Executive Vice President, Retail from 1991 until 1993 and Executive Vice President, Marketing from 1985 to 1991. 73 83 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. 74 84 EXECUTIVE COMPENSATION EMPLOYMENT AGREEMENTS Concurrently with the consummation of the Merger, the Company will enter into employment agreements with certain of the current executive officers of Ralphs and Food 4 Less. It is expected that Byron E. Allumbaugh, George G. Golleher, Alfred A. Marasca, as well as other executive officers of the Company, including Messrs. Mays, Peets, Gray and Reed, will enter into three-year employment contracts with the Company and that the existing employment contracts, if any, of such officers will be cancelled. New Allumbaugh Agreement. The employment agreement between the Company and Byron Allumbaugh, 63, is expected to provide for a salary of $1 million for the first year and $1.25 million for the second year. If Mr. Allumbaugh continues as the Chief Executive Officer during the third year following the Merger, he would be entitled to a salary of $2 million and if he is employed in another capacity then he would be entitled to a salary of $1.25 million for the third year. Mr. Allumbaugh will be entitled to a bonus equal to his salary in each year if certain prescribed earnings targets (the "Earnings Targets") for the year are reached. If the Company completes an initial public offering of capital stock during the first two years of Mr. Allumbaugh's employment, Mr. Allumbaugh will remain Chief Executive Officer for one year after the public offering. If the public offering is anticipated to occur during the third year of Mr. Allumbaugh's employment agreement, Mr. Allumbaugh will resign as Chief Executive Officer six months prior to the intended date of the public offering but will continue to be employed at the lesser compensation level provided in his employment agreement until its termination. New Golleher Agreement. Food 4 Less is currently a party to a five-year employment agreement with George G. Golleher providing for annual base compensation of $350,000, plus employee benefits and an incentive bonus calculated in accordance with a formula based on Food 4 Less' earnings. Under the employment agreement, Mr. Golleher may terminate his employment agreement in the event of a change of control of Food 4 Less, in which case he is entitled to receive all of the salary and benefits provided under the agreement for the remaining term thereof, notwithstanding the termination of his employment. In connection with the consummation of the Merger, the Food 4 Less board of directors has authorized the payment of a special bonus to George Golleher in a lump sum amount equal to the base salary due him under the remaining term of his employment agreement. As a condition of the payment of such bonus, Mr. Golleher's existing employment agreement will be cancelled, and he will enter into a new agreement containing terms to be mutually agreed upon between Food 4 Less and Mr. Golleher. The new employment agreement is expected to provide for an annual salary of $500,000 plus a bonus equal to his salary in each year if the Earnings Targets are reached. Certain existing contractual rights of Mr. Golleher, including the right to be elected to the Company's board of directors and the right to require the Company to repurchase certain of his shares of New Holdings stock upon his death, disability or termination without cause, will continue in effect pursuant to the new employment agreement. New Marasca Agreement. The employment agreement between the Company and Alfred Marasca is expected to provide for a salary of $500,000 per annum and an annual bonus equal to his salary if the Earnings Targets for the year are reached. General Provisions of the New Employment Agreements. The new employment agreements are expected to provide generally that the Company may terminate the agreement for cause or upon the failure of the employee to render services to the Company for a continuous period to be agreed upon by the Company and the employee because of the employee's disability. In addition, the employee's services may be suspended upon notice by the Company and in such event the employee will continue to be compensated by the Company during the remainder of the term of the agreement subject to certain offsets if the employee becomes engaged in another business. Existing Food 4 Less Employment Agreements. Food 4 Less entered into employment agreements with 24 officers providing for their employment for a one-year term commencing on the date of a change of control of Food 4 Less. These agreements provide for the payment of an incentive bonus calculated in accordance with Food 4 Less policies, and certain of the agreements provide for the payment of a special bonus payable upon a change of control (provided certain financial performance targets have been met). These agreements will become effective upon the consummation of the Merger. Greg Mays, who will be an Executive Vice 75 85 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. 76 86 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 25,580 Chairman and 1993 645,000 387,000 N/A 20,075 Chief Executive 1992 620,000 372,000 587,753 21,897 Officer Alfred A. Marasca, 1994 400,000 0 N/A 10,580 President and 1993 340,000 204,000 N/A 7,187 Chief Operating 1992 296,260 148,125 308,812 8,206 Officer Alan J. Reed, 1994 225,000 0 N/A 6,248 Senior Vice President, 1993 222,500 111,250 N/A 8,879 Finance and 1992 211,250 105,625 154,406 6,125 Chief Financial Officer Terry Peets, 1994 215,000 0 N/A 7,562 Executive Vice 1993 192,500 96,250 N/A 6,127 President 1992 182,500 91,250 154,406 6,027 Jan Charles Gray, 1994 213,750 0 N/A 9,047 Senior Vice President, 1993 207,500 103,750 N/A 9,084 General Counsel and 1992 196,250 98,125 154,406 6,605 Secretary
- --------------- (1) Bonuses for services performed in Fiscal Year 1994 were paid in Fiscal Year 1995. Bonus amounts for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray were $390,000, $240,000, $112,500, $107,500 and $106,875 respectively. (2) Represents (i) insurance premiums and the dollar value of the remainder of premiums paid under the Senior Executive Supplemental Benefit Plan, and (ii) Ralphs' contributions under the Ralphs Thrift Incentive Plan. The respective amount paid for Messrs. Allumbaugh, Marasca, Reed, Peets and Gray are as follows: (A) Insurance premiums: $18,500, $6,600, $4,025, $5,460 and $4,500; (B) dollar value of the remainder of premiums: $5,232, $2,702, $0, $0 and $2,699; (C) incentive plan contributions: $1,848, $1,278, $2,223, $2,102 and $1,848. 77 87 AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION/SAR VALUES -- RALPHS
