1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________
For Quarter Ended Commission File Number
September 17, 1994 33-31152
FOOD 4 LESS SUPERMARKETS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4222386
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
777 South Harbor Boulevard
La Habra, California 90631
(Address of principal executive offices) (zip code)
(714) 738-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____.
At October 31, 1994, there were 1,506,544 shares of Common Stock
outstanding. As of such date, none of the outstanding shares of Common Stock
was held by persons other than affiliates and employees of the registrant, and
there was no public market for the Common Stock.
================================================================================
2
FOOD 4 LESS SUPERMARKETS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of
September 17, 1994 and June 25, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of operations for the 12 weeks ended
September 17, 1994 and September 18, 1993 . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows for the 12 weeks ended
September 17, 1994 and September 18, 1993 . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of stockholder's equity as of
September 17, 1994 and June 25, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
4
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 17, June 25,
ASSETS 1994 1994
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 29,388 $ 32,996
Trade receivables, less allowances of $1,318
and $1,386 at September 17, 1994 and
June 25, 1994, respectively 24,331 25,039
Notes and other receivables 1,094 1,312
Inventories 210,548 212,892
Patronage receivables from suppliers 3,998 2,875
Prepaid expenses and other 9,437 6,323
------- -------
Total current assets 278,796 281,437
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
A. W. G. 6,718 6,718
Certified and Others 5,952 5,984
PROPERTY AND EQUIPMENT:
Land 23,488 23,488
Buildings 12,827 12,827
Leasehold improvements 101,634 97,673
Store equipment and fixtures 150,851 148,249
Transportation equipment 32,306 32,259
Construction in progress 20,369 12,641
Leased property under capital leases 78,222 78,222
Leasehold interests 93,473 93,464
------- -------
513,170 498,823
Less: Accumulated depreciation and amortization 143,135 134,089
------- -------
Net property and equipment 370,035 364,734
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $18,382 and $17,083 at September 17, 1994 and
June 25, 1994, respectively 27,245 28,536
Goodwill, less accumulated amortization of $35,732
and $33,945 at September 17, 1994 and
June 25, 1994, respectively 266,097 267,884
Other, net 23,643 24,787
------- -------
$978,486 $980,080
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
2
5
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 17, June 25,
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1994
------------ ------------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $176,148 $180,708
Accrued payroll and related liabilities 43,767 42,805
Accrued interest 14,310 5,474
Other accrued liabilities 48,782 53,910
Income taxes payable 1,249 2,000
Current portion of self-insurance liabilities 29,492 29,492
Current portion of long-term debt 19,566 18,314
Current portion of obligations under capital leases 3,612 3,616
------- -------
Total current liabilities 336,926 336,319
LONG-TERM DEBT 311,457 310,944
OBLIGATIONS UNDER CAPITAL LEASES 39,186 39,998
SENIOR SUBORDINATED DEBT 145,000 145,000
DEFERRED INCOME TAXES 14,740 14,740
SELF-INSURANCE LIABILITIES AND OTHER 65,503 64,058
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDER'S EQUITY:
Cumulative convertible preferred stock, $.01 par
value, 200,000 shares authorized and 50,000
shares issued at September 17, 1994 and
June 25, 1994, respectively (aggregate
liquidation value of $64.4 million and
$62.2 million at September 17, 1994 and
June 25, 1994, respectively) 61,373 58,997
Common stock, $.01 par value, 1,600,000 shares
authorized; 1,519,632 shares issued
at September 17, 1994 and June 25, 1994 15 15
Additional paid-in capital 107,650 107,650
Notes receivable from shareholders of parent (586) (586)
Retained deficit (100,309) (94,586)
------- -------
68,143 71,490
Treasury stock: 16,732 shares of common stock at
September 17, 1994 and June 25, 1994 (2,469) (2,469)
------- -------
Total stockholder's equity 65,674 69,021
------- -------
$978,486 $980,080
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
3
6
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
12 Weeks 12 Weeks
Ended Ended
September 17, September 18,
1994 1993
------------ ------------
SALES $598,698 $616,616
COST OF SALES (including purchases from related parties
for the 12 weeks ended September 17, 1994 and
September 18, 1993 of $41,165 and $47,607, respectively) 495,656 504,269
-------- --------
GROSS PROFIT 103,042 112,347
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 88,152 95,694
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED 1,787 1,772
-------- --------
OPERATING INCOME 13,103 14,881
INTEREST EXPENSE 16,008 15,730
GAIN ON DISPOSAL OF ASSETS (458) (37)
-------- --------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,447) (812)
PROVISION FOR INCOME TAXES 900 300
-------- --------
NET LOSS $ (3,347) $ (1,112)
======== ========
PREFERRED STOCK ACCRETION 2,376 2,023
LOSS APPLICABLE TO COMMON SHARES $ (5,723) $ (3,135)
======== ========
LOSS PER COMMON SHARE $ (3.81) $ (2.08)
======== ========
Average Number of Common Shares Outstanding 1,502,900 1,505,004
========= =========
The accompanying notes are an integral part of these consolidated statements.
