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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
OCTOBER 8, 1995 33-31152
RALPHS GROCERY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4356030
(STATE OR OTHER JURISDICTION OF (I.R.S EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1100 WEST ARTESIA BOULEVARD
COMPTON, CALIFORNIA 90220
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 884-9000
(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 NOVEMBER 22, 1995, THERE WERE 1,513,938 SHARES OF COMMON STOCK
OUTSTANDING. AS OF SUCH DATE, ALL OF THE OUTSTANDING SHARES OF COMMON STOCK
WERE HELD BY FOOD 4 LESS HOLDINGS, INC., AND THERE WAS NO PUBLIC MARKET FOR THE
COMMON STOCK.
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RALPHS GROCERY COMPANY
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of
October 8, 1995 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of operations for the 12 weeks ended
October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of operations for the 36 weeks ended
October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the 36 weeks ended
October 8, 1995 and September 17, 1994 . . . . . . . . . . . . . . . . . . . 6
Consolidated statements of stockholder's equity as of
October 8, 1995 and January 29, 1995 . . . . . . . . . . . . . . . . . . . . 8
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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RALPHS GROCERY COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
October 8, January 29,
ASSETS 1995 1995
----------- -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 64,792 $ 19,560
Trade receivables, net 71,631 23,377
Notes and other receivables 6,268 3,985
Inventories 476,884 224,686
Patronage receivables from suppliers 3,761 5,173
Prepaid expenses and other 45,534 13,051
---------- ----------
Total current assets 668,870 289,832
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
A. W. G. 7,288 6,718
Certified and Others 5,651 5,686
PROPERTY AND EQUIPMENT:
Land 185,872 23,488
Buildings 211,548 24,172
Leasehold improvements 224,092 110,020
Fixtures and Equipment 414,230 190,016
Construction in progress 47,504 8,042
Leased property under capital leases 179,646 82,526
Leasehold interests 115,942 96,556
---------- ----------
1,378,834 534,820
Less: Accumulated depreciation and amortization 192,759 154,382
---------- ----------
Net property and equipment 1,186,075 380,438
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $5,379 and $20,496 at October 8, 1995 and
January 29, 1995, respectively 94,210 25,469
Goodwill, less accumulated amortization of $55,072
and $38,560 at October 8, 1995 and
January 29, 1995, respectively 1,120,179 263,112
Other, net 24,736 29,440
---------- ----------
$3,107,009 $1,000,695
========== ==========
The accompanying notes are an integral part
of these consolidated balance sheets.
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RALPHS GROCERY COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
October 8, January 29,
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1995
---------- -----------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 384,393 $ 190,455
Accrued payroll and related liabilities 95,399 42,007
Accrued interest 54,648 10,730
Other accrued liabilities 174,581 65,279
Income taxes payable 1,491 293
Current portion of self-insurance liabilities 59,284 28,616
Current portion of long-term debt 24,649 22,263
Current portion of obligations under capital leases 20,341 4,965
---------- ----------
Total current liabilities 814,786 364,608
LONG-TERM SENIOR DEBT 1,113,213 320,901
OBLIGATIONS UNDER CAPITAL LEASES 130,140 40,675
SENIOR SUBORDINATED DEBT 671,222 145,000
DEFERRED INCOME TAXES 19,567 17,534
SELF-INSURANCE LIABILITIES 89,097 41,872
LEASE VALUATION RESERVE 24,655 --
OTHER NON-CURRENT LIABILITIES 79,527 12,302
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDER'S EQUITY:
Cumulative convertible preferred stock, $.01 par value,
200,000 shares authorized: 50,000 shares outstanding at
January 29, 1995 (aggregate liquidation value of
$67.9 million) and no shares at October 8, 1995 -- 65,136
Common stock, $.01 par value, 5,000,000 shares
authorized; 1,513,938 shares and 1,519,632 shares issued
at October 8, 1995 and January 29, 1995, respectively 15 15
Additional paid-in capital 466,783 107,650
Notes receivable from stockholders of parent (643) (702)
Retained deficit (301,353) (112,225)
---------- ----------
164,802 59,874
Treasury stock: 12,345 shares of common stock at
January 29, 1995 and no shares at October 8, 1995 -- (2,071)
---------- ----------
Total stockholder's equity 164,802 57,803
---------- ----------
$3,107,009 $1,000,695
========== ==========
The accompanying notes are an integral part
of these consolidated balance sheets.
