-----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, N9FM7PtFYNeRnZbwWkiUszIRWotEGRi99HxEtlLpEe3OvK6L7tBwGpieddGVBten k2HLQrunYRPFlRfvYOjUtg== 0000950150-95-000418.txt : 19950607 0000950150-95-000418.hdr.sgml : 19950607 ACCESSION NUMBER: 0000950150-95-000418 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950606 SROS: NASD 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: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-88894 FILM NUMBER: 95545172 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: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-88894-01 FILM NUMBER: 95545173 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 424B3 1 424(B)(3) 1 SUPPLEMENT TO PROSPECTUS AND SOLICITATION STATEMENT This filing is made pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration No. 33-88894 FOOD 4 LESS HOLDINGS, INC. SUPPLEMENT TO PROSPECTUS ------------------------------ FOOD 4 LESS, INC. FOOD 4 LESS HOLDINGS, INC. SUPPLEMENT TO SOLICITATION OF CONSENTS OF STOCKHOLDERS ------------------------------ The supplemental information contained herein (i) presents a revised sources and uses table that reflects revised assumptions of the participation levels in the Holdings Offer to Purchase, the RGC Offers and the F4L Exchange Offers and the revised amount of New F4L Senior Notes and New RGC Notes being offered in the Public Offerings as well as certain changes in the fees payable in connection with the Merger and the Financing, (ii) sets forth the results of operations of Holdings for the 31 weeks ended January 29, 1995 prepared in connection with Holdings' adoption of Ralphs' fiscal year end for financial reporting purposes as well as other recent results of operations, (iii) sets forth revised pro forma financial information and (iv) sets forth a revised principal stockholders table. The Prospectus is hereby amended by the terms of this Supplement and the information set forth herein supersedes any contrary statements contained in the Prospectus. Except as set forth herein, the terms and conditions of the Prospectus, the Solicitation and the other financing transactions described in the Prospectus remain as set forth therein. Unless otherwise defined, capitalized terms used herein have the same meanings as are assigned to them in the Prospectus. As described in the Prospectus, the Proposed Mergers and the Stockholders Agreement Proposal are being undertaken at the request of certain investors who will purchase a minimum of $140 million of preferred stock of Food 4 Less Holdings, Inc., a Delaware corporation ("New Holdings") which will be the successor to Holdings, in connection with New Holdings' acquisition of Ralphs Supermarkets, Inc. ("RSI"). The Proposed Mergers will simplify the holding company structure of the combined entities by consolidating all of the existing stockholders of FFL and Holdings, as well as the new preferred stockholders, at the same corporate level. This streamlining of the corporate structure will serve to facilitate the acquisition of RSI. In addition, approval of the Stockholders Agreement Proposal will eliminate conflicting contractual obligations of New Holdings and provide significant benefits to existing stockholders and warrantholders. Following its acquisition of RSI, New Holdings will operate the largest supermarket chain in Southern California, consisting of 332 stores with combined pro forma annual sales in excess of $5 billion. THE SOLICITATION WITH RESPECT TO THE FFL MERGER AND THE STOCKHOLDERS AGREEMENT PROPOSAL HAS BEEN EXTENDED AND WILL EXPIRE AT 5:00 P.M., LOS ANGELES TIME, ON JUNE 12, 1995, UNLESS FURTHER EXTENDED, AND THE SOLICITATION WITH RESPECT TO THE REINCORPORATION MERGER WILL EXPIRE AT 5:00 P.M., LOS ANGELES TIME, ON THE DATE OF EFFECTIVENESS OF THE FFL MERGER, UNLESS EXTENDED (IN EITHER CASE, THE "EXPIRATION DATE"). CONSENTS MAY BE REVOKED AT ANY TIME PRIOR TO THE APPLICABLE EXPIRATION DATE. ------------------------------ SEE THE PROSPECTUS UNDER "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING THE PROPOSED MERGERS AND THE STOCKHOLDERS AGREEMENT PROPOSAL. ------------------------------ THE DATE OF THIS SUPPLEMENT TO PROSPECTUS AND SOLICITATION STATEMENT IS JUNE 1, 1995 2 The proposed acquisition of RSI will be effected through the merger (the "RSI Merger") of Holdings' subsidiary Food 4 Less Supermarkets, Inc. ("Food 4 Less") with and into RSI, and the immediately subsequent merger (the "RGC Merger," and together with the RSI Merger, the "Merger") of Ralphs Grocery Company ("RGC"), a wholly-owned subsidiary of RSI, with and into RSI, after which RSI will change its name to Ralphs Grocery Company ("Ralphs Grocery Company" or the "Company"). A detailed description of the Merger is set forth in this Prospectus and Solicitation Statement. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS SUPPLEMENT OR IN THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS SUPPLEMENT, OR THE SOLICITATION OF A CONSENT, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER, OR SOLICITATION OF AN OFFER, OR CONSENT SOLICITATION. NEITHER DELIVERY OF THIS SUPPLEMENT NOR ANY DISTRIBUTION OF THE SECURITIES BEING OFFERED PURSUANT TO THIS SUPPLEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE OF THIS SUPPLEMENT. ------------------------ THE HOLDINGS COMMON STOCK TO BE ISSUED IN THE FFL MERGER AND THE NEW HOLDINGS COMMON STOCK TO BE ISSUED IN THE REINCORPORATION MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS SUPPLEMENT TO PROSPECTUS AND SOLICITATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Holders must use the Consent form circulated along with the Prospectus to effect valid deliveries of Consents. Any holder who previously has validly delivered a Consent need not take any further action in connection herewith. TABLE OF CONTENTS
PAGE ---- SOURCES AND USES........................................................................... 1 PRO FORMA CAPITALIZATION................................................................... 3 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.......................................... 5 SELECTED HISTORICAL FINANCIAL DATA OF HOLDINGS............................................. 14 UPDATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................................... 16 PRINCIPAL STOCKHOLDERS..................................................................... 20 INDEX TO FINANCIAL STATEMENTS.............................................................. F-1
ii 3 SOURCES AND USES The following revised table illustrates the sources and uses of funds to consummate the Merger, assuming the transaction occurs as of June 15, 1995. Based upon tenders received through May 26, 1995 (and, in the case of the Discount Notes, anticipated tenders as of the Closing Date), this presentation assumes that $423.0 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New RGC Notes (representing 94.0% of the outstanding aggregate principal amount of Old RGC Notes), $27.0 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash (representing 6.0% of the outstanding aggregate principal amount of Old RGC Notes), $145.3 million principal amount of Old F4L Senior Notes and $140.7 million principal amount of Old F4L Senior Subordinated Notes are tendered into the F4L Exchange Offers (representing 83.0% and 97.0% of the outstanding aggregate principal amount of Old F4L Senior Notes and Old F4L Senior Subordinated Notes, respectively) and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Holdings Offer to Purchase (representing 100% of the outstanding aggregate principal amount (at maturity) of Discount Notes). Although management believes such assumptions are reasonable under the circumstances, actual sources and uses may differ from those set forth below depending upon the outcome of the F4L Exchange Offers, the RGC Offers and the Holdings Offer to Purchase. SOURCES AND USES (in millions) CASH SOURCES CASH USES - --------------------------------------------- --------------------------------------------- New Term Loans(a).................. $ 600.0 Purchase RSI Common Stock(j)....... $ 375.9 New Revolving Facility(b).......... 6.5 Purchase Old RGC Notes(k).......... 27.3 New F4L Senior Notes(c)............ 350.0 Purchase Discount Notes............ 84.4 Repay Ralphs 1992 Credit New RGC Notes(d)................... 100.0 Agreement........................ 238.2 New Equity Investment(e)........... 140.0 Repay F4L Credit Agreement......... 160.8 New Discount Debentures(f)......... 59.0 Pay Accrued Interest(l)............ 34.4 EAR Related Payments(m)............ 22.8 Repay Mortgage Indebtedness(n)..... 194.4 Purchase New Holdings Common Stock(o)......................... 3.7 Fees and Expenses(p)............... 113.6 -------- -------- Total Cash Sources............ $1,255.5 Total Cash Uses............... $1,255.5 ======= ======= NON-CASH SOURCES NON-CASH USES - --------------------------------------------- --------------------------------------------- New F4L Senior Notes(g)............ $ 145.3 Old F4L Senior Notes Exchanged..... $ 145.3 Assumed Old F4L Senior Notes....... 29.7 Assumed Old F4L Senior Notes....... 29.7 New F4L Senior Subordinated Old F4L Senior Subordinated Notes Notes............................ 140.7 Exchanged.......................... 140.7 Assumed Old F4L Senior Subordinated Assumed Old F4L Senior Subordinated Notes............................ 4.3 Notes............................ 4.3 New RGC Notes(h)................... 423.0 Old RGC Notes Exchanged............ 423.0 New Discount Debentures(f)......... 41.0 Fees and Expenses(p)............... 22.5 Assumed Capital Leases and Other Assumed Capital Leases and Other Debt............................. 162.9 Debt............................. 162.9 Seller Debentures(i)............... 131.5 Purchase RSI Common Stock(i)....... 150.0 -------- -------- Total Non-Cash Sources........ $1,078.4 Total Non-Cash Uses........... $1,078.4 ======= =======
- --------------- (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 $925 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 $600 million, comprised of the $275 million Tranche A Loan, the $108.3 million Tranche B Loan, the $108.3 million Tranche C Loan, and the $108.4 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 the Prospectus under "Description of the New Credit Facility." (b) The New Revolving Facility will provide for a $325 million line of credit which will be available for working capital requirements and general corporate purposes. Up to $150 million of the New Revolving Facility may be used to support standby letters of credit. The letters of credit will be used to cover workers' compensation contingencies and for other purposes permitted under the New Revolving Facility. The Company anticipates that letters of credit for approximately $92.6 million will be issued under the New 1 4 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. (d) Represents New RGC Notes issued pursuant to the Subordinated Note Public Offering. (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 the Prospectus under "Description of Capital Stock -- New Equity Investment." (f) Represents a portion of the New Discount Debentures having an aggregate initial accreted value of $100 million, $59 million of which will be issued for cash, and $18.5 million of which will be issued to the RSI stockholders as Merger consideration and $17.5 million, $2.5 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 $18.5 million initial accreted value of New Discount Debentures and $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 Seller Debentures 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 the Prospectus under "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 the Prospectus under "Executive Compensation -- New Management Stock Option Plan and Management Investment." The termination date for the Merger Agreement has been extended through the Closing Date. (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 the Prospectus under "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 $174.0 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) The $136.1 million in total cash and non-cash fees and expenses includes advisory fees of $21.5 million to be paid to Yucaipa, other fees of $2.5 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, $17.5 million of Yucaipa's advisory fee, $2.5 million of Apollo's commitment fee and BT Securities' $2.5 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 the Prospectus under "Certain Relationships and Related Transactions -- Food 4 Less and Holdings." For additional information, see the Prospectus under "Description of the New Credit Facility," "The Exchange Offers and the Public Offerings" and "Description of Other Indebtedness." 2 5 PRO FORMA CAPITALIZATION The following revised table sets forth the pro forma combined capitalization of Holdings as of January 29, 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. Based upon tenders received through May 26, 1995 (and, in the case of the Discount Notes, anticipated tenders as of the Closing Date), this presentation assumes that $423.0 million principal amount of Old RGC Notes is tendered into the RGC Offers in exchange for New RGC Notes, $27.0 million principal amount of Old RGC Notes is tendered into the RGC Offers for cash, $145.3 million principal amount of Old F4L Senior Notes and $140.7 million principal amount of Old F4L Senior Subordinated Notes are tendered into the F4L Exchange Offers and $103.6 million principal amount (at maturity) of Discount Notes is tendered into the Holdings 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 Supplement and in the Prospectus.
