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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
April 23, 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 June 7, 1995, there were 1,386,169 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
April 23, 1995 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of operations for the 12 weeks ended
April 23, 1995 and April 2, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows for the 12 weeks ended
April 23, 1995 and April 2, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of shareholders' deficit as of
April 23, 1995 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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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)
April 23, January 29,
ASSETS 1995 1995
--------- -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 16,924 $ 19,560
Trade receivables, less allowances of $1,068
and $1,192 at April 23, 1995 and
January 29, 1995, respectively 19,426 23,377
Notes and other receivables 1,897 3,985
Inventories 208,848 224,686
Patronage receivables from suppliers 1,738 5,173
Prepaid expenses and other 9,162 13,051
-------- ----------
Total current assets 257,995 289,832
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
A. W. G. 7,298 6,718
Certified and Others 5,654 5,686
PROPERTY AND EQUIPMENT:
Land 23,488 23,488
Buildings 29,685 24,172
Leasehold improvements 114,362 110,020
Store equipment and fixtures 162,207 157,607
Transportation equipment 32,239 32,409
Construction in progress 7,591 8,042
Leased property under capital leases 82,524 82,526
Leasehold interests 95,429 96,556
-------- ----------
547,525 534,820
Less: Accumulated depreciation and amortization (163,712) (154,382)
-------- ----------
Net property and equipment 383,813 380,438
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $21,890 and $20,496 at April 23, 1995 and
January 29, 1995, respectively 24,068 25,469
Goodwill, less accumulated amortization of $40,389
and $38,560 at April 23, 1995 and
January 29, 1995, respectively 261,283 263,112
Other, net 31,129 29,440
-------- ----------
$971,240 $1,000,695
======== ==========
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)
April 23, January 29,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1995 1995
-------- -----------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 171,966 $ 190,455
Accrued payroll and related liabilities 39,993 42,007
Accrued interest 8,221 10,730
Other accrued liabilities 60,572 65,279
Income taxes payable 588 293
Current portion of self-insurance liabilities 28,616 28,616
Current portion of long-term debt 23,511 22,263
Current portion of obligations under capital leases 4,927 4,965
--------- ----------
Total current liabilities 338,394 364,608
LONG-TERM DEBT 323,030 320,901
OBLIGATIONS UNDER CAPITAL LEASES 39,816 40,675
SENIOR SUBORDINATED DEBT 145,000 145,000
SENIOR DISCOUNT NOTES 67,512 65,136
DEFERRED INCOME TAXES 17,534 17,534
SELF-INSURANCE LIABILITIES AND OTHER 52,465 54,174
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value, 1,600,000 shares
authorized; 1,386,169
shares issued at April 23, 1995 and
January 29, 1995 14 14
Additional paid-in capital 105,580 105,580
Notes receivable from shareholders (692) (702)
Retained deficit (117,413) (112,225)
--------- ----------
Total shareholders' deficit (12,511) (7,333)
--------- ----------
$ 971,240 $1,000,695
========= ==========
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)
12 Weeks 12 Weeks
Ended Ended
April 23, April 2,
1995 1994
--------- ---------
SALES $ 623,598 $ 587,871
COST OF SALES (including purchases from related parties for the
12 weeks ended April 23, 1995 and April 2, 1994 of
$41,770 and $40,223, respectively) 516,430 479,182
--------- ---------
GROSS PROFIT 107,168 108,689
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 91,352 90,447
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED 1,829 1,772
--------- ---------
OPERATING INCOME 13,987 16,470
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 17,898 16,675
Amortization of deferred financing costs 1,394 1,262
--------- ---------
19,292 17,937
GAIN ON DISPOSAL OF ASSETS (417) (21)
UNUSUAL EARTHQUAKE LOSS - 4,504
--------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,888) (5,950)
PROVISION FOR INCOME TAXES 300 400
--------- ---------
NET LOSS $ (5,188) $ (6,350)
========= =========
LOSS PER COMMON SHARE $ (3.74) $ (4.59)
========= =========
Average Number of Common Shares Outstanding 1,386,169 1,382,523
========= =========
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)
12 Weeks 12 Weeks
Ended Ended
April 23, April 2,
1995 1994
--------- --------
CASH PROVIDED BY OPERATING ACTIVITIES:
Cash received from customers $ 623,598 $ 587,871
Cash paid to suppliers and employees (595,468) (548,017)
Interest paid (18,031) (4,307)
Income taxes paid (5) (298)
Interest received 133 167
Other, net 299 (933)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,526 34,483
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 5,301 319
Payment for purchase of property and equipment (18,238) (14,354)
Payment of store acquisition costs - (6,570)
Other, net (2,694) 328
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (15,631) (20,277)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Payments of long-term debt (4,623) (3,366)
Payments of capital lease obligation (925) (1,531)
Net change in Revolving Loan 8,000 -
Purchase of treasury stock, net - (218)
Other, net 17 (12)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,469 (5,127)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,636) 9,079
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,560 29,792
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,924 $ 38,871