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($) 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
78 88 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") 79 89 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." 80 90 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)(7)......... 600,000 3.0% -- -- -- -- 1.6% 1.5% Alfred A. Marasca(2)(7).... 200,000 1.0% -- -- -- -- 0.5% 0.5% Greg Mays(8)............... -- -- -- -- -- -- -- -- Alan J. Reed(7)............ -- -- -- -- -- -- -- -- Terry Peets(7)............. -- -- -- -- -- -- -- -- Jan Charles Gray(7)........ -- -- -- -- -- -- -- -- Apollo Advisors, L.P.(9) 2 Manhattanville Road Purchase, NY 10577....... 1,285,165 6.4% 12,283,244 73.6% -- -- 36.8% 33.9% BT Investment Partners, Inc.(10) 130 Liberty Street New York, NY 10006....... 509,812 2.5% 900,000 5.4% 3,100,000 100% 3.8% 11.3% Other New Equity Investors as a group(11)........... 3,500,000 21.0% -- -- 9.5% 8.8% All directors and executive officers as a group (15 persons)(2)(4)(5)(6)..... 20,876,539 74.0% -- -- -- -- 46.5% 43.5%
- --------------- (1) Gives effect to (i) a stock split to be effected with respect to the outstanding common stock of Holdings prior to the Merger, (ii) the conversion (in connection with the FFL Merger) of the outstanding common stock of FFL into newly-issued common stock of Holdings in an amount which will preserve the proportionate ownership interests of FFL's stockholders, and of the equity holders of Holdings, in the combined Company, (iii) the conversion (in connection with the Reincorporation Merger) of the outstanding common stock, and warrants to acquire common stock, of Holdings into New Holdings common stock and warrants, (iv) the issuance by New Holdings of 16,683,244 shares of Series A Preferred Stock and 3,100,000 shares of Series B Preferred Stock in connection with the New Equity Investment and the concurrent exchange of outstanding shares of common stock acquired by the New Equity Investors from an existing stockholder, and (v) the assumed exercise of the outstanding warrants to acquire New Holdings common stock issued to the former Holdings warrantholders in connection with the Reincorporation Merger. (2) Gives effect to the exercise of Tier One Options to be issued to Byron E. Allumbaugh, George G. Golleher and Alfred A. Marasca under a new management stock option plan to be adopted prior to completion of the Merger, covering 600,000, 200,000 and 200,000 shares, respectively. Does not give effect to the exercise of (a) Tier Two Options to purchase up to 1,000,000 shares of New Holdings common stock to be issued at the discretion of the Board of Directors to certain management employees of the Company, under such stock option plan, concurrently with or following completion of the Merger or (b) Reinvestment Options to purchase up 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 81 91 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) Does not include Reinvestment Options to purchase 228,428 shares, 100,000 shares, 60,000 shares, 60,000 shares and 174,940 shares of New Holdings Common Stock to be issued to Messrs. Allumbaugh, Marasca, Reed, Peets and Gray, respectively, in exchange for the cancellation of the EAR payments which would otherwise be payable upon consummation of the Merger. (8) Mr. Mays owns 8,890 of the 852,326 shares of Common Stock which are subject to the Stockholder Voting Agreement and Proxy described in note (6) above. (9) Represents shares owned by one or more entities managed by or affiliated with Apollo Advisors, L.P., together with certain affiliates or designees of Apollo. (10) Represents shares owned by BT Investment Partners, Inc. ("BTIP"), Bankers Trust New York Corporation and BT Securities Corporation. Bankers Trust New York Corporation and BT Securities Corporation are affiliated with BTIP. BTIP expressly disclaims beneficial ownership of all shares owned by Bankers Trust New York Corporation and BT Securities Corporation. (11) Includes certain institutional investors, other than Apollo and BTIP, which will purchase Series A Preferred Stock of New Holdings in connection with the Financing. Pursuant to the 1995 Stockholders Agreement, certain corporate actions by New Holdings and its subsidiaries will require the consent of the directors whom the New Equity Investors, including Apollo and BTIP, are entitled to elect to the New Holdings Board of Directors. See "Description of Capital Stock -- 1995 Stockholders Agreement." Such investors do not affirm the existence of a "group" within the meaning of Rule 13d-5 under the Exchange Act, and expressly disclaim beneficial ownership of all New Holdings shares except for those shares held of record by each such investor or its nominees. DESCRIPTION OF CAPITAL STOCK Following is a description of the capital stock of the Company and New Holdings to be authorized and outstanding upon completion of the Merger, the FFL Merger and the Reincorporation Merger, including the terms of the New Equity Investment to be made in New Holdings in connection with the closing of the Merger. THE COMPANY Upon completion of the Merger, the authorized capital stock of the Company will consist of 1,600,000 shares of common stock, $.01 par value per share, of which 1,513,938 shares will be outstanding. All of such outstanding shares will be owned by New Holdings. There will be no public trading market for the common stock of the Company. The indentures that will govern outstanding debt securities of the Company will contain certain restrictions on the payment of cash dividends with respect to the Company's common stock. In addition, it is expected that the New Credit Facility will also restrict such payments. Subject to the limitations contained in the New Credit Facility and such indentures, holders of common stock of the Company will be entitled to dividends when and as declared by the Board of Directors from funds legally available therefor, and upon liquidation, will be entitled to share ratably in any distribution to holders of common stock. All holders of common stock will be entitled to one vote per share on any matter coming before the stockholders for a vote. 82 92 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 83 93 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 84 94 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 85 95 $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." 