PRO FORMA CAPITALIZATION --------------- (IN MILLIONS) Cash............................................................................ $ 54.7 ========== Short-term and current portion of long-term debt: New Term Loans................................................................ $ 3.3 Other indebtedness............................................................ 24.3 --------------- Total short-term and current portion of long-term debt................ $ 27.6 ========== Long-term debt: New Term Loans(a)............................................................. $ 596.7 New Revolving Facility(b)..................................................... 35.5 Other indebtedness............................................................ 131.9 New F4L Senior Notes(c)....................................................... 495.3 Old F4L Senior Notes.......................................................... 29.7 New RGC Notes(d).............................................................. 523.0 New F4L Senior Subordinated Notes............................................. 140.7 Old F4L Senior Subordinated Notes............................................. 4.3 New Discount Debentures (initial accreted value).............................. 100.0 Seller Debentures............................................................. 131.5 --------------- Total long-term debt.................................................. 2,188.6 --------------- 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.............................................................. (197.9) Treasury stock................................................................ (5.8) --------------- Total stockholders' equity................................................. 48.3 --------------- Total capitalization.................................................. $ 2,236.9 ==========
- --------------- (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 $925 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 $600 million, comprised of the $275 million Tranche A Loan, the $108.3 million Tranche B Loan, the $108.3 million Tranche C Loan and the $108.4 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 the Prospectus under "Description of the New Credit Facility." 3 6 (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 the Prospectus under "Executive Compensation -- Food 4 Less Stock Plan." 4 7 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following revised unaudited pro forma combined financial statements of New Holdings for the 52 weeks ended June 25, 1994 and as of and for the 31 weeks ended January 29, 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 29, 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 31 weeks ended January 29, 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 32 weeks ended January 29, 1995, respectively. For information regarding the Merger, the FFL Merger, the Reincorporation Merger and the Financing, see the Prospectus under "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. Reflecting tenders received through May 26, 1995 (and, in the case of the Discount Notes, anticipated tenders as of the Closing Date), the pro forma adjustments are based upon the following assumptions: (i) $423.0 million principal amount of Old RGC Notes are tendered into the RGC Offers in exchange for New RGC Notes, (ii) $27.0 million principal amount of Old RGC Notes are tendered into the RGC Offers for cash, (iii) $145.3 million principal amount of Old F4L Senior Notes and $140.7 million principal amount of Old F4L Senior Subordinated Notes are tendered into the F4L Exchange Offers, and (iv) $103.6 million principal amount (at maturity) of Discount Notes are tendered into the Holdings Offer to Purchase. The presentation also assumes that $100 million principal amount of New RGC Notes are issued pursuant to the Subordinated Note Public Offering and that $350 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 Supplement and in the Prospectus. 5 8 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(l)................................... 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 10.6 (g) 29.3 Provision for restructuring..................... 2.4 0.0 -- 2.4 --------- -------- ------- --------- Operating income........................... 150.9 72.8 (40.3) 183.4 Other expenses: Interest expense -- cash...................... 93.2 57.0 69.9 (h) 220.1 Interest expense -- non-cash.................. 9.4 14.6 23.8 (h) 47.8 Amortization of debt issuance costs........... 6.4 5.5 1.8 (h) 13.7 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(m)............................. 29.1 (8.8) (135.8) (115.5) Income tax expense (benefit).................... (108.0) 2.7 105.3 (i) -- --------- -------- ------- --------- Net earnings (loss)(j)..................... $ 137.1 $ (11.5) $(241.1) $ (115.5) ========= ======== ======= ========= Ratio of earnings to fixed charges(k)...... 1.2x -- -- ========= ======== =========
See Notes to Unaudited Pro Forma Combined Statement of Operations. 6 9 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- CONTINUED (DOLLARS IN MILLIONS)
32 WEEKS 31 WEEKS ENDED ENDED ----------- ------------- RALPHS HOLDINGS (HISTORICAL) (HISTORICAL) (UNAUDITED) (AUDITED) JANUARY 29, JANUARY 29, PRO FORMA PRO FORMA 1995 1995 ADJUSTMENTS COMBINED ----------- ------------- ----------- --------- Sales.......................................... $1,695.8 $1,556.5 $(131.3)(a) $3,121.0 Cost of sales.................................. 1,304.5 1,294.1 (107.6)(a) 2,493.3 2.5 (b) (1.0)(c) 0.8 (d) -------- -------- -------- -------- Gross profit.............................. 391.3 262.4 (26.0) 627.7 Selling, general and administrative expenses(l).................................. 294.8 222.4 (18.3)(a) 506.4 4.8 (b) 1.4 (d) 1.0 (e) 0.3 (f) Amortization of excess cost over net assets acquired..................................... 6.8 4.6 6.0 (g) 17.4 Provision for restructuring.................... 0.0 5.1 -- 5.1 -------- -------- ------- -------- Operating income.......................... 89.7 30.3 (21.2) 98.8 Other expenses: Interest expense -- cash..................... 60.5 35.3 37.3 (h) 133.1 Interest expense -- non-cash................. 5.6 9.6 15.6 (h) 30.8 Amortization of debt issuance costs.......... 3.6 3.4 1.1 (h) 8.1 Loss (gain) on disposal of assets............ 0.8 (0.4) -- 0.4 -------- -------- ------- -------- Earnings (loss) before income tax provision(m)............................ 19.2 (17.6) (75.2) (73.6) Income tax expense (benefit)................... 0.0 0.0 -- 0.0 -------- -------- ------- -------- Net earnings (loss)(j).................... $ 19.2 $ (17.6) $ (75.2) $ (73.6) ======== ======== ======= ======== Ratio of earnings to fixed charges(k)..... 1.2x -- -- ======== ======== ========
See Notes to Unaudited Pro Forma Combined Statement of Operations. 7 10 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 $1.2 million for the 31 weeks ended January 29, 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 31 weeks ended January 29, 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 ($21.6 million for the 52 weeks ended June 25, 1994 and $12.8 million for the 31 weeks ended January 29, 1995) and elimination of Ralphs' historical amortization ($11.0 million for the 52 weeks ended June 25, 1994 and $6.8 million for the 31 weeks ended January 29, 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:
31 WEEKS 52 WEEKS ENDED ENDED JANUARY 29, JUNE 25, 1994 1995 ------------- ----------- Historical interest expense -- cash.......................................... $ 150.2 $ 95.8 ------- ------ Plus: Interest on borrowings under: New Credit Facility...................................................... 63.2 37.2 New F4L Senior Notes..................................................... 36.6 21.8 New RGC Notes............................................................ 57.5 34.3 Other bank fees.......................................................... 3.9 2.3 Other debt............................................................... 2.0 2.1 Less: Interest on borrowings under: Old bank term loans: Ralphs................................................................. (21.3) (15.5) Food 4 Less............................................................ (11.5) (7.7) Old RGC Notes............................................................ (43.9) (27.0) Other debt............................................................... (16.6) (10.2) ------- ------ Pro forma adjustment....................................................... 69.9 37.3 ------- ------ Pro forma interest expense -- cash........................................... $ 220.1 $133.1 ======= ====== Historical interest expense -- non-cash...................................... $ 24.0 $ 15.2 Plus: Interest on Seller Debentures............................................ 18.5 12.3 Accretion of New Discount Debentures..................................... 14.1 9.4 Less: Accretion of Discount Notes.............................................. (8.8) (6.1) ------- ------ Pro forma interest expense -- non-cash....................................... $ 47.8 $ 30.8 ======= ====== Historical amortization of debt issuance costs............................... $ 11.9 $ 7.0 Plus: Financing and exchange/consent fees...................................... 8.6 5.1 Other fees and expenses.................................................. 4.6 2.7 Less: Historical financing costs: Ralphs................................................................... (6.1) (3.6) Food 4 Less.............................................................. (5.3) (3.1) ------- ------ Pro forma adjustment....................................................... 1.8 1.1 ------- ------ Pro forma amortization of debt issuance costs................................ $ 13.7 $ 8.1 ======= ======
