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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
January 7, 1995 33-59212
FOOD 4 LESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4407768
(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 February 14, 1995, there were 1,384,309 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.
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FOOD 4 LESS HOLDINGS, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated balance sheets as of
January 7, 1995 and June 25, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of operations for the 16 weeks ended
January 7, 1995 and January 8, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of operations for the 28 weeks ended
January 7, 1995 and January 8, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the 28 weeks ended
January 7, 1995 and January 8, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated statements of shareholders' equity (deficit) as of
January 7, 1995 and June 25, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . 9
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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
January 7, June 25,
ASSETS 1995 1994
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 15,750 $ 32,996
Trade receivables, less allowances of $1,264
and $1,386 at January 7, 1995 and
June 25, 1994, respectively 25,992 25,039
Notes and other receivables 777 1,312
Inventories 223,261 212,892
Patronage receivables from suppliers 5,093 2,875
Prepaid expenses and other 12,542 6,323
------- -------
Total current assets 283,415 281,437
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
A. W. G. 6,718 6,718
Certified and Others 5,694 5,984
PROPERTY AND EQUIPMENT:
Land 23,488 23,488
Buildings 24,148 12,827
Leasehold improvements 106,484 97,673
Store equipment and fixtures 153,538 148,249
Transportation equipment 32,363 32,259
Construction in progress 14,459 12,641
Leased property under capital leases 78,222 78,222
Leasehold interests 93,226 93,464
------- -------
525,928 498,823
Less: Accumulated depreciation and amortization 155,758 134,089
------- -------
Net property and equipment 370,170 364,734
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $20,166 and $17,083 at January 7, 1995 and
June 25, 1994, respectively 25,529 28,536
Goodwill, less accumulated amortization of $38,113
and $33,945 at January 7, 1995 and
June 25, 1994, respectively 263,658 267,884
Other, net 29,438 24,787
------- -------
$984,622 $980,080
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 7, June 25,
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1995 1994
------------ ------------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $164,981 $180,708
Accrued payroll and related liabilities 39,976 42,805
Accrued interest 7,454 5,474
Other accrued liabilities 60,619 53,910
Income taxes payable 689 2,000
Current portion of self-insurance liabilities 28,616 29,492
Current portion of long-term debt 22,290 18,314
Current portion of obligations under capital leases 3,634 3,616
------- -------
Total current liabilities 328,259 336,319
LONG-TERM DEBT 342,396 310,944
OBLIGATIONS UNDER CAPITAL LEASES 38,071 39,998
SENIOR SUBORDINATED DEBT 145,000 145,000
SENIOR DISCOUNT NOTES 64,541 58,997
DEFERRED INCOME TAXES 14,740 14,740
SELF-INSURANCE LIABILITIES AND OTHER 55,701 64,058
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 1,600,000 shares
authorized; 1,384,309 shares and 1,381,782
shares issued at January 7, 1995 and June 25,
1994, respectively 14 14
Additional paid-in capital 105,460 105,182
Notes receivable from shareholders (702) (586)
Retained deficit (108,858) (94,586)
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Total shareholders' equity (deficit) (4,086) 10,024
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$984,622 $980,080
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The accompanying notes are an integral part of these consolidated balance
sheets.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
16 Weeks 16 Weeks
Ended Ended
January 7, January 8,
1995 1994
------------ ------------
SALES $805,967 $ 799,597
COST OF SALES (including purchases from related parties for the
16 weeks ended January 7, 1995 and January 8, 1994 of
$58,202 and $58,453, respectively) 671,549 649,720
------- ---------
GROSS PROFIT 134,418 149,877
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 111,009 125,770
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED 2,381 2,360
RESTRUCTURING CHARGE 5,134 -
--------- ------------
OPERATING INCOME 15,894 21,747
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 23,060 22,121
Amortization of deferred financing costs 1,784 1,709
--------- ----------
24,844 23,830
LOSS (GAIN) ON DISPOSAL OF ASSETS (1) 124
---------- -----------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (8,949) (2,207)
PROVISION (BENEFIT) FOR INCOME TAXES (400) 400
----------- -----------
NET LOSS $ (8,549) $ (2,607)
============ ===========
LOSS PER COMMON SHARE $ (6.18) $ (1.89)
============ ===========
Average Number of Common Shares Outstanding 1,384,255 1,382,558
========= =========
The accompanying notes are an integral part of these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
28 Weeks 28 Weeks
Ended Ended
January 7, January 8,