========= =========
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)
12 Weeks 12 Weeks
Ended Ended
April 23, April 2,
1995 1994
-------- --------
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (5,188) $(6,350)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 16,083 14,274
Accretion of senior discount notes 2,376 2,023
Gain on sale of assets (417) (21)
Change in assets and liabilities:
Accounts and notes receivable 9,474 3,723
Inventories 15,838 7,890
Prepaid expenses and other 1,493 (3,888)
Accounts payable and accrued liabilities (27,775) 13,866
Self-insurance liabilities (1,653) 2,864
Income taxes payable 295 102
-------- -------
Total adjustments 15,714 40,833
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 10,526 $34,483
======== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Acquisition of stores:
Fair value of assets acquired $ - $11,187
Cash paid in acquisition - (6,570)
-------- -------
Liabilities assumed $ - $ 4,617
======== =======
The accompanying notes are an integral part of these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' 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 Deficit
------ ------ --------- ------- --------- -------------
BALANCES AT JANUARY 29, 1995 1,386,169 $14 $(702) $105,580 $(112,225) $ (7,333)
Payment of Shareholders' Notes
(unaudited) - - 10 - - 10
Net loss
(unaudited) - - - - (5,188) (5,188)
--------- --- ----- -------- --------- --------
BALANCES AT APRIL 23, 1995
(unaudited) 1,386,169 $14 $(692) $105,580 $(117,413) $(12,511)
========= === ===== ======== ========= ========
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
April 23, 1995 and the consolidated statements of operations and cash
flows for the interim periods ended April 23, 1995 and April 2, 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").
In anticipation of the Merger and in order to align the
Company's fiscal year end with the fiscal year end of RSI (as defined
in Note 3 -- "Ralphs Merger"), the Company 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 fiscal year ended January 29, 1995. As a
result of the change in the fiscal year end, the Company's results of
operations are presented for the 12 weeks ended April 23, 1995 in the
current fiscal year and for the 12 weeks ended April 2, 1994 for the
comparable 12-week period in the prior fiscal year.
The Company's subsidiary, Food 4 Less Supermarkets, Inc.
("Supermarkets"), is a vertically integrated supermarket company with
268 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
Inventorie
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 $17,566,000 and $16,531,000 at April 23,
1995 and January 29, 1995, respectively, and gross profit and
operating income would have been greater by $1,035,000 and $735,000
for the 12 weeks ended April 23, 1995 and April 2, 1994, respectively.
3. RESTATEMENT
The Company has restated the statement of operations for the
12 weeks ended April 2, 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 $47.0 million for
the 12 weeks ended April 2, 1994. 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 $1.5 million for the 12 weeks ended April 2,
1994. 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 income (loss),
income (loss) before provision for income taxes, or loss per common
share.
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4. RALPHS MERGER
On September 14, 1994, Holdings, Food 4 Less, Inc. ("F4L"),
and Supermarkets 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, Supermarkets 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 "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 Company presently anticipates
that the Merger will be completed on June 14, 1995.
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 New Holdings and Supermarkets 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., which has committed to purchase up to $140 million in New
Holdings stock. The issuance of new debt securities is expected to
consist of $350 million principal amount of Senior Notes due 2004 and
$100 million principal amount of Senior Subordinated Notes due 2005 to
be issued by Supermarkets. New Holdings will issue $100 million
initial accreted value of 13-5/8% Senior Discount Debentures due 2005
for $59 million in cash, $22.5 million in lieu of cash for fees
associated with the Merger and $18.5 million of which will be issued
to the RSI stockholders as Merger consideration. 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 plus accrued
cash interest. The bank financing will be made pursuant to a
commitment by Bankers Trust Company to provide $925 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', Supermarkets' and RGC's
currently outstanding debt securities.
As of January 29, 1995, RGC had outstanding indebtedness of
approximately $1,018.5 million. RGC had sales of $2,724.6 million,
operating income of $145.6 million and net income of $32.1 million for
its most recent reported 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, Supermarkets 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 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 stores to warehouse format stores
reflects (i) the writedown of property, plant and equipment ($27.9
million), (ii) the write-off of the Alpha Beta trademark ($8.6
million), (iii) the write-off of other assets ($4.3 million), (iv)
lease termination expense ($3.1 million) and (v) miscellaneous expense
accruals ($1.6 million). The expected cash payments to be made in
connection with the
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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
during the second quarter of the fiscal year ended January 29, 1995,
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.