86 96 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 will grant to the partnership certain registration rights with respect to the New Discount Debentures. Pursuant to such registration rights agreement, New Holdings will file with the Commission a shelf registration statement which will permit resales of the New Discount Debentures by the partnership commencing 60 days following closing of the Merger. New Holdings will be obligated to use its best efforts to cause such shelf registration statement to remain effective for up to three years. If New Holdings fails to comply with its obligations to keep such shelf registration statement effective, New Holdings will be obligated to pay certain liquidated damages. New Holdings and its subsidiaries will agree not to effect any public distribution of securities similar to the New Discount Debentures until the New Discount Debentures are resold by the partnership (or until the third anniversary of the Closing Date, if later). New Holdings believes that the partnership actively would seek to dispose of its entire interest in the New Discount Debentures promptly upon expiration of the 60 day holdback period following closing of the Merger. New Holdings will agree to use its best efforts to assist the partnership in such disposition, and to pay all expenses, including underwriting discounts and brokers' or dealers' commissions and mark-ups (subject to certain limitations), incident thereto. The $5 million cash investment to be made in the partnership by RGCIC, as described above, will be borrowed from the Company by RGCIC, and such borrowings will bear interest at the applicable Federal rate (as defined under the Internal Revenue Code). RGCIC will be obligated to repay such borrowings with any distributions received from the partnership in connection with resales of the New Discount Debentures. Such repayments will be applied first to the principal balance of the borrowings and then to accrued interest. To the extent that such distributions are not sufficient to repay such borrowings, any remaining indebtedness of RGCIC (including all accrued interest) will be forgiven by the Company and the Company's obligation to pay the Ralphs deferred EAR liability will be correspondingly forgiven. Upon receipt of any principal amounts 87 97 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 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). 88 98 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 89 99 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 90 100 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 June 9, 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, 91 101 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 92 102 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 93 103 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"). 94 104 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 95 105 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 96 106 (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- 97 107 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 98 108 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 99 109 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 100 110 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. 101 111 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. 102 112 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.) 103 113 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 June 1 and December 1, beginning December 1, 1995. The New RGC Notes will mature on June 1, 2005. On or after June 1, 2000, the New RGC Notes may be redeemed in whole at any time or in part from time to time, at the option of the Company, at a redemption 104 114 price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 months commencing on June 1 of the years set forth below:
REDEMPTION YEAR PRICE ---------------------------------------------------------- ---------- 2000...................................................... 104.125 % 2001...................................................... 102.750 % 2002...................................................... 101.375 % 2003 and thereafter....................................... 100.000 %
In the event that the interest rate on the New RGC Notes is greater than 11%, the above redemption prices will be correspondingly adjusted. In addition, on or prior to June 1, 1998 the Company may, at its option, use the net cash proceeds from one or more Public Equity Offerings to redeem up to an aggregate of 35% of the principal amount of the New RGC Notes originally issued, at a redemption price equal to 111% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1995, 109.625% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1996 and 108.25% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1997, in each case plus accrued and unpaid interest, if any, to the redemption date. In the event that the interest rate on the New RGC Notes is greater than 11%, 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 105 115 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 106 116 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 June 1 and December 1, beginning December 1, 1995. The New F4L Senior Subordinated Notes will mature on June 1, 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. 107 117 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 108 118 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 June 1 and December 1, beginning December 1, 1995. The New F4L Senior Notes will mature on June 1, 2004. On or after June 1, 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 June 1 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 June 1, 1998, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the 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 June 1, 1995, 109.1438% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1996 and 107.8375% of the principal amount thereof if redeemed during the 12 months commencing on June 1, 1997, in each case plus accrued and unpaid interest, if any, to the redemption date. In the event that the interest rate on the New F4L Senior Notes is greater than 10.45%, the above redemption prices will be correspondingly adjusted. In order to effect the foregoing redemption with the proceeds of a Public Equity Offering, the Company shall send the redemption notice not later than 60 days after the consummation of such Public Equity Offering. 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. 