(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) 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 8 11 Income Taxes." As such, no income tax benefit has been reflected in these pro forma financial statements. See the Prospectus under "Certain Federal Income Tax Considerations." (j) The unaudited pro forma results of operations for the 52 weeks ended June 25, 1994 and the 31 weeks ended January 29, 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, (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 31 weeks ended January 29, 1995 by approximately $115.5 million and $73.6 million, respectively. However, such pro forma earnings included non-cash charges of $221.8 million for the 52 weeks ended June 25, 1994 and $135.7 million for the 31 weeks ended January 29, 1995, primarily consisting of depreciation and amortization. (l) Pro forma combined cost of sales and selling, general and administrative expenses for the 52 weeks ended June 25, 1994 and the 31 weeks ended January 29, 1995 include reduced employer contributions of $25.8 million and $22.1 million, respectively, related to union health and welfare benefit plans. (m) The pro forma combined loss before income tax provision for the 52 weeks ended June 25, 1994 and the 31 weeks ended January 29, 1995 includes reductions in self insurance reserves of $26.4 million and $28.0 million, respectively. (n) "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 the Prospectus under "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following table presents a reconciliation of pro forma EBITDA (as defined):
52 WEEKS ENDED 31 WEEKS ENDED JUNE 25, 1994 JANUARY 29, 1995 -------------- ---------------- Historical EBITDA: Ralphs EBITDA........................................................... $228.1 $143.5 EBITDA margin(1)...................................................... 8.4% 8.5% Food 4 Less EBITDA...................................................... $130.5 $ 76.9 EBITDA margin......................................................... 5.0% 4.9% Less: Pro Forma Adjustments(2)............................................ $(16.1) $ (9.1) ------ ------ Pro Forma EBITDA.......................................................... $342.5 $211.3 ====== ====== 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. 9 12 UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN MILLIONS)
RALPHS HOLDINGS (HISTORICAL) (HISTORICAL) (AUDITED) (AUDITED) PRO FORMA JANUARY 29, 1995 JANUARY 29, 1995 ADJUSTMENTS PRO FORMA ---------------- ---------------- ----------- --------- ASSETS Current assets: Cash and cash equivalents.................... $ 35.1 $ 19.6 $ 0.0 (a) $ 54.7 Accounts receivable.......................... 43.6 23.4 -- 67.0 Inventories.................................. 221.4 224.7 39.9 (b) 486.0 Prepaid expense and other current assets..... 19.8 22.2 -- 42.0 -------- -------- ------- -------- Total current assets.................. 319.9 289.9 39.9 649.7 Investments.................................... 0.0 12.4 -- 12.4 Property, plant and equipment.................. 624.7 380.4 160.0 (c) 1,140.3 (22.8)(d) (2.0)(e) Excess of cost over net assets acquired, net... 365.4 263.1 496.7 (f) 1,125.2 Beneficial lease rights........................ 49.2 0.0 -- 49.2 Deferred debt issuance costs, net.............. 23.0 25.5 94.8 (g) 99.4 (43.9)(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 $1,000.7 $ 602.3 $3,112.9 ======== ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt......... $ 84.0 $ 27.2 $ (83.6)(k) $ 27.6 Short-term debt.............................. 51.5 0.0 (51.5)(l) 0.0 Accounts payable............................. 176.6 190.5 -- 367.1 Accrued expenses............................. 99.8 118.3 (17.6)(m) 207.0 4.7 (d) 1.8 (n) Current portion of self-insurance reserves... 27.5 28.6 -- 56.1 -------- -------- ------- -------- Total current liabilities............. 439.4 364.6 (146.2) 657.8 Long-term debt................................. 883.0 571.7 733.9 (o) 2,188.6 Self-insurance reserves........................ 44.9 44.1 -- 89.0 Deferred income taxes.......................... 0.0 17.5 -- 17.5 Lease valuation reserve........................ 29.0 0.0 -- 29.0 Other non-current liabilities.................. 86.4 10.1 (27.8)(p) 82.7 11.0 (q) 3.0 (e) -------- -------- ------- -------- Total liabilities..................... 1,482.7 1,008.0 573.9 3,064.6 -------- -------- ------- -------- 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................... 175.2 105.6 10.0 (p) 59.9 (175.2)(t) (57.8)(s) 2.1 (u) Notes receivable from shareholders........... 0.0 (0.7) -- (0.7) Retained deficit............................. (148.3) (112.2) (23.7)(v) (197.9) 148.3 (t) (40.4)(d) (1.8)(n) (19.8)(w) Treasury stock............................... -- -- (2.1)(u) (5.8) (3.7)(x) -------- -------- ------- -------- Total stockholders' equity(y)......... 27.2 (7.3) 28.4 48.3 -------- -------- ------- -------- Total liabilities and stockholders' equity.............................. $1,509.9 $1,000.7 $ 602.3 $3,112.9 ======== ======== ======= ========
See Notes to Unaudited Pro Forma Combined Balance Sheet. 10 13 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............................................................................ $ 600.0 New Revolving Facility.................................................................... 35.5 New F4L Senior Notes...................................................................... 350.0 New RGC Notes............................................................................. 100.0 New Equity Investment..................................................................... 140.0 New Discount Debentures................................................................... 59.0 Purchase Discount Notes................................................................... (84.4) Purchase RSI Common Stock................................................................. (375.9) Repay Ralphs 1992 Credit Agreement........................................................ (297.4) Repay F4L Credit Agreement................................................................ (153.0) Purchase Old RGC Notes.................................................................... (27.3) Pay EAR liability......................................................................... (17.8) Loan to affiliate......................................................................... (5.0) Repay other Ralphs debt................................................................... (188.8) Purchase New Holdings Common Stock........................................................ (3.7) Accrued Interest.......................................................................... (17.6) Fees and Expenses......................................................................... (113.6) ------- 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 the Prospectus under "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 ($862.1 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...................................................................... 51.1 -------- Total purchase price................................................................... $ 577.0 -------- Purchase price is financed by: Seller Debentures...................................................................... $ 131.5 New Discount Debentures................................................................ 18.5 New Equity Investment.................................................................. 140.0 New borrowings......................................................................... 287.0 -------- $ 577.0 =======
11 14 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............................................................................... 862.1 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) -------- $ 577.0 =======
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..................................................................... 577.0 ---------- Excess of purchase price to be allocated........................................... $1,047.9 ========== Excess allocated to: Inventories........................................................................ $ 39.9 Property, fixtures and equipment................................................... 160.0 Goodwill........................................................................... 862.1 Other non-current liabilities...................................................... (14.1) ---------- $1,047.9 ==========
(g) Reflects the debt issuance costs associated with the New Credit Facility, ($29.4 million), the RGC Offers ($4.2 million), the F4L Exchange Offers ($2.9 million), the Senior Note Public Offering ($10.5 million) and the Subordinated Note Public Offering ($3.0 million), the cash exchange payments associated with the RGC Offers ($8.5 million) and the F4L Exchange Offers ($3.5 million) and other financing costs ($32.8 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) ($9.0 million), the Old RGC Notes ($10.4 million) and the Old F4L Notes ($14.7 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 the Prospectus under "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 ($3.3 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 ($2.7 million), the Old RGC Notes ($5.5 million), the Old F4L Notes ($6.3 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. 12 15 (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............................................................................ $ 596.7 New Revolving Facility.................................................................... 35.5 New F4L Senior Notes...................................................................... 350.0 New RGC Notes............................................................................. 100.0 New Discount Debentures................................................................... 100.0 Seller Debentures......................................................................... 131.5 Purchase Discount Notes (book value)...................................................... (65.1) Repay Ralphs 1992 Credit Agreement........................................................ (180.0) Repay F4L Credit Agreement................................................................ (133.2) Purchase Old RGC Notes.................................................................... (27.0) Repay other Ralphs debt................................................................... (174.5) ------- Net pro forma adjustment.......................................................... $ 733.9 =======
(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 the Prospectus under "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 29, 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 29, 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. 13 16 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, June 29, 1991 and June 27, 1992, and the historical financial data of Holdings presented below as of and for the 52 weeks ended June 26, 1993 and June 25, 1994 and the 31 weeks ended January 29, 1995 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 32 weeks ended February 5, 1994 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 Supplement and in the Prospectus. Because New Holdings did not exist prior to December 19, 1994, no historical financial data exists with respect thereto.