1995 1994
------------ ------------
SALES $1,404,665 $1,416,213
COST OF SALES (including purchases from related parties for the
28 weeks ended January 7, 1995 and January 8, 1994 of
$99,367 and $106,060, respectively) 1,167,205 1,153,989
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GROSS PROFIT 237,460 262,224
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 199,161 221,464
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED 4,168 4,132
RESTRUCTURING CHARGE 5,134 -
----------- -----------
OPERATING INCOME 28,997 36,628
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 40,145 38,635
Amortization of deferred financing costs 3,083 2,948
--------- ---------
43,228 41,583
LOSS (GAIN) ON DISPOSAL OF ASSETS (459) 87
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LOSS BEFORE PROVISION FOR INCOME TAXES (13,772) (5,042)
PROVISION FOR INCOME TAXES 500 700
--------- ---------
NET LOSS $ (14,272) $ (5,742)
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LOSS PER COMMON SHARE $ (10.32) $ (4.15)
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Average Number of Common Shares Outstanding 1,383,170 1,383,127
========= =========
The accompanying notes are an integral part of these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
28 Weeks 28 Weeks
Ended Ended
January 7, January 8,
1995 1994
------------ ------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Cash received from customers $1,404,665 $1,416,213
Cash paid to suppliers and employees (1,389,667) (1,361,103)
Interest paid (32,621) (29,178)
Income taxes refunded (paid) (1,811) 1,652
Interest received 836 486
Other, net 583 2,388
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (18,015) 30,458
CASH PROVIDED (USED) BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 7,120 12,307
Payment for purchase of property and equipment (39,049) (20,404)
Other, net (907) 61
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (32,836) (8,036)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Payments of long-term debt (13,272) (10,395)
Payments of capital lease obligation (1,909) (1,565)
Net change in Revolving Loan 48,700 (4,900)
Proceeds from issuance of debt - 28
Sale (purchase) of treasury stock, net 92 (726)
Other, net (6) (161)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 33,605 (17,719)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,246) 4,703
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,996 25,089
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,750 $ 29,792
========= =========
The accompanying notes are an integral part of these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
28 Weeks 28 Weeks
Ended Ended
January 7, January 8,
1995 1994
------------ ------------
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Net loss $(14,272) $(5,742)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 33,878 33,320
Accretion of senior discount notes 5,544 4,721
Restructuring charge 5,134 -
Loss (gain) on sale of assets (459) 87
Change in assets and liabilities:
Accounts and notes receivable (2,725) (9,568)
Inventories (10,369) (16,106)
Prepaid expenses and other (9,097) (5,659)
Accounts payable and accrued liabilities (20,228) 23,752
Self-insurance liabilities (4,110) 3,301
Deferred income taxes - 1,714
Income taxes payable (1,311) 638
------ ------
Total adjustments (3,743) 36,200
------ ------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $(18,015) $30,458
====== ======
The accompanying notes are an integral part of these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock
-------------------
Number Share- Add'l Total
of holders' Paid-In Retained Shareholders'
Shares Amount Notes Capital Deficit Equity (Deficit)
------ ------ --------- ------- -------- ----------------
BALANCES AT JUNE 25, 1994 1,381,782 $14 $(586) $105,182 $(94,586) $10,024
Payment of Shareholders' Notes
(unaudited) - - 70 - - 70
Issuance of Common Stock
(unaudited) 3,644 - (191) 340 - 149
Purchase of Common Stock
(unaudited) (1,117) - 5 (62) - (57)
Net loss
(unaudited) - - - - (14,272) (14,272)
--------- --- ----- -------- --------- -------
BALANCES AT JANUARY 7, 1995
(unaudited) 1,384,309 $14 $(702) $105,460 $(108,858) $(4,086)
========= === ===== ======== ========= =======
The accompanying notes are an integral part of these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet of Food 4 Less Holdings, Inc.
("Holdings" or, together with its subsidiaries, the "Company") as of
January 7, 1995 and the consolidated statements of operations and cash
flows for the interim periods ended January 7, 1995 and January 8,
1994 are unaudited, but include all adjustments (consisting of only
normal recurring accruals) which the Company considers necessary for a
fair presentation of its consolidated financial position, results of
operations and cash flows for these periods. These interim financial
statements do not include all disclosures required by generally
accepted accounting principles, and, therefore, should be read in
conjunction with the Company's financial statements and notes thereto
included 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.
Holdings is a nonoperating holding company formed for the
purpose of issuing 15.25% Senior Discount Notes due 2004 (the "Notes")
and 121,118 Common Stock Purchase Warrants (the "Warrants").