109 119 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 Offering, (ii) the principal amount of proceeds from the Subordinated Note Public Offering or (iii) the principal amount available under the Tranche A Loan. Proceeds of the New Term Loans and loans under the Revolving Credit Facility on the Closing Date, together with proceeds from the New Discount Debenture Placement, the New Equity Investment and the Public 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 110 120 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 111 121 Tranche C Loans and the Tranche D Loans will be used to make an offer to repay such loans and to the extent not accepted 50% of such amount will be applied to reduce Tranche A Loans on a pro rata basis and the remaining 50% may be retained by the Company. GUARANTEES AND COLLATERAL New Holdings and all active subsidiaries of the Company (including the Subsidiary Guarantors) will guarantee the Company's obligations under the New Credit Facility. The Company's obligations and the guarantees of its subsidiaries will be secured by substantially all personal property of the Company and its subsidiaries, including a pledge of the stock of all subsidiaries of the Company (with the exception of the stock of Bell Markets, Inc., which has been pledged to secure notes payable to the former owners thereof, so long and only so long as such stock is subject to the liens of such former owners). New Holdings' guarantee will be secured by a pledge of the stock of the Company. The Company's obligations will also be secured by first 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. 112 122 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 July 1, 2005. The New Discount Debentures will be senior unsecured obligations of New Holdings and will be senior in right of payment to all subordinated indebtedness of New Holdings, including the Seller Debentures. Until June 1, 2000, no interest will accrue on the New Discount Debentures, but the Accreted Value (as defined in the indenture governing the New Discount Debentures (the "New Debenture Indenture")) will accrete at a rate of 13 5/8% (representing the amortization of the original issue discount) from the date of original issuance until June 1, 2000, on a semi-annual bond equivalent basis using a 360 day year comprised of twelve 30-day months, such that the Accreted Value shall be equal to the full principal amount of the New Discount Debentures on June 1, 2000. The initial Accreted Value per $1,000 principal amount of New Discount Debentures will be $517.33 (representing the original purchase price). Beginning on June 1, 2000, cash interest on the New Discount Debentures will accrue at a rate of 13 5/8% per annum and will be payable semi-annually in arrears on each June 1 and December 1 of each year, commencing December 1, 2000, to the holders of record on the immediately preceding May 15 and November 15. On or after June 1, 2000, the New Discount Debentures may be redeemed, at the option of New Holdings, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest, to the redemption date, if redeemed during the twelve-month period commencing on June 1 in the years set forth below:
YEAR REDEMPTION PRICE ------------------------------------------ ---------------- 2000...................................... 106.8125% 2001...................................... 105.1094% 2002...................................... 103.4063% 2003...................................... 101.7031% 2004 and thereafter....................... 100.0000%
Notwithstanding the foregoing, prior to June 1, 1998, New Holdings may use the net proceeds of an Initial Public Offering (as defined in the New Debenture Indenture) of New Holdings or the Company (or of FFL under certain circumstances) to redeem up to 35% of the New Discount Debentures at a redemption price equal to 110% of the Accreted Value thereof on the date of redemption. In the event of a Change of Control (as defined in the New Debenture Indenture), each holder has the right to require the repurchase of such holder's New Discount Debentures at a purchase price equal to 101% of the Accreted Value thereof on the Change of Control Payment Date (as defined in the New Debenture Indenture) (if such date is prior to June 1, 2000) or 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Change of Control Payment Date (if such date is on or after June 1, 2000). The New Debenture Indenture will contain covenants that, among other things, limit the ability of New Holdings to enter into certain mergers or consolidations or incur certain liens or of New Holdings or its subsidiaries to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined in the New Debenture Indenture), or engage in certain transactions with affiliates. Under certain circumstances, New Holdings will be required to make an offer to purchase New Discount Debentures at a price equal to 100% of the Accreted Value thereof on the date of purchase, if such date is prior to June 1, 2000, or 100% of the principal amount thereof, plus accrued interest to the date of purchase, if such date is on or after June 1, 2000, with the proceeds of certain Asset Sales (as defined in the New Debenture Indenture). The New Debenture Indenture will contain certain customary events of defaults, which will include the failure to pay interest and principal, the failure to comply with certain covenants in the New Discount Debentures or 113 123 the New Debenture Indenture, a default under certain indebtedness, the imposition of certain final judgments or warrants of attachment and certain events occurring under bankruptcy laws. Pursuant to the terms of a registration rights agreement to be entered into by New Holdings, New Holdings will be obligated to file a shelf registration statement with the Commission with respect to the New Discount Debentures, to have such shelf registration statement declared effective prior to or at the closing of the Merger, to use its best efforts to cause such shelf registration statement to remain effective for up to three years, and to pay the expenses related thereto, including underwriting discounts and brokers' or dealers' commissions and 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 and its subsidiaries will agree not to effect any public distribution of securities similar to the New Discount Debentures until the New Discount Debentures are resold by the partnership (or until the third anniversary of the Closing Date, if later). New Holdings believes that the 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 June 1, 2007. The Seller Debentures will be general unsecured obligations of New Holdings and will be subordinated to the prior payment when due of all Senior Indebtedness (as defined in the indenture governing the Seller Debentures (the "Debenture Indenture")), including the New Discount Debentures and any 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 June 1, 2000, the Seller Debentures may be redeemed, at the option of New Holdings, in whole at any time or in part from time to time, at a redemption price equal to the applicable percentage of the principal amount thereof set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve-month period commencing on June 1 in the years set forth below:
REDEMPTION YEAR PRICE ----------------------------------------- ---------- 2000..................................... 106.8125% 2001..................................... 105.1094% 2002..................................... 103.4063% 2003..................................... 101.7031% 2004 and thereafter...................... 100.0000%
Notwithstanding the foregoing, prior to June 1, 1998, New Holdings may use the net proceeds of an Initial Public Offering (as defined in the Debenture Indenture) of New Holdings or Food 4 Less to redeem up to 35% of the Seller Debentures at a redemption price equal to 110% of the 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 114 124 subsidiaries to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined in the Debenture Indenture), or engage in certain transactions with affiliates. Under certain circumstances, New Holdings will be required to make an offer to purchase Seller Debentures at a price equal to 100% of the 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 115 125 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. 116 126 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-1 127 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-2 128 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-3 129 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-4 130 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-5 131 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-6 132 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-7 133 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-8 134 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-9 135 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-10 136 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-11 137 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 [A 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-12 138 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-13 139 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 estimated fair value of each class of financial instruments (where practical), all held for non-trading purposes, is as follows in (000s): Long-term debt............................................ $953,883 Interest rate swap agreement.............................. $ 1,252 Interest rate cap agreement............................... $ (366)
(6) LEASES Ralphs has leases for retail store facilities, warehouses and manufacturing plants for periods up to 30 years. Generally, the lease agreements include renewal options for five years each. Under most leases, Ralphs is responsible for property taxes, insurance, maintenance and expense related to the lease property. Certain store leases require excess rentals based on a percentage of sales at that location. Certain equipment is leased by Ralphs under agreements ranging from 3 to 15 years. The agreements usually do not include renewal option provisions. Minimum rental payments due under capital leases and operating leases subsequent to fiscal 1994 are as follows:
CAPITAL OPERATING LEASES LEASES TOTAL -------- -------- -------- (DOLLARS IN THOUSANDS) 1995............................................... $ 21,640 $ 61,324 $ 82,964 1996............................................... 19,093 60,847 79,940 1997............................................... 18,288 58,182 76,470 1998............................................... 15,901 53,321 69,222 1999............................................... 11,784 52,839 64,623 2000 and thereafter................................ 53,959 373,021 426,980 -------- -------- -------- Total minimum lease payments....................... $140,665 $659,534 $800,199 ======== ======== Less amounts representing interest................. (51,581) -------- Present value of net minimum lease payments........ 89,084 Less current portion of lease obligations.......... (13,151) -------- Long-term capital lease obligations................ $ 75,933 ========
F-14 140 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 30, 1994 1995 -------- -------- (DOLLARS IN THOUSANDS) Self-insurance liability..................................... $ 97,864 $ 87,830 Less: Discount............................................... (17,854) (15,324) -------- -------- Net self-insurance liability................................. $ 80,010 $ 72,506 ======== ========
The Company expects that cash payments for claims over the next five years will aggregate approximately $28 million in fiscal year 1995, $19 million in fiscal year 1996, $13 million in fiscal year 1997, $8 million in fiscal year 1998 and $7 million in fiscal year 1999. (8) COMMITMENTS AND CONTINGENCIES In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against Ralphs and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in the retail market for fluid milk and to fix the retail price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14, and December 23, 1992, respectively. The Court has yet to certify any of these classes. A demurrer to the complaints was denied. Notwithstanding that it believes there is no merit to these cases, Ralphs had reached an agreement in principle to settle them. F-15 141 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-16 142 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-17 143 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-18 144 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-19 145 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-20 146 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-21 147 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-22 148 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-23 149 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-24 150 RALPHS SUPERMARKETS, INC. (AS SUCCESSOR TO RALPHS GROCERY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the Ralphs Non-qualified Stock Option Plan.