HOLDINGS FOOD 4 LESS -------------------------------------------------------- ---------------------------------- 31 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 32 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED ENDED JANUARY JUNE 30, JUNE 29, JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, 29, 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 $1,616.7 $1,556.5 Cost of sales................ . 1,113.4 1,340.9 2,392.7 2,257.8 2,115.9 1,317.2 1,294.1 -------- -------- -------- -------- -------- -------- -------- Gross profit.................. 204.8 265.7 520.8 484.2 469.3 299.5 262.4 Selling, general, administrative and other expenses.................... 157.8 213.1 469.7 434.9 388.8 252.3 222.4 Amortization of excess cost over net assets acquired.... 5.3 5.3 7.8 7.6 7.7 4.7 4.6 Restructuring charge.......... -- -- -- -- -- -- 5.1(d) -------- -------- -------- -------- -------- -------- -------- Operating income.............. 41.7 47.3 43.3 41.7 72.8 42.5 30.3 Interest expense(c)........... 50.8 50.1 70.2 73.6 77.0 47.6 48.4 Loss (gain) on disposal of assets...................... -- 0.6 (1.3 ) (2.1 ) -- 0.1 (0.5) Provision for earthquake losses...................... -- -- -- -- 4.5 -- -- Provision for income taxes.... 1.0 2.5 3.4 1.4 2.7 1.0 -- Extraordinary charge.......... -- 3.7 (f) 4.8 (g) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net loss(e)................... $ (10.1) $ (9.6) $ (33.8) $ (31.2) $ (11.5) $ (6.2) $ (17.6) ======== ======== ======== ======== ======== ======== ======== 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) $ (13.8) $ (74.8) Total assets.................. 574.7 980.0 998.5 957.8 980.1 957.4 1,000.7 Total debt(j)................. 360.7 558.9 525.3 588.3 576.9 582.0 598.9 Redeemable stock.............. 5.1 -- -- -- -- -- -- Stockholder's equity (deficit)................... 20.6 84.6 50.8 22.6 10.0 15.8 (7.3) OTHER DATA: Depreciation and amortization(k)............. $ 25.8 $ 31.9 $ 54.9 $ 57.6 $ 57.1 $ 34.8 $ 36.6 Capital expenditures.......... 36.4 34.7 60.3 53.5 57.5 29.1 49.0 Stores open at end of period...................... 115 259 249 248 258 249 267 EBITDA (as defined)(l)........ $ 69.5 $ 80.7 $ 103.1 $ 105.9 $ 130.5 $ 79.8 $ 76.9 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, 14 17 $5.5 million for the 52 weeks ended June 25, 1994, $3.4 million for the 32 weeks ended February 5, 1994 and $3.4 million for the 31 weeks ended January 29, 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 $9.8 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 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995, respectively. Included in the 52 weeks ended June 25, 1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995 are reduced employer contributions of $8.1 million, $3.7 million and $14.3 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, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995 by approximately $9.1 million, $3.4 million, $25.6 million, $29.8 million, $8.8 million, $5.2 million and $17.6 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, $43.5 million for the 32 weeks ended February 5, 1994 and $46.2 million for the 31 weeks ended January 29, 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 February 5, 1994 reflect the Alpha Beta acquisition and the financings and refinancings associated therewith. Balance sheet data as of June 25, 1994 and January 29, 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 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 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, $4.7 million and $4.6 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, provision for restructuring 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 the Prospectus under "Management's Discussion and Analysis of Financial Condition and Results of Operations." (m) EBITDA margin represents EBITDA (as defined) as a percentage of sales. 15 18 UPDATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following sections of Management's Discussion and Analysis of Financial Condition and Results of Operations update the corresponding sections and information presented in the Prospects and add a discussion of certain recent results of operations. 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"), for the 32 weeks ended February 5, 1994 and for the 31 weeks ended January 29, 1995:
52 WEEKS ENDED ---------------------------------------------------------- 32 WEEKS ENDED 31 WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29, 1992 1993 1994 1994 1995 ---------------- ---------------- ---------------- ------------------ ------------------ (IN MILLIONS) (UNAUDITED) Sales.................. $2,913.5 100.0% $2,742.0 100.0% $2,585.2 100.0% $1,616.7 100.0% $1,556.5 100.0% Gross profit........... 520.8 17.9 484.2 17.7 469.3 18.1 299.5 18.5 262.4 16.9 Selling, general, administrative and other, net........... 469.7 16.1 434.9 15.9 388.8 15.0 252.3 15.6 222.4 14.3 Amortization of excess costs over net assets acquired............. 7.8 0.3 7.6 0.3 7.7 0.3 4.7 0.3 4.6 0.3 Restructuring charge... -- -- -- -- -- -- -- -- 5.1 0.3 Operating income....... 43.3 1.5 41.7 1.5 72.8 2.8 42.5 2.6 30.3 1.9 Interest expense....... 70.2 2.4 73.6 2.6 77.0 2.9 47.6 2.9 48.4 3.1 Loss (gain) on disposal of assets............ (1.3) -- (2.1) (0.1) -- -- 0.1 -- (0.5) -- Provision for earthquake losses.... -- -- -- -- 4.5 0.2 -- -- -- -- Provision for income taxes................ 3.4 0.1 1.4 0.1 2.7 0.1 1.0 0.1 0.0 0.0 Loss before extraordinary charge............... (29.0) (1.0) (31.2) (1.1) (11.5) (0.4) (6.2) (0.4) (17.6) (1.1) Extraordinary charges.............. 4.8 0.2 -- -- -- -- -- -- -- -- Net loss............... (33.8) (1.2) (31.2) (1.1) (11.5) (0.4) (6.2) (0.4) (17.6) (1.1)
COMPARISON OF HOLDINGS' RESULTS OF OPERATIONS FOR THE 31 WEEKS ENDED JANUARY 29, 1995 WITH HOLDINGS' RESULTS OF OPERATIONS FOR THE 32 WEEKS ENDED FEBRUARY 5, 1994 Sales Sales per week decreased $0.3 million, or 0.6%, from $50.5 million per week in the 32 weeks ended February 5, 1994, to $50.2 million per week in the 31 weeks ended January 29, 1995, primarily as a result of a 4.6% decline in comparable store sales, partially offset by sales from new and acquired stores opened since February 5, 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 32 weeks ended February 5, 1994, to 16.9% in the 31 weeks ended January 29, 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 February 5, 1994, to 89 at January 29, 1995. The decrease in the gross profit margin was partially offset by improvements in product procurement. 16 19 Selling, General, Administrative and Other, Net Selling, general, administrative and other expenses, net ("SG&A") were $252.3 million and $222.4 million for the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995, respectively. SG&A decreased as a percentage of sales from 15.6% to 14.3% for the same periods. Food 4 Less experienced a reduction of workers' compensation and general liability self-insurance costs of $14.8 million during the 31 weeks ended January 29, 1995 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. 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 48 at February 5, 1994, to 89 at January 29, 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 $3.7 million in the 32 weeks ended February 5, 1994 and $14.3 million in the 31 weeks ended January 29, 1995, respectively. An additional $4.4 million of credits was recognized during the period from February 6, 1994 through the end of Fiscal 1994. The remainder of the excess reserves will be recognized as the credits are taken in fiscal 1995. 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 which was recorded in the 31 weeks ended January 29, 1995. Restructuring Charge Food 4 Less has converted 11 of its conventional format supermarkets to warehouse format stores. During the 31 weeks ended January 29, 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 $47.6 million and $48.4 million for the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 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 during the 31 weeks ended January 29, 1995. As a result of capital expenditures subsequent to January 29, 1995, Food 4 Less has increased its borrowing under the F4L Credit Agreement, which, coupled with increased rates, has increased its interest expense and net loss during such period. Net Loss Primarily as a result of the factors discussed above, Holdings' net loss increased from $6.2 million in the 32 weeks ended February 5, 1994 to $17.6 million in the 31 weeks ended January 29, 1995. 17 20 LIQUIDITY AND CAPITAL RESOURCES Pursuant to the New Credit Facility, the New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of $275 million, will have a six-year term; (ii) Tranche B, in the amount of $108.3 million, will have a seven-year term; (iii) Tranche C, in the amount of $108.3 million, will have an eight-year term; and (iv) Tranche D, in the amount of $108.4 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 $3.3 million in the first year, $36.3 million in the second year and increasing thereafter. See the Prospectus under "Description of the New Credit Facility." Holdings generated approximately $87.8 million and approximately $17.6 million of cash from operating activities during the 52-week period ended June 25, 1994 and the 31 weeks ended January 29, 1995, respectively (as compared to generating approximately $30.2 million of cash from operating activities during the 32 weeks ended February 5, 1994). The decrease in cash from operating activities is due primarily to changes in operating assets and liabilities and a decrease in operating income. 