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RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
12 Weeks 12 Weeks
Ended Ended
October 8, September 17,
1995 1994
---------- -------------
SALES $1,207,093 $ 598,698
COST OF SALES 965,976 495,656
---------- ---------
GROSS PROFIT 241,117 103,042
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 225,020 88,152
AMORTIZATION OF EXCESS COSTS OVER
NET ASSETS ACQUIRED 10,000 1,787
---------- ---------
OPERATING INCOME 6,097 13,103
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 52,386 14,709
Amortization of deferred financing costs 3,369 1,299
---------- ---------
55,755 16,008
LOSS (GAIN) ON DISPOSAL OF ASSETS 92 (458)
---------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (49,750) (2,447)
PROVISION FOR INCOME TAXES -- 900
---------- ---------
NET LOSS (49,750) (3,347)
PREFERRED STOCK ACCRETION -- 2,376
---------- ---------
LOSS APPLICABLE TO COMMON SHARES $ (49,750) $ (5,723)
========== =========
LOSS PER COMMON SHARE $ (32.86) $ (3.81)
========== ==========
Average Number of Common Shares Outstanding 1,513,938 1,502,900
========== ==========
The accompanying notes are an integral part of these consolidated statements.
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RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
---------- -------------
SALES $2,688,035 $1,767,645
COST OF SALES 2,178,133 1,457,509
---------- ----------
GROSS PROFIT 509,902 310,136
SELLING, GENERAL, ADMINISTRATIVE AND OTHER, NET 480,026 255,378
AMORTIZATION OF EXCESS COSTS OVER NET ASSETS ACQUIRED 16,512 5,346
RESTRUCTURING CHARGE 63,587 --
---------- ----------
OPERATING INCOME (LOSS) (50,223) 49,412
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 98,354 43,573
Amortization of deferred financing costs 6,363 3,823
---------- ----------
104,717 47,396
GAIN ON DISPOSAL OF ASSETS (344) (362)
PROVISION FOR EARTHQUAKE LOSSES -- 4,504
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE AND
PROVISION FOR INCOME TAXES (154,596) (2,126)
PROVISION FOR INCOME TAXES 500 2,900
---------- ----------
LOSS BEFORE EXTRAORDINARY CHARGE (155,096) (5,026)
EXTRAORDINARY CHARGE 23,128 --
---------- ----------
NET LOSS (178,224) (5,026)
PREFERRED STOCK ACCRETION 3,960 6,422
---------- ----------
LOSS APPLICABLE TO COMMON SHARES $ (182,184) $ (11,448)
========== ==========
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (105.31) $ (7.62)
Extraordinary charges (15.31) --
---------- ----------
Net Loss $ (120.62) $ (7.62)
========== ==========
Average Number of Common Shares Outstanding 1,510,349 1,503,195
========== ==========
The accompanying notes are an integral part of these consolidated statements.
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RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
---------- -------------
CASH PROVIDED BY OPERATING ACTIVITIES:
Cash received from customers $2,688,035 $1,767,645
Cash paid to suppliers and employees (2,533,431) (1,666,125)
Interest paid (54,436) (33,457)
Income taxes received (paid) 90 (3,550)
Interest received 528 1,105
Other, net 344 (2,613)
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 101,130 63,005
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 5,788 2,795
Payment for purchase of property and equipment (68,515) (50,406)
Payment of acquisition costs, net of cash acquired (356,250) (11,050)
Other, net (3,219) 752
---------- -----------
NET CASH USED BY INVESTING ACTIVITIES (422,196) (57,909)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 956,179 --
Payments of long-term debt (559,634) (8,164)
Payments of capital lease obligation (8,170) (2,944)
Net change in Revolving Loan (27,300) 6,100
Capital contribution from parent 12,108 --
Dividends (6,944) --
Purchase of treasury stock, net -- (466)
Other, net 59 (26)
---------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 366,298 (5,500)
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 45,232 (404)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,560 29,792
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,792 $ 29,388
========== ===========
The accompanying notes are an integral part of these consolidated statements.