4
7
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12 Weeks 12 Weeks
Ended Ended
September 17, September 18,
1994 1993
------------ ------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Cash received from customers $598,698 $616,616
Cash paid to suppliers and employees (582,504) (586,745)
Interest paid (5,873) (4,367)
Income taxes refunded (paid) (1,651) 1,289
Interest received 688 202
Other, net 140 2,093
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,498 29,088
CASH PROVIDED (USED) BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 2,703 2,486
Payment for purchase of property and equipment (16,750) (6,585)
Other, net - 799
---------- -------
NET CASH USED BY INVESTING ACTIVITIES (14,047) (3,300)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Payments of long-term debt (4,335) (1,955)
Payments of capital lease obligation (816) (667)
Net change in Revolving Loan 6,100 (4,900)
Other, net (8) (214)
--------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 941 (7,736)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,608) 18,052
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,996 25,089
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,388 $ 43,141
======= =======
The accompanying notes are an integral part of these consolidated statements.
5
8
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12 Weeks 12 Weeks
Ended Ended
September 17, September 18,
1994 1993
------------ ------------
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $(3,347) $(1,112)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 14,301 14,263
Provision for self-insurance, net 3,501 1,240
Gain on sale of assets (458) (37)
Loss on investments in supplier cooperative 32 -
Change in assets and liabilities:
Accounts and notes receivable (197) (5,777)
Inventories 2,344 7,562
Prepaid expenses and other (3,982) (3,213)
Accounts payable and accrued liabilities (1,945) 14,573
Deferred income taxes - 1,289
Income taxes payable (751) 300
------ ------
Total adjustments 12,845 30,200
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 9,498 $29,088
====== ======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCIAL ACTIVITIES:
Accretion of preferred stock $ 2,376 $ 2,023
====== ======
The accompanying notes are an integral part of these consolidated statements.
6
9
FOOD 4 LESS SUPERMARKETS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Common Stock Treasury Stock
------------------- ------------------- ------------------
Number Number Number Share-
of of of holders'
Shares Amount Shares Amount Shares Amount Notes
------ ------ ------ ------ ------ ------ --------
BALANCES AT JUNE 25, 1994 50,000 $58,997 1,519,632 $15 (16,732) $(2,469) $(586)
Net loss
(unaudited) - - - - - - -
Accretion of Preferred Stock
(unaudited) - 2,376 - - - - -
------ ------- --------- --- ------- ------- -----
BALANCES AT SEPTEMBER 17, 1994
(unaudited) 50,000 $61,373 1,519,632 $15 (16,732) $(2,469) $(586)
====== ======= ========= === ======= ======= =====
Add'l Total
Paid-In Retained Stockholder's
Capital Deficit Equity
------- -------- -------------
BALANCES AT JUNE 25, 1994 $107,650 $ (94,586) $69,021
Net loss
(unaudited) - (3,347) (3,347)
Accretion of Preferred Stock
(unaudited) - (2,376) -
-------- --------- -------
BALANCES AT SEPTEMBER 17, 1994
(unaudited) $107,650 $(100,309) $65,674
======== ========= =======
The accompanying notes are an integral part of these consolidated statements.