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, Holdings had a working capital deficit of $74.8 million at January 29, 1995. Subsequent to January 29, 1995 Holdings continued its practice of using cash from operations for non current purposes which increased the working capital deficit. For the 31 weeks ended January 29, 1995, Holdings' cash used in investing activities was $42.6 million. Investing activities consisted of capital expenditures of $49.0 million, partially offset by $6.5 million of sale/leaseback transactions. The capital expenditures, net of the proceeds from sale/leaseback transactions, were financed with cash provided by a combination of financing and operating activities. The capital expenditures included the costs associated with the conversion of 11 conventional format stores to the Food 4 Less warehouse format. See the Prospectus under "Business -- The Merger -- Two Leading Complementary Formats." In May 1995, the F4L Credit Agreement was further amended in order to, among other things, accommodate Food 4 Less' new fiscal year end and to make adjustments to Food 4 Less' financial covenants. Food 4 Less' cash provided by financing activities was $11.6 million for the 31 weeks ended January 29, 1995, which consisted primarily of $27.3 million of borrowings outstanding on the Revolving Credit Facility at January 29, 1995 partially offset by a $11.3 million repayment of the Term Loan. At January 29, 1995, $48.6 million of standby letters of credit had been issued under Food 4 Less' existing letter of credit facility. RECENT RESULTS Ralphs. Ralphs sales for the 12 weeks ended April 23, 1995 (the "first quarter") increased $21.5 million, or 3.5%, to $637.5 million from $616.0 million in the 12 weeks ended April 24, 1994. Comparable store sales in the first quarter decreased 2.2% from the corresponding period in the prior year. Operating income for the 12 weeks ended April 23, 1995 decreased $2.8 million to $31.3 million from $34.1 million in the 12 weeks ended April 24, 1994. EBITDA (as defined) in the first quarter of the current fiscal year decreased to $52.3 million from $52.7 million in the comparable period of the prior year. Ralphs net earnings in the first quarter of the current fiscal year declined $3.5 million from $8.4 million in the first quarter of Fiscal 1994 to $4.9 million in the first quarter of the current fiscal year. The decline in net earnings was largely attributable to an increased level of union health and welfare benefit credits in the prior fiscal year. Such conditions continue to cause similar decreases in operating income and net income through the period ended May 26, 1995 as compared to the same period in the preceding year. Holdings. Holdings' sales for the 12 weeks ended April 23, 1995 increased $35.7 million, or 6.1% to $623.6 million from $587.9 million in the 12 weeks period ended April 2, 1994. Comparable store sales 18 21 decreased approximately 2.2% from the 12 week period in the prior year. EBITDA (as defined) in the first quarter of the current fiscal year decreased slightly to $30.1 million from $30.2 million in the prior year's period. Holdings' net loss decreased from $6.3 million for the 12 weeks ended April 2, 1994 to $5.2 million for the 12 weeks ended April 23, 1995; however, Holdings' net loss for the 1994 period reflected a charge of $4.5 million related to earthquake damage. Holdings' increased borrowings for capital expenditures in the current fiscal year and the resulting increased interest expense contributed to the net loss in the first quarter of the current year. 19 22 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 B COMMON SERIES A PREFERRED STOCK(1)(2) PREFERRED 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. Apollo Advisors II, L.P.(9) 2 Manhattanville Road Purchase, NY 10577....... 1,285,165 6.4% 10,783,244 64.6% -- -- 32.7% 30.2% 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)........... 40,172 0.2% 5,000,000 30.0% -- -- 13.7% 12.6% 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 20 23 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 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. or Apollo Advisors II, 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. 21 24 INDEX TO FINANCIAL STATEMENTS
PAGE ---- FOOD 4 LESS HOLDINGS, INC. (A CALIFORNIA CORPORATION): Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-2 Consolidated balance sheets as of June 26, 1993, June 25, 1994 and January 29, 1995... F-3 Consolidated statements of operations for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994, the 32 weeks ended February 5, 1994 (unaudited) and the 31 weeks ended January 29, 1995........................................................ F-5 Consolidated statements of cash flows for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994, the 32 weeks ended February 5, 1994 (unaudited) and the 31 weeks ended January 29, 1995........................................................ F-6 Consolidated statements of shareholders' equity (deficit) for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 31 weeks ended January 29, 1995............. F-8 Notes to consolidated financial statements............................................ F-9 FOOD 4 LESS HOLDINGS, INC. (A DELAWARE CORPORATION): Report of Independent Public Accountants (Arthur Andersen LLP)........................ F-26 Balance sheet as of January 4, 1995................................................... F-27 Notes to the balance sheet............................................................ F-28
F-1 25 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, June 25, 1994 and January 29, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 31 weeks ended January 29, 1995. 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, June 25, 1994 and January 29, 1995, and the results of their operations and their cash flows for the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994 and the 31 weeks ended January 29, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California May 18, 1995 F-2 26 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
JUNE 26, JUNE 25, JANUARY 29, 1993 1994 1995 -------- -------- ----------- CURRENT ASSETS: Cash and cash equivalents............................... $ 25,089 $ 32,996 $ 19,560 Trade receivables, less allowances of $1,919, $1,386 and $1,192 at June 26, 1993, June 25, 1994 and January 29, 1995, respectively............................... 22,048 25,039 23,377 Notes and other receivables............................. 1,278 1,312 3,985 Inventories............................................. 191,467 212,892 224,686 Patronage receivables from suppliers.................... 2,680 2,875 5,173 Prepaid expenses and other.............................. 6,011 6,323 13,051 -------- -------- ---------- Total current assets............................ 248,573 281,437 289,832 INVESTMENTS IN AND NOTES RECEIVABLE FROM SUPPLIER COOPERATIVES: A.W.G................................................... 6,693 6,718 6,718 Certified and Other..................................... 6,657 5,984 5,686 PROPERTY AND EQUIPMENT: Land.................................................... 23,912 23,488 23,488 Buildings............................................... 12,827 12,827 24,172 Leasehold improvements.................................. 81,049 97,673 110,020 Store equipment and fixtures............................ 129,178 148,249 157,607 Transportation equipment................................ 31,758 32,259 32,409 Construction in progress................................ 757 12,641 8,042 Leased property under capital leases.................... 77,553 78,222 82,526 Leasehold interests..................................... 93,863 93,464 96,556 -------- -------- ---------- 450,897 498,823 534,820 Less: Accumulated depreciation and amortization......... 96,948 134,089 154,382 -------- -------- ---------- Net property and equipment........................... 353,949 364,734 380,438 OTHER ASSETS: Deferred financing costs, less accumulated amortization of $11,611, $17,083 and $20,496 at June 26, 1993, June 25, 1994 and January 29, 1995, respectively..... 33,778 28,536 25,469 Goodwill, less accumulated amortization of $26,254, $33,945 and $38,560 at June 26, 1993, June 25, 1994 and January 29, 1995, respectively................... 280,895 267,884 263,112 Other, net.............................................. 27,295 24,787 29,440 -------- -------- ---------- $957,840 $980,080 $1,000,695 ======== ======== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 27 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
JUNE 26, JUNE 25, JANUARY 29, 1993 1994 1995 -------- -------- ----------- CURRENT LIABILITIES: Accounts payable........................................ $140,468 $180,708 $ 190,455 Accrued payroll and related liabilities................. 40,319 42,805 42,007 Accrued interest........................................ 5,293 5,474 10,730 Other accrued liabilities............................... 40,467 53,910 65,279 Income taxes payable.................................... 2,053 2,000 293 Current portion of self-insurance liabilities........... 23,552 29,492 28,616 Current portion of long-term debt....................... 12,778 18,314 22,263 Current portion of obligations under capital leases..... 2,865 3,616 4,965 -------- -------- ---------- Total current liabilities....................... 267,795 336,319 364,608 LONG-TERM DEBT............................................ 335,576 310,944 320,901 OBLIGATIONS UNDER CAPITAL LEASES.......................... 41,864 39,998 40,675 SENIOR SUBORDINATED DEBT.................................. 145,000 145,000 145,000 SENIOR HOLDINGS DISCOUNT NOTES............................ 50,230 58,997 65,136 DEFERRED INCOME TAXES..................................... 22,429 14,740 17,534 SELF-INSURANCE LIABILITIES AND OTHER...................... 72,313 64,058 54,174 COMMITMENTS AND CONTINGENCIES............................. -- -- -- SHAREHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value, 1,600,000 shares authorized and 1,385,265, 1,381,782 and 1,386,169 shares issued at June 26, 1993, June 25, 1994 and January 29, 1995, respectively....................... 14 14 14 Additional paid-in capital.............................. 106,452 105,182 105,580 Notes receivable from shareholders...................... (714) (586) (702) Retained deficit........................................ (83,119) (94,586) (112,225) -------- -------- ---------- Total shareholders' equity (deficit)............ 22,633 10,024 (7,333) -------- -------- ---------- $957,840 $980,080 $1,000,695 ======== ======== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-4 28 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FIFTY-TWO FIFTY-TWO FIFTY-TWO THIRTY-TWO THIRTY-ONE WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29, 1992 1993 1994 1994 1995 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) SALES....................................... $2,913,493 $2,742,027 $2,585,160 $1,616,720 $1,556,522 COST OF SALES (including purchases from related parties of $277,812, $204,028, $175,929, $108,264 (unaudited) and $104,407 for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995, respectively)............................. 2,392,655 2,257,835 2,115,842 1,317,216 1,294,147 ---------- ---------- ---------- ---------- ---------- GROSS PROFIT................................ 520,838 484,192 469,318 299,504 262,375 SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET....................................... 469,751 434,908 388,836 252,313 222,359 AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED.................................. 7,795 7,571 7,691 4,723 4,615 RESTRUCTURING CHARGE........................ -- -- -- -- 5,134 ---------- ---------- ---------- ---------- ---------- OPERATING INCOME............................ 43,292 41,713 72,791 42,468 30,267 INTEREST EXPENSE: Interest expense, excluding amortization of deferred financing costs............ 63,907 68,713 71,545 44,195 44,948 Amortization of deferred financing costs.................................. 6,304 4,901 5,472 3,368 3,413 ---------- ---------- ---------- ---------- ---------- 70,211 73,614 77,017 47,563 48,361 LOSS (GAIN) ON DISPOSAL OF ASSETS........... (1,364) (2,083) 37 60 (455) PROVISION FOR EARTHQUAKE LOSSES............. -- -- 4,504 ---------- ---------- ---------- ---------- ---------- LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY CHARGES..................... (25,555) (29,818) (8,767) (5,155) (17,639) PROVISION FOR INCOME TAXES.................. 