NUMBER OF PRICE OPTIONS RANGE --------- ------ Options Outstanding at January 30, 1994: Beginning of year............................................. 3,162,235 $20.21 Granted....................................................... -- -- Exercised..................................................... -- -- Cancelled..................................................... -- -- Expired....................................................... -- -- End of year................................................ 3,162,235 $20.21 --------- ------ Exercisable at end of year...................................... 811,760 -- --------- ------ Available for grant at end of year.............................. -- -- --------- ------ Options Outstanding at January 29, 1995: Beginning of year............................................. 3,162,235 $20.21 Granted....................................................... -- -- Exercised..................................................... -- -- Cancelled..................................................... -- -- Expired....................................................... -- -- End of year................................................ 3,162,235 $20.21 --------- ------ Exercisable at end of year...................................... 1,330,924 -- --------- ------ Available for grant at end of year.............................. -- -- --------- ------
The option price for outstanding options at January 29, 1995 assumes a grant date fair market value of Common Stock of the Company equal to $20.21 per share, which represents the high end of a range of estimated values of the Common Stock of the Company on February 3, 1992, the date of the grant. (16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value is discussed in Note 2. The estimated fair value of each class of financial instruments (where practical), all held for non-trading purposes, is as follows in (000s):
JANUARY 30, 1994 JANUARY 29, 1995 ----------------------- ----------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Long term debt................................ $998,884 $1,014,634 $967,009 $ 953,883 Interest rate swap agreements................. n/a 1,153 n/a 1,252 Interest rate cap agreements.................. n/a (19) n/a (366)
In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate cap agreement with an effective date of November 6, 1992 and a three year maturity. The interest rate cap agreement hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal amount against increases in short-term rates. This F-25 151 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-26 152 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-27 153 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-28 154 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-29 155 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-30 156 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-31 157 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-32 158 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-33 159 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-34 160 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-35 161 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-36 162 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-37 163 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-38 164 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-39 165 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-40 166 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-41 167 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-42 168 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-43 169 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-44 170 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-45 171 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 $16 million, $20 million, $18 million, $12 million and $7 million 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, a partnership which owns stock of FFL has assumed the obligation to purchase any FFL shares as to which terminated plan participants exercise a put option under the terms of Falley's ESOP. The Company is not required to make cash payments to redeem the shares. As part of that agreement, the Company may elect, after providing a right of first refusal to the partnership, to purchase FFL shares put under the provisions of the plan. However, the partnership's obligation to purchase such FFL shares is unconditional, and any repurchase of shares by the Company is at the Company's sole election. During the year ended June 25, 1994, the Company elected to purchase $1.0 million of FFL shares as to which terminated plan participants had exercised their put option. FFL shares purchased by the Company are classified as additional paid-in-capital. As of April 30, 1994, the fair value of the shares allocated which are subject to a repurchase obligation by the partnership referred to above was approximately $15,170,000. The Company also sponsors two ESOPs for employees of the Company who are members of certain collective bargaining agreements (the "Union ESOPs"). The Union ESOPs provide for annual contributions based on hours worked at a rate specified by the terms of the collective bargaining agreements. The Company contributions are made in the form of Holdings stock or cash for the purchase of Holdings stock and are to be allocated to participants based on hours worked. During the 28 weeks ended January 7, 1995, the Company recorded a charge against operations of approximately $230,000 (unaudited) for benefits under the Union ESOPs. There were no shares issued to the Union ESOPs at January 7, 1995. All other full-time employees of the Company who are not members of a collective bargaining agreement are covered under a separate 401(k) plan (the "Management Plan"). The Management Plan provides for annual contributions which are determined at the discretion of the Company. The Company contributions are allocated to participants based on employee compensation and matching of certain employee contributions. A portion of the Company contribution allocated based on compensation is made in the form of stock or cash for the purchase of stock. F-46 172 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-47 173 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-48 174 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 non-cash restructuring charge for the write-off of property and equipment at the 11 stores of $5.1 million. F-49 175 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-50 176 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-51 177 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. $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 by New Holdings for $83.9 million. 