The Company's subsidiary, Food 4 Less Supermarkets, Inc.
("Supermarkets"), is a vertically integrated supermarket company with
266 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 $16.2 million and $13.8 million at January
7, 1995 and June 25, 1994, respectively, and gross profit and
operating income would have been greater by $1.4 million and $1.2
million for the 16 weeks ended January 7, 1995 and January 8, 1994,
respectively, and by $2.4 million and $2.2 million for the 28 weeks
ended January 7, 1995 and January 8, 1994, 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.
3. RESTATEMENT
The Company has restated the statement of operations for the
16 and 28 weeks ended January 8, 1994 to classify certain buying,
occupancy and labor costs associated with making its products
available for sale as cost of sales. These amounts were previously
classified as selling, general, administrative, and other, net, and
depreciation and amortization of property and equipment, and totalled
$63.4 million and $114.3 million for the 16 and 28 weeks ended January
8, 1994, respectively. 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 $1.9 million and $3.3 million for the 16 and 28 weeks ended
January 8, 1994, respectively. Depreciation and amortization costs
not classified in cost of sales are included in selling, general,
administrative and other, net. The change in classifications did not
affect the net loss, loss before provision for income taxes, or loss
per common share.
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4. RALPHS MERGER
On September 14, 1994, Holdings, Supermarkets, and Food 4
Less, Inc. ("FFL") entered into a definitive Agreement and Plan of
Merger (the "Merger") with Ralphs Supermarkets, Inc. ("Ralphs") and
the stockholders of Ralphs. Pursuant to the terms of the Merger
agreement, Supermarkets will, subject to certain terms and conditions
being satisfied or waived, be merged into Ralphs and Ralphs will
become a wholly-owned subsidiary of Holdings. Supermarkets and Ralphs
have reached an agreement with the California Attorney General under
which Supermarkets and Ralphs, on a combined basis, will be required
to sell 27 stores to other food retailers. In addition, the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
has expired and the Federal Trade Commission has advised the Company
that it has closed its investigation of the Merger. 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 Ralphs is approximately $1.5
billion, including the assumption of debt. In connection with the
Merger, FFL will merge into Holdings and Holdings will change its
jurisdiction by merging into a newly formed Delaware corporation ("New
Holdings").
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 New 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 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 New Holdings and Supermarkets and
the incurrence of additional bank financing by Supermarkets. The
equity issuance would be made to a group of investors led by Apollo
Advisors, L.P., which has committed to purchase up to $150 million in
New Holdings stock. It is presently anticipated that the issuance of
new debt securities would be in the form of senior notes of
Supermarkets up to $400 million. The bank financing would be made
pursuant to a commitment by Bankers Trust Company to provide up to
$1,075 million in such financing. In connection with the receipt of
new financing, Holdings and Supermarkets will also be required to
complete certain exchange offers, consent solicitations and or other
transactions with the holders of theirs and Ralphs' currently
outstanding debt securities.
As of October 9, 1994, Ralphs had outstanding indebtedness of
approximately $1,001 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 reported 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 an additional restructuring charge. The
amount of the additional 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 January 7, 1995.
5. RESTRUCTURING CHARGE
The Company has converted 11 of its conventional supermarkets
to warehouse stores. During the 28 weeks ended January 7, 1995, the
Company recorded a restructuring charge for the write-off of property
and equipment at the 11 stores of $5.1 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (UNAUDITED)
General
Holdings was incorporated in California on December 8, 1992 for the
purpose of issuing $103.6 million aggregate principal amount of the Notes and
121,118 Warrants and contributing the gross proceeds of $50.0 million therefrom
to Supermarkets in exchange for preferred and common stock. Concurrently, with
the issuance of the Notes, Supermarkets became a wholly-owned subsidiary of
Holdings. Holdings does not have any business operations of its own and its
assets consist solely of all the outstanding capital stock of Supermarkets.