3,441 1,427 2,700 1,000 -- ---------- ---------- ---------- ---------- ---------- LOSS BEFORE EXTRAORDINARY CHARGES........... (28,996) (31,245) (11,467) (6,155) (17,639) 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) $ (6,155) $ (17,639) ========== ========== ========== ========== ========== LOSS PER COMMON SHARE: Loss before extraordinary charges......... $ (20.74) $ (22.43) $ (8.29) $ (4.45) $ (12.75) Extraordinary charges..................... (3.45) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net loss.................................. $ (24.19) $ (22.43) $ (8.29) $ (4.45) $ (12.75) ========== ========== ========== ========== ========== Average Number of Common Shares Outstanding............................ 1,397,939 1,393,289 1,382,710 1,383,054 1,383,307 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-5 29 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 THIRTY-TWO THIRTY-ONE WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29, 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 $ 1,616,720 $ 1,556,522 Cash paid to suppliers and employees... (2,752,442) (2,711,779) (2,441,353) (1,561,092) (1,507,523) Interest paid.......................... (56,234) (58,807) (56,762) (29,743) (33,553) Income taxes (paid) refunded........... (4,665) 2,971 (247) 1,652 1,087 Interest received...................... 1,266 993 903 544 867 Other, net............................. 4,734 8,093 121 2,108 221 ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............................. 106,152 (16,502) 87,822 30,189 17,621 CASH PROVIDED (USED) BY INVESTING ACTIVITIES: Proceeds from sale of property and equipment........................... 17,395 15,685 11,953 12,337 7,199 Payment for purchase of property and equipment........................... (60,263) (53,467) (57,471) (29,090) (49,023) Business acquisition costs, net of cash acquired............................ (27,563) -- (11,050) -- -- Receivable received from seller of business acquired................... 12,259 -- -- -- -- Other, net............................. (4,754) (18) 813 718 (797) ----------- ----------- ----------- ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES.... (62,926) (37,800) (55,755) (16,035) (42,621) 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) 600 27,300 Payments of long-term debt............. (184,389) (14,319) (14,224) (10,571) (13,394) Proceeds from the issuance of preferred stock............................... -- 46,348 -- -- -- Proceeds from issuance of common stock, net................................. 341 3,652 -- -- 269 Purchase of common stock, net.......... (313) (545) (1,192) (726) (57) Payments of capital lease obligation... (2,814) (2,840) (3,693) (1,791) (2,278) Deferred financing costs and other..... (6,656) (8,839) (179) (161) (276) ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............................. (40,231) 54,914 (24,160) (12,621) 11,564 ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 2,995 612 7,907 1,533 (13,436) 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 $ 26,622 $ 19,560 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-6 30 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 THIRTY-TWO THIRTY-ONE WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29, 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) $ (6,155) $(17,639) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization......... 61,181 62,541 62,555 38,123 40,036 Accretion of Holdings Discount Notes............................... -- 3,882 8,767 5,395 6,139 Restructuring charge.................. -- -- -- -- 5,134 Extraordinary charge.................. 4,818 -- -- -- -- Loss (gain) on sale of assets......... (1,364) (4,613) 65 60 (455) 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) (2,139) (3,398) Inventories......................... 202 17,697 (17,125) (10,254) (11,794) Prepaid expenses and other.......... (2,834) (6,163) (5,717) (6,701) (11,239) Accounts payable and accrued liabilities...................... 71,369 (83,286) 55,301 5,614 18,715 Self-insurance liabilities.......... 15,034 2,935 (3,790) 3,594 (8,965) Deferred income taxes............... 2,033 4,004 2,506 1,714 2,794 Income taxes payable................ (3,257) 394 (53) 938 (1,707) -------- -------- -------- -------- -------- Total adjustments..................... 139,966 14,743 99,289 36,344 35,260 -------- -------- -------- -------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............................... $106,152 $(16,502) $ 87,822 $ 30,189 $ 17,621 ======== ======== ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of property and equipment through issuance of capital lease obligation............................ -- -- $ 2,575 -- $ 4,304 ======== ======== ======== ======== ======== 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-7 31 FOOD 4 LESS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ------------------ --------------- TOTAL SHARE- NUMBER NUMBER SHARE- ADD'L HOLDERS' OF OF HOLDERS' PAID-IN RETAINED EQUITY SHARES AMOUNT SHARES AMOUNT NOTES CAPITAL (DEFICIT) (DEFICIT) --------- ------ ------ ------ --------- -------- --------- -------- 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 Net loss.......................... -- -- -- -- -- -- (17,639) (17,639) Issuance of Common Stock.......... 5,504 -- -- -- (191) 460 -- 269 Purchase of Common Stock.......... (1,117) -- -- -- 5 (62) -- (57) Payment of Shareholders' Notes.... -- -- -- -- 70 -- -- 70 --------- ---- ------ ------ ------ -------- --------- -------- BALANCES AT JANUARY 29, 1995........ 1,386,169 $ 14 -- $ -- $(702) $105,580 $(112,225) $ (7,333) ========= ==== ====== ====== ====== ======== ========= ========
The accompanying notes are an integral part of these consolidated statements. F-8 32 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-9 33 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. (c) Fiscal Years In anticipation of the Merger (as defined in Note 13 -- Ralphs Merger), and in order to align the Company's fiscal year end with the fiscal year end of RSI (as defined in Note 13 -- Ralphs Merger), the Company, together with its subsidiaries, changed its fiscal year end from the 52 or 53-week period which ends on the last Saturday in June to the 52 or 53-week period which ends on the Sunday closest to January 31, resulting in a 31-week transition period ended January 29, 1995. As a result of the fiscal year end change, the 52-week period ended June 27, 1992 is referred to as fiscal year 1992, the 52-week period ended June 26, 1993 is referred to as fiscal year 1993, the 52-week period ended June 25, 1994 is referred to as fiscal year 1994, the 32-week period ended February 5, 1994 is referred to as the 1994 transition period, and the 31-week period ended January 29, 1995 is referred to as the 1995 transition period. In addition, information presented below concerning subsequent fiscal years starts with fiscal year 1995, which will cover the 52 weeks ended January 28, 1996, and will proceed sequentially forward. (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 $16,531,000 at June 26, 1993, June 25, 1994 and January 29, 1995, respectively, and gross profit and operating income would have been greater by $3,554,000, $4,441,000, $699,000, $2,565,000 (unaudited) and $2,729,000 (unaudited) for the 52 weeks ended June 27, 1992, June 26, 1993, and June 25, 1994, the 32 weeks ended February 5, 1994, and the 31 weeks ended January 29, 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, June 26, 1993, and June 25, 1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995, utilization of this reserve was $4.0 million, $2.4 million, $1.1 million, $579,000 (unaudited) and $573,000, 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-10 34 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. 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 January 29, 1995, no impairment existed. Covenants not to compete, which are included in Other Assets, are amortized on a straight-line basis over the term of the covenant. (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-11 35 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 January 29, 1995 presentation. F-12 36 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LONG-TERM DEBT AND SENIOR SUBORDINATED DEBT Long-Term Debt The Company's long-term debt is summarized as follows:
JUNE 26, JUNE 25, JANUARY 29, 1993 1994 1995 ------------ ------------ ------------ Bank Term Loan, principal due quarterly through January 1999, with interest payable monthly in arrears............... $148,478,000 $137,064,000 $125,732,000 10.45 percent Senior Notes principal due 2000 with interest payable semi-annually in arrears............................... 175,000,000 175,000,000 175,000,000 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 65,136,000 Revolving Loan............................. 4,900,000 -- 27,300,000 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 $2,104,000............................... 1,558,000 1,521,000 1,498,000 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 1,420,000 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 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 1,070,000 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 1,422,000 10.0 percent real estate mortgage due 2000, $8,000 of principal and interest payable monthly.................................. 474,000 419,000 392,000 Other long-term debt....................... 2,216,000 1,415,000 1,330,000 ------------ ------------ ------------ 398,584,000 388,255,000 408,300,000 Less -- current portion.................... 12,778,000 18,314,000 22,263,000 ------------ ------------ ------------ $385,806,000 $369,941,000 $386,037,000 ============ ============ ============
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 January 29, 1995, $125.7 million was outstanding under the Bank Term Loan, $27.3 million was outstanding under the Revolving Loan and $48.6 million of standby letters of F-13 37 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 January 29, 1995, the weighted average interest rate on the Bank Term Loan was 8.3 percent. Quarterly principal installments on the Bank Term Loan continue to December 1998, with $19,829,000 payable in fiscal year 1995, $22,661,000 payable in fiscal year 1996, $33,792,000 payable in fiscal year 1997 and $49,450,000 payable in fiscal year 1998. Interest on borrowings under the Revolving Loan is at the bank's Base Rate (as defined) plus 1.25 percent. At January 29, 1995, the interest rate on the Revolving Loan was 9.75 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. The Credit Agreement has been amended to, among other things, allow for the acceleration of the capital expenditures and other costs associated with the conversion of 11 conventional stores to the warehouse format. In May 1995, the Credit Agreement was further amended in order to, among other things, accommodate the Company's new fiscal year end for financial reporting purposes and to make adjustments to financial covenants of the Company. 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. 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 January 29, 1995, the Company was in compliance with the financial covenants of its debt agreements. At January 29, 1995, dividends and certain other payments are restricted based on terms in the debt agreements. On December 31, 1992, Holdings issued $103.6 million aggregate principal amount of 15.25% Senior 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. F-14 38 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of principal of Long-Term Debt at January 29, 1995 are as follows:
FISCAL YEAR ----------- 1995................................................... $ 22,263,000 1996................................................... 59,902,000 1997................................................... 33,991,000 1998................................................... 49,673,000 1999................................................... 88,976,000 Later years............................................ 153,495,000 ------------ $408,300,000 ============
Senior Subordinated Debt 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, which are due on June 15, 2001, 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. (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 32 WEEKS 31 WEEKS ENDED ENDED ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29, 1992 1993 1994 1995 1995 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Minimum rents................... $46,706,000 $44,504,000 $49,788,000 $29,830,000 $35,458,000 Rents based on sales............ 7,656,000 5,917,000 3,806,000 2,716,000 1,999,000
Following is a summary of future minimum lease payments under operating leases at January 29, 1995:
FISCAL YEAR ----------- 1995................................................... $ 62,120,000 1996................................................... 58,163,000 1997................................................... 53,432,000 1998................................................... 47,064,000 1999................................................... 44,680,000 Later years............................................ 406,897,000 ------------ $672,356,000 ============
The Company has entered into lease agreements for new supermarket sites which were not in operation at January 29, 1995. Future minimum lease payments under such operating leases generally begin when such supermarkets open and at January 29, 1995 are: 1995 -- $2,170,000; 1996 -- $6,640,000; 1997 -- $6,890,000; 1998 -- $6,890,000; 1999 -- $6,890,000; later years -- $145,425,000. F-15 39 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 January 29, 1995 are as follows:
FISCAL YEAR ----------- 1995.................................................... $ 9,564,000 1996.................................................... 8,957,000 1997.................................................... 8,050,000 1998.................................................... 6,236,000 1999.................................................... 5,739,000 Later years............................................. 40,841,000 ----------- Total minimum lease payments.................. 79,387,000 Less: amounts representing interest..................... 33,747,000 ----------- Present value of minimum lease payments................. 45,640,000 Less: current portion................................... 4,965,000 ----------- $40,675,000 ===========
Accumulated depreciation related to capital leases was $20,356,000, $24,041,000 and $27,623,000 at June 26, 1993, June 25, 1994 and January 29, 1995, respectively. The Company is leasing a distribution facility and four store locations from the previous owner of Alpha Beta. The agreement contains a purchase option for the land, buildings and improvements and equipment at a price that equals or exceeds the estimated fair market value throughout the term of the lease. (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:
FISCAL YEAR ----------- 1995..................................................... $ -- 1996..................................................... 795,000 1997..................................................... 1,420,000 1998..................................................... 1,520,000 1999..................................................... 1,504,000 Later years.............................................. 1,479,000 ---------- $6,718,000 ==========
F-16 40 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INCOME TAXES The provision (benefit) for income taxes consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS ENDED ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 29, 1992 1993 1994 1995 ---------- ---------- ----------- ----------- Current: Federal....................... $2,507,000 $ -- $ 3,251,000 $(2,894,000) State and other............... 934,000 82,000 712,000 100,000 ---------- ---------- ----------- ----------- 3,441,000 82,000 3,963,000 (2,794,000) ---------- ---------- ----------- ----------- Deferred: Federal....................... -- 1,345,000 78,000 2,794,000 State and other............... -- -- (1,341,000) -- ---------- ---------- ----------- ----------- -- 1,345,000 (1,263,000) 2,794,000 ---------- ---------- ----------- ----------- $3,441,000 $1,427,000 $ 2,700,000 $ -- ========== ========== =========== ===========
A reconciliation of the provision (benefit) for income taxes to amounts computed at the federal statutory rates of 34% for fiscal 1992 and 1993 and 35% for fiscal 1994 and the 1995 transition period is as follows:
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS ENDED ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 29, 1992 1993 1994 1995 ----------- ------------ ----------- ----------- 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) $(6,173,000) State and other taxes, net of federal tax benefit.................................. 934,000 82,000 (1,000) 65,000 Alternative minimum tax.................... 2,507,000 -- -- -- Effect of permanent differences resulting from: Amortization of goodwill................. 2,706,000 2,850,000 2,820,000 1,701,000 Original issue discount.................. -- 208,000 526,000 387,000 Accounting limitation of deferred tax benefit.................................. 5,983,000 8,425,000 2,423,000 4,020,000 ----------- ------------ ----------- ----------- $ 3,441,000 $ 1,427,000 $ 2,700,000 $ -- =========== ============ =========== ===========
F-17 41 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for deferred taxes consists of the following:
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS ENDED ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 29, 1992 1993 1994 1995 ----------- ----------- ----------- ----------- Depreciation................................ $ 6,282,000 $ 7,756,000 $ 2,536,000 $(1,513,000) Difference between book and tax basis of assets sold............................ 2,514,000 3,198,000 (4,223,000) 2,505,000 Deferred revenues and allowances............ (7,028,000) 40,000 (2,349,000) 707,000 Original issue discount..................... -- (1,308,000) (2,981,000) (2,066,000) Pre-opening costs........................... 1,072,000 (512,000) 174,000 784,000 Accounts receivable reserves................ -- (270,000) 249,000 80,000 Unicap...................................... (124,000) (5,000) (536,000) (755,000) Capital lease obligation.................... (2,010,000) (1,385,000) 2,792,000 527,000 Self-insurance reserves..................... (13,558,000) (4,082,000) (535,000) 5,523,000 Inventory shrink reserve.................... (528,000) 777,000 (869,000) (569,000) LIFO........................................ 7,104,000 (554,000) (1,010,000) (1,303,000) Closed store reserve........................ 964,000 1,092,000 440,000 176,000 Accrued expense............................. -- -- (582,000) 350,000 Accrued payroll and related liabilities..... (2,656,000) 193,000 1,721,000 (3,879,000) Damaged inventory reimbursement............. 1,195,000 -- -- -- Acquisition costs........................... 4,974,000 2,626,000 1,397,000 (5,444,000) Sales tax reserves.......................... -- (715,000) (418,000) 433,000 Deferred rent subsidy....................... -- (483,000) (624,000) (29,000) Net operating loss usage.................... -- -- 5,782,000 (6,963,000) Tax credits benefited....................... -- (1,392,000) (4,477,000) 1,711,000 Accounting limitation (recognition) of deferred tax benefit................... 1,588,000 (3,283,000) 1,896,000 12,563,000 Other, net.................................. 211,000 (348,000) 354,000 (44,000) ----------- ----------- ----------- ----------- $ -- $ 1,345,000 $(1,263,000) $ 2,794,000 =========== =========== =========== ===========
F-18 42 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, JANUARY 29, 1993 1994 1995 ------------ ------------ ------------ Deferred tax assets: Accrued payroll and related liabilities......................... $ 4,064,000 $ 2,448,000 $ 6,248,000 Other accrued liabilities.............. 14,796,000 18,271,000 18,467,000 Property and equipment................. 9,674,000 2,997,000 -- Self-insurance liabilities............. 30,907,000 27,744,000 25,204,000 Loss carryforwards..................... 27,863,000 20,675,000 27,638,000 Tax credit carryforwards............... 1,392,000 5,869,000 4,157,000 Other.................................. 1,223,000 580,000 570,000 ------------ ------------ ------------ Gross deferred tax assets........... 89,919,000 78,584,000 82,284,000 Valuation allowance.................... (46,316,000) (35,467,000) (48,030,000) ------------ ------------ ------------ Net deferred tax assets............. $ 43,603,000 $ 43,117,000 $ 34,254,000 ------------ ------------ ------------ Deferred tax liabilities: Inventories............................ $(20,243,000) $(16,738,000) $(11,690,000) Property and equipment................. (38,298,000) (30,516,000) (28,527,000) Obligations under capital leases....... (5,802,000) (8,733,000) (9,261,000) Other.................................. (1,689,000) (1,870,000) (2,310,000) ------------ ------------ ------------ Gross deferred tax liability........ (66,032,000) (57,857,000) (51,788,000) ------------ ------------ ------------ Net deferred tax liability.......... $(22,429,000) $(14,740,000) $(17,534,000) ============ ============ ============