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. F-52 178 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-1 179 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-2 180 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-3 181 (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-4 182 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-5 183 (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-6 184 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-7 185 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-8 186 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-9 187 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-10 188 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-11 189 "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-12 190 "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-13 191 "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-14 192 "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-15 193 (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-16 194 "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-17 195 "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-18 196 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
197 EDGAR APPENDIX This EDGAR Appendix is filed in compliance with Item 304 of Regulation S-T regarding graphic and image information. It describes material appearing on pages 8 and 9 of the Offer to Purchase and Solicitation Statement. PAGE 8 The chart consists of two columns which graphically illustrate the respective corporate structures of Food 4 Less and Ralphs before the Merger. Food 4 Less' corporate structure illustrates that Food 4 Less, Inc. ("FFL") owns Food 4 Less Holdings, Inc. ("Holdings"), which, in turn, owns Food 4 Less Supermarkets, Inc. ("Food 4 Less") which, in turn, owns several other Food 4 Less subsidiaries. The Ralphs' corporate structure illustrates that Ralphs Supermarkets, Inc. ("RSI"), owns Ralphs Grocery Company ("RGC") which, in turn, owns Crawford Stores, Inc. A dotted arrow has been drawn from the box representing Food 4 Less to the box representing RSI to simulate the RSI Merger. A dotted arrow has been drawn from the box representing RGC to the box representing RSI to simulate the RGC Merger. A dotted arrow has been drawn to the box representing Holdings from the box representing FFL to simulate the FFL Merger. PAGE 9 The chart illustrates the corporate structure of the Company after the Merger and the FFL Merger. The corporate structure illustrates that New Holdings owns the Company which, in turn, is the parent of all other subsidiaries of the Company. The anticipated debt obligations of New Holdings are placed in order of ranking next to the box representing New Holdings and the anticipated debt obligations of the Company are placed in order of ranking next to the box representing the Company. 198 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 duty of loyalty, actions not in good faith, and certain other liabilities. Section 145 of the DGCL provides for the indemnification by a Delaware corporation of its directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against liabilities and expenses incurred in any such action, suit or proceeding. 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-1 199 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-2 200 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-effective Amendment No. 2 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 May 11, 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. 2 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 May 11, 1995 - --------------------------------------------- Director (Principal Executive Ronald W. Burkle Officer) * Executive Vice President -- May 11, 1995 - --------------------------------------------- Finance/Administration and Greg Mays Chief Financial Officer (Principal Financial and Accounting Officer) * Director May 11, 1995 - --------------------------------------------- Joe S. Burkle /s/ MARK A. RESNIK Director May 11, 1995 - --------------------------------------------- Mark A. Resnik * Director May 11, 1995 - --------------------------------------------- George G. Golleher * Power of Attorney by /s/ MARK A. RESNIK - --------------------------------------------- Mark A. Resnik Vice President and Secretary
II-3 201 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-effective Amendment No. 2 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 May 11, 1995. FOOD 4 LESS HOLDINGS, INC., a Delaware 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. 2 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * President and Director May 11, 1995 - --------------------------------------------- (Principal Executive Officer) Ronald W. Burkle * Executive Vice President May 11, 1995 - --------------------------------------------- (Principal Financial and Greg Mays Accounting Officer) * Director May 11, 1995 - --------------------------------------------- Joe S. Burkle /s/ MARK A. RESNIK Secretary and Director May 11, 1995 - --------------------------------------------- Mark A. Resnik * Director May 11, 1995 - --------------------------------------------- George G. Golleher * Director May 11, 1995 - --------------------------------------------- Patrick L. Graham * Power of Attorney by /s/ MARK A. RESNIK - --------------------------------------------- Mark A. Resnik Vice President and Secretary
II-4 202 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 offer to purchase. KPMG PEAT MARWICK LLP Los Angeles, California May 10, 1995 S-1 203 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-2 204 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-3 205 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) 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-4 206 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-5 207 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-6 208 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-7 209 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 5.1 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-5.1 2 FORM OF OPINION OF LATHAM & WATKINS RE: LEGALITY 1 EXHIBIT 5.1 [LETTERHEAD] May 11, 1995 Food 4 Less Holdings, Inc. 777 South Harbor Boulevard La Habra, California 90631 Re: FOOD 4 LESS HOLDINGS, INC. (A CALIFORNIA CORPORATION) FOOD 4 LESS HOLDINGS, INC. (A DELAWARE CORPORATION) REGISTRATION STATEMENT ON FORM S-4 (FILE NO. 33-86356) Ladies/Gentlemen: At your request, we have examined the Registration Statement on Form S-4 (File No. 33-86356) (the "Registration Statement"), which you have filed with the Securities and Exchange Commission in connection with the registration under the Securities Act of 1933, as amended, of the offer to purchase and the related solicitation by Food 4 Less Holdings, Inc. ("Holdings") of consents to certain amendments to the indenture (the "Indenture") under which the 15.25% Senior Discount Notes due 2004 (the "Notes") of Holdings were issued. Upon the receipt of the requisite consents of Holders of the Notes and upon the satisfaction of certain other conditions as provided in the Registration Statement, the Notes will be amended pursuant to a supplemental indenture (the "Supplemental Indenture"). We have examined such matters of fact and questions of law as we have considered appropriate for purposes of this opinion. We have examined, among other things, the terms of the Indenture and the Supplemental Indenture. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies. Capitalized terms used herein without definition have the meanings given to them in the Registration Statement. We are opining herein as to the effect on the subject transaction only of the federal securities laws of the United States and the internal laws of the States of New York and California, and we express no opinion with respect to the applicability thereto, or the effect thereon, of any other laws. Based upon the foregoing, we are of the opinion that upon the consummation of the FFL Merger and the Reincorporation Merger and upon the execution and delivery of the Supplemental Indenture in the manner described in the Registration Statement, the Notes, as amended by the Supplemental Indenture will be legally valid and binding obligations of New Holdings, except as may be limited by the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights or remedies of creditors; the effect of general principles of equity, whether enforcement is considered 2 Food 4 Less Holdings, Inc. May 11, 1995 Page 2 in a proceeding in equity or at law, and the discretion of the court before which any proceeding therefor may be brought; and the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy. We consent to your filing this opinion as an exhibit to the Registration Statement. Very truly yours, LATHAM & WATKINS EX-8.1 3 FORM OF OPINION OF LATHAM & WATKINS RE: TAX MATTER 1 EXHIBIT 8.1 LATHAM & WATKINS May 11, 1995 Food 4 Less Holdings, Inc. 777 South Harbor Boulevard La Habra, CA 90631 Re: Food 4 Less Holdings, Inc. (a California corporation) Food 4 Less Holdings, Inc. (a Delaware corporation) Registration Statement on Form S-4 (File Number 33-86356) Ladies/Gentlemen: You have requested our opinion concerning the material federal income tax consequences of the offer to purchase and the related solicitation of consents to amendments to be made to the indenture for the 15.25% Senior Discount Notes due 2004 of Food 4 Less Holdings, Inc., in connection with the Registration Statement on Form S-4 filed with the Securities and Exchange Commission (the "Commission") on November 14, 1994 (File No. 33-86356), as amended by Amendment No. 1 filed with the Commission on January 6, 1995, as further amended by Amendment No. 2 filed with the Commission on January 24, 1995, as further amended by Post-effective Amendment No. 1 filed with the Commission on April 27, 1995, and as further amended by Post-effective Amendment No. 2 filed with the Commission on May 11, 1995 (collectively, the "Registration Statement"). The facts, as we understand them, and upon which with your permission we rely in rendering the opinion expressed herein, are set forth in the Registration Statement. Based on such facts, it is our opinion that the material federal income tax consequences are accurately set forth under the heading "Certain Federal Income Tax Considerations" in the Registration Statement. No opinion is expressed as to any matter not discussed therein. This opinion is based on various statutory provisions, regulations promulgated thereunder and interpretations thereof by the Internal Revenue Service and the courts having jurisdiction over such matters, all of which are subject to change either prospectively or retroactively. Also, any variation or difference in the facts from those set forth in the Registration Statement may affect the conclusion stated herein. This opinion is rendered to you solely for use in connection with the Registration Statement. We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference of our firm under the heading "Certain Federal Income Tax Considerations." Very truly yours, LATHAM & WATKINS EX-23.1 4 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 offer to purchase. KPMG PEAT MARWICK LLP Los Angeles, California May 10, 1995 EX-23.2 5 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 May 10, 1995 EX-99.1 6 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 12, 1995 THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 9, 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 12, 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 I -- PLEASE PROVIDE OR YOUR TAXPAYER IDENTIFICATION DEPARTMENT OF THE TREASURY NUMBER IN THE BOX AT THE INTERNAL REVENUE SERVICE RIGHT AND CERTIFY BY BY SIGNING AND DATING Employer Identification BELOW. 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 7 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 12, 1995 As set forth in the Offer to Purchase and Solicitation Statement dated May 12, 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 JUNE 9, 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 8 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 12, 1995 THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 9, 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 12, 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 12, 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 JUNE 9, 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 9 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 12, 1995 THE OFFER AND THE SOLICITATION WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 9, 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 12, 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 June 9, 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 10 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: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in trade or business in the U.S. and that have at least one nonresident partner. - Payments of patronage dividends not paid in money. - Payments made by certain foreign organizations. Payments of interest generally not subject to backup withholding include the following: - 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. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to nonresident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. - 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-----