Comparison of Results of Operations
The following table sets forth the selected unaudited operating
results of the Company for the 16 and 28 weeks ended January 7, 1995 and
January 8, 1994:
16 Weeks Ended 28 Weeks Ended
-------------- --------------
January 7, 1995 January 8, 1994 January 7, 1995 January 8, 1994
--------------- --------------- --------------- ---------------
(dollars in millions)
(unaudited)
Sales $806.0 100.0 % $799.6 100.0 % $1,404.7 100.0 % $1,416.2 100.0 %
Gross profit 134.4 16.7 % 149.9 18.7 % 237.5 16.9 % 262.2 18.5 %
Selling, general, administrative and
other, net 111.0 13.8 % 125.8 15.7 % 199.2 14.2 % 221.5 15.6 %
Amortization of excess costs over
net assets acquired 2.4 0.3 % 2.4 0.3 % 4.2 0.3 % 4.1 0.3 %
Restructuring charge 5.1 0.6 % 0.0 0.0 % 5.1 0.4 % 0.0 0.0 %
Operating income 15.9 2.0 % 21.7 2.7 % 29.0 2.0 % 36.6 2.6 %
Interest expense 24.8 3.1 % 23.8 2.9 % 43.2 3.0 % 41.5 2.9 %
Loss (gain) on disposal of assets 0.0 0.0 % 0.1 0.0 % (0.5) 0.0 % 0.1 0.0 %
Provision (benefit) for income taxes 0.4 0.0 % 0.4 0.1 % 0.5 0.0 % 0.7 0.1 %
Net loss (8.5) (1.1)% (2.6) (0.3)% (14.3) (1.0)% (5.7) (0.4)%
Sales. Sales per week increased $0.4 million, or 0.8%, from $50.0
million in the 16 weeks ended January 8, 1994 to $50.4 million in the 16 weeks
ended January 7, 1995 and decreased $0.4 million, or 0.8%, from $50.6 million
in the 28 weeks ended January 8, 1994 to $50.2 million in the 28 weeks ended
January 7, 1995. The increase in sales for the 16 weeks ended January 7,1995
resulted primarily from new and acquired stores opened since January 8, 1994,
partially offset by a comparable store sales decline of 3.5%. The decline in
sales for the 28 weeks ended January 7, 1995 resulted primarily from a 4.5%
decline in comparable store sales, partially offset by sales from new and
acquired stores opened since January 8, 1994. Management believes that the
decline in comparable store sales is attributable to the weak economy in
Southern California and, to a lesser extent, in the Company's other operating
areas, and competitive store openings and remodels in Southern California.
Gross Profit. Gross profit decreased as a percentage of sales from
18.7% in the 16 weeks ended January 8, 1994 to 16.7% in the 16 weeks ended
January 7, 1995 and decreased from 18.5% in the 28 weeks ended January 8, 1994
to 16.9% in the 28 weeks ended January 7, 1995. Decreases in gross profit
margin were primarily attributable to pricing and promotional activities
related to the Company's "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 the Company's
conventional stores) from 48 at January 8, 1994 to 87 at January 7, 1995. The
decrease in the gross profit margin was partially offset by improvements in
product procurement.
Selling, General, Administrative and Other, Net. Selling, general,
administrative and other expenses ("SG&A") were $125.8 million and $111.0
million for the 16 weeks and $221.5 million and $199.2 million for the 28 weeks
ended January 8, 1994 and January 7, 1995, respectively. SG&A decreased as a
percentage of sales from 15.7% to 13.8% and from 15.6% to 14.2% for the same
periods. The Company experienced a reduction of workers' compensation and
general liability self-insurance
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costs of $6.1 million and $9.7 million in the 16 and 28 weeks ended January 7,
1995, respectively, 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. In addition, the Company maintained tight
control of administrative expenses and store level expenses, including payroll
(due primarily to increased productivity), advertising, 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 48 at
January 8, 1994 to 87 at January 7, 1995, also contributed to decreased SG&A.
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, of which the Company recognized $8.4
million in fiscal 1994 and $9.0 million and $13.7 million in the 16 and 28
weeks ended January 7, 1995, respectively. 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.
Restructuring Charge. The Company has converted 11 of its
conventional supermarkets to warehouse stores. During the 28 weeks ended
January 7, 1995, the Company recorded a restructuring charge for the write-off
of property and equipment at the 11 stores of $5.1 million.
Interest Expense. Interest expense (including amortization of
deferred financing costs) was $23.8 million and $24.8 million for the 16 weeks
and $41.5 million and $43.2 million for the 28 weeks ended January 8, 1994 and
January 7, 1995, respectively. The increase in interest expense was due
primarily to higher interest rates on the Term Loan and Revolving Credit
Facility combined with increased indebtedness under the Senior Discount Notes
and the $70 million Revolving Credit Facility, 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, net
loss increased from $2.6 million in the 16 weeks ended January 8, 1994 to $8.5
million in the 16 weeks ended January 7, 1995 and from $5.7 million in the 28
weeks ended January 8, 1994 to $14.3 million in the 28 weeks ended January 7,
1995.