The Company recorded a valuation allowance to reserve a portion of its gross deferred tax assets at January 29, 1995 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 January 29, 1995, approximately $8,864,000 of the valuation allowance for deferred tax assets will reduce goodwill when the allowance is no longer required. At January 29, 1995, the Company has net operating loss carryforwards for federal income tax purposes of $77,360,000, which expire in 2007 through 2009. The Company has federal Alternative Minimum Tax ("AMT") credit carryforwards of approximately $556,000 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-19 43 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 $1,167,000 during the 31 weeks ended January 29, 1995, $1,231,000 (unaudited) during the 32 weeks ended February 5, 1994, $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. There were no such advisory fees paid or accrued for the 31 weeks ended January 29, 1995 or for the 32 weeks ended February 5, 1994. 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 $1,818,000. 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 January 29, 1995, the Company had capitalized construction costs of $15,081,000 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 31 weeks ended January 29, 1995, the 32 weeks ended February 5, 1994, and the 52 weeks ended June 25, 1994, June 26, 1993 and June 27, 1992, self-insurance loss provisions were $6,304,000, $21,064,000 (unaudited), $19,880,000, F-20 44 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $38,040,000 and $46,140,000, respectively. During the 52 weeks ended June 27, 1992, June 26, 1993 and June 25, 1994, the Company discounted its self-insurance liability using a 7.0% discount rate. In the 1995 transition period, the Company changed the discount rate to 7.5%. Management believes that this rate approximates the time value of money over the anticipated payout period (approximately 10 years) for essentially risk-free investments. The net self-insurance liability would have been greater by $794,000 had the 7.0% discount rate been applied during the 31 weeks ended January 29, 1995, as opposed to the 7.5% discount rate. The Company's historical self-insurance liability for the three most recent fiscal years is as follows:
52 WEEKS 52 WEEKS 52 WEEKS 31 WEEKS ENDED ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, JANUARY 29, 1992 1993 1994 1995 ----------- ----------- ---------- ------------ Self-insurance liability............ $ 95,605,000 $100,773,000 $90,898,000 $ 84,286,000 Less: Discount......... (13,046,000) (15,279,000) (9,194,000) (11,547,000) ------------ ------------ ---------- ----------- Net self-insurance liability............ $ 82,559,000 $ 85,494,000 $81,704,000 $ 72,739,000 ============ ============ =========== ============
The Company expects that cash payments for claims will aggregate approximately $10 million, $14 million, $13 million, $15 million and $5 million for its fiscal years 1995, 1996, 1997, 1998 and 1999, respectively. (9) EMPLOYEE BENEFIT PLANS The Company implemented Statement of Position ("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 31-week period ended January 29, 1995, the Company did not purchase any of the FFL shares. 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 31 weeks ended January 29, 1995, the Company recorded a charge against operations of approximately $286,000 for benefits under the Union ESOPs. There were no shares issued to the Union ESOPs at January 29, 1995. F-21 45 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) All other full-time employees of the Company who are not members of a collective bargaining agreement are covered under a separate 401(k) plan (the "Management Plan"). The Management Plan provides for annual contributions which are determined at the discretion of the Company. The Company contributions are allocated to participants based on employee compensation and matching of certain employee contributions. A portion of the Company contribution allocated based on compensation is made in the form of stock or cash for the purchase of stock. Total charges against operations related to all employee benefit plans sponsored by the Company and its subsidiaries were $337,000, $284,000, $103,000 (unaudited) and $699,000 for the 52 weeks ended June 27, 1992, the 52 weeks ended June 26, 1993, the 32 weeks ended February 5, 1994 and the 52 weeks ended June 25, 1994, respectively, and there were no such charges for the 31 weeks ended January 29, 1995. No contributions were made with stock and no stock was acquired by any plans in fiscal 1992, fiscal 1993, fiscal 1994 or in the 1995 transition period. 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 January 29, 1995 is not available. The Company contributed $78.6 million, $69.4 million, $57.2 million, $35.7 million (unaudited) and $21.6 million to these plans for the 52 weeks ended June 27, 1992, June 26, 1993, June 25, 1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995, 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, $3.7 million (unaudited) and $14.3 million was recognized in the 52 weeks ended June 25, 1994, the 32 weeks ended February 5, 1994 and the 31 weeks ended January 29, 1995, respectively, 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. F-22 46 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 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:
JANUARY 29, 1995 ----------------------------- CARRYING FAIR AMOUNT VALUE ------------ ------------ Cash and cash equivalents............................... $ 19,560,000 $ 19,560,000 Short-term notes and other receivables.................. 6,364,000 6,364,000 Investments in and notes receivable from supplier cooperatives.......................................... 12,404,000 -- Long-term debt for which it is: - Practicable to estimate fair values................. 538,168,000 550,915,000 - Not practicable..................................... 15,132,000 --
(12) OTHER INCOME, NET The components of other income items included in SG&A are as follows:
52 WEEKS 52 WEEKS 52 WEEKS 32 WEEKS 31 WEEKS ENDED ENDED ENDED ENDED ENDED JUNE 27, JUNE 26, JUNE 25, FEBRUARY 5, JANUARY 29, 1992 1993 1994 1994 1995 ---------- ---------- --------- ----------- ----------- (UNAUDITED) Interest income.............. $1,266,000 $ 993,000 $ 903,000 $ 544,000 $ 867,000 Licensing fees............... 493,000 246,000 270,000 142,000 77,000 Other income (expense)....... 769,000 3,710,000 (177,000) 1,967,000 139,000 ---------- ---------- --------- ---------- ---------- $2,528,000 $4,949,000 $ 996,000 $2,653,000 $1,083,000 ========== ========== ========= ========== ==========
(13) RALPHS MERGER On September 14, 1994, Holdings, Supermarkets and FFL entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Ralphs Supermarkets, Inc. ("RSI") and the stockholders of RSI. Pursuant to the terms of the Merger Agreement, as amended, the Company will 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 F-23 47 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) "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, Ralphs will become a wholly-owned subsidiary of New Holdings. Conditions to the consummation of the Merger include, among other things, the completion of financing for the transaction and the receipt of other necessary consents. The purchase price for RSI is approximately $1.5 billion, including the assumption of debt. The aggregate purchase price, payable to the stockholders of RSI in connection with the Merger, consists of $375 million in cash, $131.5 million principal amount of New Holdings 13 5/8% Senior Subordinated Pay-in-Kind Debentures due 2007 and $18.5 million initial accreted value of New Holdings 13 5/8% Senior Discount Debentures due 2005. In addition, Ralphs will enter into an agreement with a stockholder of RSI pursuant to which such stockholder will act as a consultant to Ralphs with respect to certain real estate and general commercial matters for a period of five years from the closing of the 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 New Holdings, the issuance of new debt securities by Supermarkets and New Holdings and the incurrence of additional bank financing by Ralphs. The equity issuance will be made to a group of investors led by Apollo Advisors, L.P. and Apollo Advisors II, L.P., which has committed to purchase up to $140 million in New Holdings stock. The issuance of new debt securities is expected to consist of up to $295 million principal amount of Senior Notes due 2004 and $200 million principal amount of Senior Subordinated Notes due 2005 to be issued by Supermarkets. New Holdings 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. Holdings will redeem the Holdings 15.25% Senior Discount Notes, with a book value of $65.1 million at January 29, 1995, for $83.9 million in cash. The bank financing will 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, Holdings and Supermarkets will also be required to complete certain exchange offers, consent solicitations, offers to repurchase, and other transactions with the holders of Holdings' and Supermarkets' and RGC's currently outstanding debt securities. 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, 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 of the Company's conventional stores to warehouse stores and the closure of certain of the Company's conventional stores as well as the write-off of the Alpha Beta trademark. This restructuring charge has been estimated at approximately $45.5 million. On December 14, 1994, the Company and RSI entered into a Settlement Agreement (the "Settlement Agreement") with the State of California. Under the Settlement Agreement, the Company must divest a total of 27 stores (23 of the Company's conventional stores, 1 warehouse store and 3 RGC stores). In addition, although not required pursuant to the Settlement Agreement, an additional 5 under-performing stores 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 Company's 24 stores to be divested under the Settlement Agreement, the 5 planned closures and the conversion of 16 of the Company's conventional F-24 48 FOOD 4 LESS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stores to warehouse 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 conventional store conversions by the Company during the second quarter of the 1995 transition period, the Company has recorded a non-cash restructuring charge for the write-off of property and equipment of $5.1 million in its results of operations for the 31 weeks ended January 29, 1995. The Company has determined that there is no impairment of existing goodwill related to the store closures based on its projections of future undiscounted cash flows. The remaining estimated restructuring charge will be recorded as an expense once the Merger is completed. The divestiture of the 3 RGC 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. (14) RESTRUCTURING CHARGE The Company has converted 11 of its conventional format supermarkets to warehouse format stores. During the 31 weeks ended January 29, 1995, the Company recorded a restructuring charge for the write-off of property and equipment at the 11 stores of $5.1 million. F-25 49 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-26 50 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-27 51 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. One hundred three million six hundred thousand dollars of the Holdings 15.25% Discount Notes with a book value of $64.5 million at January 7, 1995 will be redeemed for $83.9 million. 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-28 -----END PRIVACY-ENHANCED MESSAGE-----