7
10
FOOD 4 LESS SUPERMARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet of Food 4 Less Supermarkets,
Inc. (the "Company") as of September 17, 1994 and the consolidated
statements of operations and cash flows for the interim periods ended
September 17, 1994 and September 18, 1993 are unaudited, but include
all adjustments (consisting of only normal recurring accruals) which
the Company considers necessary for a fair presentation of its
consolidated financial position, results of operations and cash flows
for these periods. These interim financial statements do not include
all disclosures required by generally accepted accounting principles,
and, therefore, should be read in conjunction with the Company's
financial statements and notes thereto included in the Company's
latest annual report filed on Form 10-K. Results of operations for
interim periods are not necessarily indicative of the results for a
full fiscal year.
The Company is a vertically integrated supermarket company
with 261 stores located in Southern California, Northern California
and certain areas of the midwest. The Company's Southern California
division includes a manufacturing facility, with bakery and creamery
operations, and a full-line warehouse and distribution facility.
2. SIGNIFICANT ACCOUNTING POLICIES
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 $14,822,000 and $13,802,000 at September 17,
1994 and June 25, 1994, respectively, and gross profit and operating
income would have been greater by $1,020,000 and $1,011,000 for the 12
weeks ended September 17, 1994 and September 18, 1993, respectively.
Income Taxes
The Company provides for deferred income taxes under an
asset and liability approach in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), Accounting for Income
Taxes. SFAS 109 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.
Employee Benefit Plans
The Company implemented SOP No. 93-6, Employer Accounting for
Employee Stock Ownership Plans, effective June 26, 1994. The
implementation of SOP No. 93-6 did not have a material effect on the
accompanying unaudited consolidated financial statements.
The Company and its subsidiaries sponsor several ESOPs. 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 Food 4
Less, Inc. ("FFL") stock (the "Falley's ESOP"). As part of the
original stock sale agreement between FFL and the Falley's ESOP, which
has been amended from time to time, an affiliate of the Company has
assumed the obligation to purchase any FFL shares as to which
terminated plan participants have exercised a put option under the
terms of the Falley's ESOP. As part of the agreement, the Company
may, at its sole discretion, after providing a right of first refusal
to the affiliate, purchase FFL shares put under the provisions of the
plan. During the 12 weeks ended September 17, 1994, no shares were
put under the provisions of the plan and the Company recorded a charge
against operations of approximately $15,000 for benefits under the
Falley's ESOP. FFL shares previously purchased by the Company are
classified as treasury stock. As of September 17, 1994, the fair
value of the shares allocated which are subject to a repurchase
obligation by an affiliate of the Company was approximately
$13,286,000.
8
11
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 Food 4 Less Holdings, Inc. ("Holdings") stock or cash
for the purchase of Holdings stock and are to be allocated to
participants based on hours worked. During the 12 weeks ended
September 17, 1994, the Company recorded a charge against operations
of approximately $77,000 for benefits under the Union ESOPs. There
were no shares issued to the Union ESOPs at September 17, 1994.
3. RESTATEMENT
The Company has restated the statement of operations for the
12 weeks ended September 18, 1993 to classify certain buying,
occupancy and labor costs associated with making its products
available for sale as cost of sales. These amounts were previously
classified as selling, general, administrative, and other, net, and
depreciation and amortization of property and equipment, and totalled
$50,910,000. The Company has also classified a portion of its
self-insurance cost as interest expense that was previously recorded
in selling, general, administrative and other, net. This amount was
$1,389,000 for the 12 weeks ended September 18, 1993. Depreciation
and amortization costs not classified in cost of sales are included in
selling, general, administrative and other, net. The change in
classifications did not affect the net loss, loss before provision for
income taxes, or loss per common share.
4. RECENT EVENTS
On September 14, 1994, the Company, Holdings, and "FFL"
entered into a definitive Agreement and Plan of Merger (the "Merger")
with Ralphs Supermarkets, Inc. ("Ralphs") and the stockholders of
Ralphs. Pursuant to the terms of the Merger Agreement, the Company
will, subject to certain terms and conditions being satisfied or
waived, be merged into Ralphs and Ralphs will become a wholly-owned
subsidiary of Holdings. Conditions to the consummation of the Merger
include, among other things, receipt of regulatory approvals and other
necessary consents and the completion of financing for the
transaction. The purchase price for Ralphs is approximately $1.5
billion, including the assumption of debt.