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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.
In anticipation of the Merger and in order to align the Company's
fiscal year end with the fiscal year end of RSI (as defined in Note 3 --
"Ralphs Merger"), the Company 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 fiscal
year ended January 29, 1995. As a result of the change in the fiscal year end,
the Company's results of operations are presented for the 12 weeks ended April
23, 1995 for the current fiscal year and for the 12 weeks ended April 2, 1994
for the comparable 12-week period in the prior fiscal year.
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating
results of the Company for the 12 weeks ended April 23, 1995 and April 2, 1994:
12 Weeks Ended
-------------------------------------------------
April 23, 1995 April 2, 1994
-------------------- -------------------
(dollars in millions)
(unaudited)
Sales $623.6 100.0% $587.9 100.0%
Gross profit 107.2 17.2 108.7 18.5
Selling, general, administrative and other, net 91.4 14.7 90.4 15.4
Amortization of excess costs over
net assets acquired 1.8 0.3 1.8 0.3
Operating income 14.0 2.2 16.5 2.8
Interest expense 19.3 3.1 17.9 3.1
Loss (gain) on disposal of assets (0.4) -0.1 0.0 0.0
Unusual earthquake loss 0.0 0.0 4.5 0.8
Provision for income taxes 0.3 0.0 0.4 0.1
Net loss (5.2) -0.8 (6.4) -1.1
Sales. Sales per week increased $3.0 million, or 6.1%, from $49.0
million in the 12 weeks ended April 2, 1994 to $52.0 million in the 12 weeks
ended April 23, 1995. The increase in sales resulted primarily from new and
acquired stores opened since April 2, 1994, partially offset by a comparable
store sales decline of 2.3%. However, the decline in comparable store sales
has improved by 2.1%, from a decline of 4.3%, in the 12 weeks ended April 2,
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
18.5% in the 12 weeks ended April 2, 1994 to 17.2% in the 12 weeks ended April
23, 1995. The decrease in gross profit margin was primarily attributable to 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 65 at April 2, 1994 to 90 at April 23,
1995. The decrease in the gross profit margin was partially offset by
improvements in product procurement.
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Selling, General, Administrative and Other, Net. Selling, general,
administrative and other expenses ("SG&A") were $90.4 million and $91.4 million
for the 12 weeks ended April 2, 1994 and April 23, 1995, respectively. SG&A
decreased as a percentage of sales from 15.4% to 14.7% for the same periods.
The decrease in SG&A as a percentage of sales was due to the increase in the
number of warehouse format stores (which have lower SG&A than the Company's
conventional format stores) and by the effect of the fixed cost component of
SG&A as compared to a larger sales base.
The Company experienced a reduction in workers compensation and
general liability self-insurance costs of $1.4 million in the 12 weeks ended
April 23, 1995 due to continued improvement in the cost and frequency of
claims.
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 received 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 $2.8 million in the
12 weeks ended April 2, 1994 and the remainder of the excess reserves totaling
$1.5 million in the 12 weeks ended April 23, 1995.
These decreases in SG&A were partially offset by increased rent from
new stores and the additional operating leases associated with equipment in
remodeled and converted stores.
Interest Expense. Interest expense (including amortization of
deferred financing costs) was $17.9 million and $19.3 million for the 12 weeks
ended April 2, 1994 and April 23, 1995, respectively. The increase in interest
expense is due to additional indebtedness related to the 15.25% Senior Discount
Notes due 2004, higher interest rates on the Term Loan and Revolving Credit
Facility and increased borrowings on the Company's $70 million Revolving Credit
Facility in the current year, partially offset by the reduction of indebtedness
under the Term Loan as a result of amortization payments.
Unusual Earthquake Losses. On January 17, 1994, Southern California
was struck by a major earthquake which resulted in the temporary closure 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). The pre-tax financial impact, net of
insurance recoveries, was $4.5 million. The Company reserved for this charge
during the 12 weeks ended April 2, 1994.
Net Loss. Primarily as a result of the factors discussed above, net
loss decreased from $6.4 million in the 12 weeks ended April 2, 1994 to a net
loss of $5.2 million in the 12 weeks ended April 23, 1995.