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. However, there can be no assurance that the
Company will continue to generate cash flow from operations at historical
levels or that it will be able to make future borrowings under the Revolving
Credit Facility.
The Merger, which is subject to, among other things, the completion of
the financing for the transaction and the receipt of other necessary consents,
will require the issuance of significant additional equity by New Holdings, the
issuance of new debt securities by New Holdings and Supermarkets and the
incurrence of additional bank financing by Supermarkets. The equity issuance
would be made to a group of investors led by Apollo Advisors, L.P., which has
committed to purchase up to $150 million in New Holdings stock. It is
presently anticipated that the issuance of new debt securities would be in the
form of senior notes of Supermarkets up to $400 million. The bank financing
would be made pursuant to a commitment by Bankers Trust Company to provide up
to $1,075 million in such financing. In connection with the receipt of new
financing, Holdings and Supermarkets 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 $160 million of other existing
indebtedness of 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 New 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
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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. (See "Note 4 -- Ralphs Merger")
During the 28-week period ended January 7, 1995, the Company used
approximately $18.0 million of cash for its operating activities compared to
cash provided by operating activities of $30.5 million for the 28 weeks ended
January 8, 1994. The decrease in cash from operating activities is due
primarily to changes in operating assets and liabilities for the 28 weeks ended
January 7, 1995. The Company's principal use of cash in its operating
activities is inventory purchases. The Company's high inventory turnover
allows it to finance a substantial portion of its inventory through trade
payables, thereby reducing its short-term borrowing needs. At January 7, 1995,
this resulted in a working capital deficit of $45.4 million.
Cash used for investing activities was $32.8 million for the 28 weeks ended
January 7, 1995. Investing activities consisted primarily of capital
expenditures of $39.0 million, partially offset by $6.5 million of
sale/leaseback transactions. The capital expenditures, net of the proceeds
from sale/leaseback transactions, were financed primarily from cash provided by
financing activities.
The capital expenditures discussed above were made to build or acquire
20 new stores (13 of which have opened) and convert 11 conventional stores to
the warehouse format (all of which have been completed). 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 stores
to the warehouse format. The Company currently anticipates that its aggregate
capital expenditures for fiscal 1995 will be approximately $67.6 million.
Consistent with its past practices, the Company intends to finance these
capital expenditures primarily with cash provided by operations and through
leasing transactions. At January 7, 1995, the Company had approximately $4.0
million of unused equipment leasing facilities. No assurance can be given that
sources of financing for capital expenditures will be available or sufficient.
However, the capital expenditure program has substantial flexibility and is
subject to revision based on various factors, including 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 Merger or the related costs of converting additional stores,
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 $33.6 million for the 28
weeks ended January 7, 1995, which was primarily the $48.7 million of
borrowings outstanding on the $70 million Revolving Credit Facility at January
7, 1995 partially offset by a $11.3 million repayment of the Term Loan. At
January 7, 1995, $48.1 million of standby letters of credit had been issued
under the $55 million Letter of Credit Facility.
The Company is highly leveraged. At January 7, 1995, the Company's
total long-term indebtedness (including current maturities) and stockholder's
deficit were $615.9 million and $4.1 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
19.1 Sixth Modification Agreement to the Credit Agreement
dated as of November 22, 1994 by and among
Supermarkets, Alpha Beta Company, Cala Foods, Inc.,
Falley's, Inc. and Food 4 Less Merchandising, Inc. as
Borrowers, Citicorp North America, Inc., Bankers
Trust Company and Chemical Bank (successor in
interest to Manufacturers Hanover Trust Company) as
Co-Agents, Citicorp North America, Inc. as
Administrative Agent and the Required Lenders and
other Loan Parties, all as identified therein.
19.2 Seventh Modification Agreement to the Credit
Agreement dated as of January 23, 1995 by and among
Supermarkets, Alpha Beta Company, Cala Foods, Inc.,
Falley's, Inc. and Food 4 Less Merchandising, Inc. as
Borrowers, Citicorp North America, Inc., Bankers
Trust Company and Chemical Bank (successor in
interest to Manufacturers Hanover Trust Company) as
Co-Agents, Citicorp North America, Inc. as
Administrative Agent and the Required Lenders and
other Loan Parties, all as identified therein.
27. Financial Data Schedule
(b) Reports on Form 8-K
None
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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: February 20, 1995 FOOD 4 LESS HOLDINGS, INC.
/s/ Ronald W. Burkle
--------------------------
Ronald W. Burkle
Chief Executive Officer
/s/ Greg Mays
--------------------------
Greg Mays
Chief Financial Officer
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