The aggregate purchase price, payable to the stockholders of
Ralphs in connection with the Merger, consists of $425 million in cash
and $100 million initial principal amount of 13% Senior Subordinated
Pay-in-Kind Debentures due 2006 issued by Holdings. In addition, the
Company will enter into an agreement with a stockholder of Ralphs
pursuant to which such stockholder will act as a consultant to the
Company with respect to certain real estate and general commercial
matters for a period of five years from the closing of the Ralphs
Merger in exchange for the payment of a consulting fee.
The financing required to complete the Merger will include the
issuance of significant additional equity by FFL, the issuance of new
debt securities by the Company and Holdings and the incurrence of
additional bank financing by the Company. The equity issuance would
be made to a group of investors led by Apollo Advisors, L.P., which
has committed to purchase up to $150 million in FFL stock, and the
bank financing would be made pursuant to a commitment by Bankers Trust
Company to provide up to $1,225 million in such financing. In
connection with the receipt of new financing, the Company and Holdings
will also be required to complete certain exchange offers, consent
solicitations and or other transactions with the holders of their
currently outstanding debt securities.
As of July 17, 1994, Ralphs had outstanding indebtedness of
approximately $990 million. Ralphs had sales of $2,730 million,
operating income of $152.1 million and earnings before income taxes of
$30.3 million for its most recent fiscal year ended January 30, 1994.
Upon consummation of the Merger, the operations and activities
of the Company will be significantly impacted due to conversions of
the Company's existing Southern California conventional stores to
either Ralphs or Food 4 Less warehouse stores as well as the
consolidation of various operating functions and departments. This
consolidation may result in a restructuring charge and, in conjunction
with the Merger, the Company intends to determine if there is any
impairment of the value of the Company's existing assets and goodwill.
The amount of the restructuring charge is not presently determinable
due to various factors, including uncertainties inherent in the
completion of the Merger; however, the restructuring charge may be
material in relation to the stockholder's equity and financial
position of the Company at September 17, 1994.
9
12
5. SUBSIDIARY REGISTRANTS
Separate financial statements of the Company's subsidiaries
(collectively, the "Subsidiary Guarantors") neither are included
herein nor otherwise filed on Form 10-Q because such Subsidiary
Guarantors are jointly and severally liable as guarantors of the
Company's 10.45% Senior Notes due 2000 and 13-3/4% Senior Subordinated
Notes due 2001, and the aggregate assets, earnings and equity of the
Subsidiary Guarantors are substantially equivalent to the assets,
earnings and equity of the Company on a consolidated basis.
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating
results of the Company for the 12 weeks ended September 17, 1994 and
September 18, 1993:
12 Weeks Ended
----------------------------------------------------------
September 17, 1994 September 18, 1993
------------------------ ------------------------
(dollars in millions)
(unaudited)
Sales $598.7 100.0% $616.6 100.0%
Gross profit 103.0 17.2% 112.4 18.2%
Selling, general, administrative
and other, net 88.1 14.7% 95.7 15.5%
Amortization of excess costs over
net assets acquired 1.8 0.3% 1.8 0.3%
Operating income 13.1 2.2% 14.9 2.4%
Interest expense 16.0 2.7% 15.7 2.6%
Gain on disposal of assets (0.5) -0.1% 0.0 0.0%
Provision for income taxes 0.9 0.2% 0.3 0.0%
Net loss (3.3) -0.6% (1.1) -0.2%
Sales. Sales per week decreased $1.5 million, or 2.9%, from $51.4
million in the 12 weeks ended September 18, 1993 to $49.9 million in the
12 weeks ended September 17, 1994 primarily as a result of a 5.8%
decline in same store sales partially offset by sales from 18 new stores opened
since September 18, 1993. Management believes that the decline in comparable
store sales is attributable to the continuing softness of the economy in
Southern California and, to a lesser extent, in the Company's other operating
areas, and increased competitive store openings and remodels in Southern
California.
Gross Profit. Gross profit decreased as a percentage of sales from
18.2% in the 12 weeks ended September 18, 1993 to 17.2% in the 12 weeks ended
September 17, 1994. The decrease in gross profit margin resulted primarily
from pricing and promotional activities related to the Company's "Total Value
Pricing" program, an increase in the number of warehouse format stores (which
have lower gross margins resulting from prices that are generally 5-12% below
the prices in the Company's conventional stores) from 46 at September 18, 1993
to 69 at September 17, 1994, and the effect of the fixed cost component of
gross profit as compared to a lower sales base. The decrease in gross profit
was partially offset by improvements in product procurement and an increase in
vendors' participation in the Company's promotional costs.