LIQUIDITY AND CAPITAL RESOURCES
No cash interest is payable on the Notes until June 15, 1998. At the
present time, Holdings has no other income or assets other than its investment
in Supermarkets' Common and Preferred Stock and intends to service the interest
payments on the Notes when they become payable in cash through dividends it
receives on Supermarkets' capital stock. At April 23, 1995, dividends and
certain other payments are restricted based upon terms in Supermarkets' debt
agreement.
Cash flow from operations and 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 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 current 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 Ralphs. The equity issuance would
be made to a group of investors led by Apollo Advisors, 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 $350 million principal amount
Senior Notes due 2004 and $100 million principal amount of Senior Subordinated
Notes due 2005 to be issued by Supermarkets and $100 million initial accreted
value of 13-5/8% Senior Discount Debentures due 2005 and $131.5 million
principal amount of 13-5/8% Senior Subordinated Pay-in-Kind debentures due 2007
to be issued by New Holdings. The bank financing would be made
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pursuant to a commitment by Bankers Trust Company to provide $925 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, offers to repurchase and other transactions with the holders of
the currently outstanding debt securities. The transaction will also require
the assumption of approximately $106 million of other existing indebtedness of
RGC. The proceeds of the foregoing financings will be used to acquire the
outstanding stock of RSI, to repay certain existing indebtedness, and to pay
fees and expenses in connection with the Merger and related transactions. The
RSI purchase price is approximately $1.5 billion, including the assumption or
repayment 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 and $18.5 million initial
accreted value of 13-5/8% Senior Discount Debentures due 2005 to be issued by
New Holdings. In addition, Ralphs 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. (See "Note 3 -- Ralphs Merger").
During the 12-week period ended April 23, 1995, the Company generated
approximately $10.5 million of cash from its operating activities compared to
$34.5 million generated by operating activities for the 12 weeks ended April 2,
1994. The decrease in cash from operating activities is due primarily to
changes in operating assets and liabilities. 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
April 23, 1995, this resulted in a working capital deficit of $80.4 million.
Cash used for investing activities was $15.6 million for the 12 weeks
ended April 23, 1995. Investing activities consisted primarily of capital
expenditures of $18.2 million, partially offset by $4.1 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 8 new
stores (3 of which have been completed) and to remodel 7 stores (all of which
have been completed). In May 1995, the Credit Agreement was amended in order
to, among other things, accommodate the Company's new fiscal year end for
financial reporting purposes and to make adjustments to allow for the
acceleration of capital expenditures and other costs associated with the
Merger. The Company currently anticipates that its aggregate capital
expenditures for fiscal 1995 will be approximately $48.1 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 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 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 $2.5 million for the 12
weeks ended April 23, 1995, which was primarily the $8.0 million of additional
borrowings on the $70 million Revolving Credit Facility, partially offset by a
$4.2 million repayment of the Term Loan. At April 23, 1995, there was $35.3
million of borrowings outstanding on the $70 million Revolving Credit Facility
and $47.1 million of standby letters of credit had been issued under the $55
million Letter of Credit Facility.
The Company is highly leveraged. At April 23, 1995, the Company's
total long-term indebtedness (including current maturities) and stockholder's
deficit were $603.8 million and $12.5 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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The supermarket industry is highly competitive and characterized by
narrow profit margins. The Company's competitors in each of its operating
divisions include national and regional supermarket chains, independent and
specialty grocers, drug and convenience stores, and the newer "alternative
format" food stores, including warehouse club stores, deep discount drug stores
and "super centers." Supermarket chains generally compete on the basis of
location, quality of products, service, price, product variety and store
condition. The Company regularly monitors its competitors' prices and adjusts
its prices and marketing strategy as management deems appropriate.
The Southern California Division competes with several large national
and regional chains, principally Albertsons, Hughes, Lucky, Ralphs, Smith's,
Stater Bros., and Vons, and with smaller independent supermarkets and grocery
stores as well as warehouse clubs and other "alternative format" food stores.
The Northern California Division competes with large national and regional
chains, principally Lucky and Safeway, and with independent supermarket and
grocery store operators and other retailers, including "alternative format"
stores. The Midwestern Division's supermarkets compete with several national
and regional supermarket chains, principally Albertson's, Dillons and
Hypermarket USA, as well as independent and "alternative format" stores. The
Company positions its Food 4 Less warehouse format supermarkets as the overall
low-price leader in each marketing area in which they operate.
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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
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: June 6, 1995 FOOD 4 LESS HOLDINGS, INC.
/s/ Ronald W. Burkle
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Ronald W. Burkle
Chief Executive Officer
/s/ Greg Mays
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Greg Mays
Chief Financial Officer
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