Selling, General, Administrative and Other, Net. Selling, general,
administrative and other expenses ("SG&A") were $95.7 million and $88.1 million
for the 12 weeks ended September 18, 1993 and September 17, 1994, respectively.
SG&A decreased as a percentage of sales from 15.5% to 14.7% for the same
periods. The Company experienced a reduction of workers' compensation and
general liability self-insurance costs of $3.5 million due to continued
improvement in the cost and frequency of claims. The improved experience was
due primarily to cost control programs implemented by the Company, including
awards for stores with the best loss experience, specific achievable goals for
each store, and increased monitoring of third-party administrators, and, to a
lesser extent, a lower sales base which reduced the Company's exposure. In
addition, the Company maintained tight control of administrative expenses and
store level expenses, including advertising, payroll (due primarily to
increased productivity), and other controllable store expenses. Because the
Company's warehouse stores have lower SG&A than conventional stores, the
increase in the number of warehouse stores, from 46 at September 18, 1993 to
69 at September 17, 1994, also contributed to decreased SG&A. The reduction in
SG&A as a percentage of sales was partially offset by the effect of the fixed
cost component of SG&A as compared to a lower sales base.
The Company participates in multi-employer health and welfare plans
for its store employees who are members of the United Food and Commercial
Workers Union ("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. The Company's share of
the excess reserves was $24.2 million,
11
14
of which the Company recognized $8.1 million in fiscal 1994 and $2.7 million in
the 12 weeks ended September 17, 1994. The remainder of the excess reserves
will be recognized as the credits are taken in the future.
On August 28, 1994, the Teamsters and the Company ratified a new
contract which, among other things, provided for the vesting of sick pay
benefits resulting in a one-time charge of $2.1 million.
Interest Expense. Interest expense (including amortization of
deferred financing costs) increased $0.3 million from $15.7 million to $16.0
million for the 12 weeks ended September 18, 1993 and September 17, 1994,
respectively. The increase in interest expense was due primarily to increasing
interest rates on the Revolving Credit Facility and the Term Loan combined with
increased borrowings under the Revolving Credit Facility. These increases were
partially offset by the reduction of indebtedness under the Term Loan as a
result of amortization payments.
Net Loss. Primarily as a result of the factors discussed above, the
Company's net loss increased from $1.1 million in the 12 weeks ended September
18, 1993 to $3.3 million in the 12 weeks ended September 17, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, amounts available under the Revolving
Credit Facility and leases are the Company's principal sources of liquidity.
The Company believes that these sources will be adequate to meet its
anticipated capital expenditures, working capital needs and debt service
requirements during fiscal 1995. There can be no assurance that the Company
will continue to generate cash flow from operations at current levels or that
it will be able to make future borrowings under the Revolving Credit Facility.
The Ralphs Merger, which is subject to, among other things, receipt of
regulatory approvals and other necessary consents and the completion of the
financing for the transaction, will require the issuance of significant
additional equity by FFL, the issuance of new debt securities by the Company
and Holdings and the incurrence of additional bank financing by the Company.
The equity issuance would be made to a group of investors led by Apollo
Advisors, L.P., which has committed to purchase up to $150 million in FFL
stock, and the bank financing would be made pursuant to a commitment by Bankers
Trust Company to provide up to $1,225 million in such financing. In connection
with the receipt of new financing, the Company and Holdings will be required to
complete certain exchange offers, consent solicitations and/or other
transactions with the holders of the currently outstanding debt securities.
The transaction will also require the assumption of approximately $265 million
of other existing indebtedness of the Company and Ralphs. The proceeds of the
foregoing financings will be used to acquire the outstanding stock of Ralphs,
to repay certain existing indebtedness, and to pay fees and expenses in
connection with the merger and related transactions. The Ralphs purchase price
is approximately $1.5 billion, including the assumption or repayment of debt.
The consideration payable to the stockholders of Ralphs consists of $425
million in cash and $100 million initial principal amount of 13% Senior
Subordinated Pay-in-Kind Debentures due 2006 to be issued by Holdings. In
addition, the Company will enter into an agreement with a stockholder of Ralphs
pursuant to which such stockholder will act as a consultant to the Company with
respect to certain real estate and general commercial matters for a period of
five years from the closing of the Ralphs Merger in exchange for the payment of
a consulting fee. (See "Note 4 -- Recent Events.")
During the 12-week period ended September 17, 1994, the Company
generated approximately $9.5 million of cash from its operating activities
compared to $29.1 million for the 12 weeks ended September 18, 1993. The
decrease in cash from operating activities is due primarily to changes in
operating assets and liabilities for the 12 weeks ended September 17, 1994.
The Company's principal use of cash in its operating activities is inventory
purchases. Its high inventory turnover allows it to finance a substantial
portion of its inventory through trade payables, thereby reducing its
short-term borrowing needs. At September 17, 1994, this resulted in a working
capital deficit of $58.1 million.
Cash used for investing activities was $14.0 million for the 12 weeks
ended September 17, 1994. Investing activities consisted primarily of capital
expenditures of $16.8 million, partially offset by $2.1 million of
sale/leaseback transactions. The capital expenditures, net of the proceeds
from sale/leaseback transactions, were financed primarily from cash provided by
operating activities.
The capital expenditures discussed above were made to build 5 new
stores. The Company currently anticipates that its aggregate capital
expenditures for fiscal 1995 will be approximately $59.3 million. Consistent
with its past practices, the Company intends to finance these capital
expenditures primarily with cash provided by operations and through leasing
transactions. No assurance can be given that sources of financing for capital
expenditures will be available or sufficient. However, the capital expenditure
program has substantial flexibility and is subject to revision based on various
factors, including
12
15
business conditions, changing time constraints and cash flow requirements.
Management believes that if the Company were to substantially reduce or
postpone these programs, there would be no substantial impact on short-term
operating profitability. However, management also believes that the
construction of warehouse format stores is an important component of its
operating strategy. In the long-term, if these programs were substantially
reduced, management believes its operating businesses, and ultimately its cash
flow, would be adversely affected. The capital expenditures discussed above do
not include potential acquisitions, including the Ralphs Merger or related
store conversion costs, which the Company could make to expand within its
existing markets or to enter other markets. The Company has grown through
acquisitions in the past and from time to time engages in discussions with
potential sellers of individual stores, groups of stores or other retail
supermarket chains.
Cash provided by financing activities was $0.9 million for the
12 weeks ended September 17, 1994, which was primarily the $6.1 million of
borrowings outstanding on the $70 million Revolving Credit Facility at
September 17, 1994 partially offset by a $2.8 million repayment of the Term
Loan. At September 17, 1994, $48.1 million of standing letters of credit had
been issued under the $55 million Letter of Credit Facility.
The Company is highly leveraged. At September 17, 1994, the Company's
total long-term indebtedness (including current maturities) and stockholder's
equity were $518.8 million and $65.7 million, respectively.
EFFECTS OF INFLATION AND COMPETITION
The Company's primary costs, inventory and labor, are affected by a
number of factors that are beyond its control, including availability and price
of merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain margins by adjusting its retail prices, but
competitive conditions may from time to time render it unable to do so while
maintaining its market share.
SUBSIDIARY REGISTRANTS
Separate financial statements of the Company's subsidiaries
(collectively, the "Subsidiary Guarantors") are neither included herein nor
otherwise filed on Form 10-K because such Subsidiary Guarantors are jointly and
severally liable as guarantors of the Company's Senior Notes and Subordinated
Notes, and the aggregate assets, earnings and equity of the Subsidiary
Guarantors are substantially equivalent to the assets, earnings and equity of
the Company on a consolidated basis.
13
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated September
14, 1994 relating to the definitive Agreement and Plan of Merger
by and among Food 4 Less, Inc., Food 4 Less Holdings, Inc., the
Company, Ralphs Supermarkets, Inc. and the Stockholders of Ralphs
Supermarkets, Inc.
14
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Orange, State of
California.
Dated: October 31, 1994 FOOD 4 LESS SUPERMARKETS, INC.
/s/ Ronald W. Burkle
----------------------------------------
Ronald W. Burkle
Chief Executive Officer
/s/ Greg Mays
----------------------------------------
Greg Mays
Chief Financial Officer
15