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RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
---------- -------------
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (178,224) $ (5,026)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Restructuring charge 63,587 --
Extraordinary charge 23,128 --
Depreciation and amortization 85,959 43,535
Gain on sale of assets (344) (480)
Change in assets and liabilities:
Accounts and notes receivable (8,513) 2,294
Inventories 23,915 1,325
Prepaid expenses and other (11,677) (4,008)
Accounts payable and accrued liabilities 101,274 29,605
Self-insurance liabilities 1,435 (3,590)
Income taxes payable 590 (650)
---------- --------
Total adjustments 279,354 68,031
---------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 101,130 $ 63,005
========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Acquisition of stores:
Fair value of assets acquired, less cash acquired
of $34,380 in 1995 $2,047,247 $11,241
Net cash paid in acquisition (356,250) (11,050)
Capital contribution from parent (280,000) --
---------- --------
Liabilities assumed $1,410,997 $ 191
---------- --------
Accretion of preferred stock $ 3,960 $ 6,422
========== ========
The accompanying notes are an integral part of these consolidated statements.
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RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Common Stock Treasury Stock
--------------------- ------------------ --------------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
BALANCES AT JANUARY 29, 1995 50,000 $65,136 1,519,632 $15 (12,345) $(2,071)
Cancellation of Food 4 Less Supermarkets, Inc.'s
Common Stock held as Treasury Stock (unaudited) -- -- (5,694) -- 5,694 955
Cancellation of Food 4 Less Holdings, Inc.'s
Common Stock held as Treasury Stock (unaudited) -- -- -- -- 6,651 1,116
Preferred Stock Accretion (unaudited) -- 3,960 -- -- -- --
Cancellation of Preferred Stock (unaudited) (50,000) (69,096) -- -- -- --
Dividend paid to Food 4 Less Holdings, Inc.
(unaudited) -- -- -- -- -- --
Payment on Stockholder Notes (unaudited) -- -- -- -- -- --
Capital Contribution by Food 4 Less Holdings, Inc.
(unaudited) -- -- -- -- -- --
Issuance of Stock Options (unaudited) -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- --
------- ------- --------- --- ------- -------
BALANCES AT OCTOBER 8, 1995 (unaudited) -- $ -- 1,513,938 $ 15 -- $ --
========= ========= ========= === ======== ========
Stock- Add'l Total
holders' Paid-In Retained Stockholder's
Notes Capital Deficit Equity
-------- ------- --------- -------------
BALANCES AT JANUARY 29, 1995 $(702) $107,650 $(112,225) $ 57,803
Cancellation of Food 4 Less Supermarkets, Inc.'s
Common Stock held as Treasury Stock (unaudited) -- (955) -- --
Cancellation of Food 4 Less Holdings, Inc.'s
Common Stock held as Treasury Stock (unaudited) -- (1,116) -- --
Preferred Stock Accretion (unaudited) -- -- (3,960) --
Cancellation of Preferred Stock (unaudited) -- 69,096 -- --
Dividend paid to Food 4 Less Holdings, Inc.
(unaudited) -- -- (6,944) (6,944)
Payment on Stockholder Notes (unaudited) 59 -- -- 59
Capital Contribution by Food 4 Less Holdings, Inc.
(unaudited) -- 282,108 -- 282,108
Issuance of Stock Options (unaudited) -- 10,000 -- 10,000
Net loss (unaudited) -- -- (178,224) (178,224)
----- -------- --------- ---------
BALANCES AT OCTOBER 8, 1995 (unaudited) $(643) $466,783 $(301,353) $ 164,802
===== ======== ========= =========
The accompanying notes are an integral part of these consolidated statements.
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RALPHS GROCERY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet and statement of stockholder's
equity of Ralphs Grocery Company (the "Company"), formerly known as
Food 4 Less Supermarkets, Inc. ("F4L Supermarkets") as of October 8,
1995 and the consolidated statements of operations and cash flows for
the interim periods ended October 8, 1995 and September 17, 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 under the name of
Food 4 Less Supermarkets, Inc. on Form 10-K for the fiscal year ended
January 29, 1995. Results of operations for interim periods are not
necessarily indicative of the results for a full fiscal year.
2. ORGANIZATION AND ACQUISITION
The Company, a wholly-owned subsidiary of Food 4 Less
Holdings, Inc. ("Holdings"), is a retail supermarket company with 412
stores located in Southern California, Northern California and certain
areas of the Midwest. The Company's Southern California division
includes manufacturing facilities, with bakery and creamery
operations, and full-line warehouse and distribution facilities.
ACQUISITION
On June 14, 1995, F4L Supermarkets acquired all of the common
stock of Ralphs Supermarkets, Inc. ("RSI") in a transaction accounted
for as a purchase by F4L Supermarkets. The consideration for the
acquisition consisted of $375 million in cash, $131.5 million
principal amount of 13.625% Senior Subordinated Pay-In-Kind Debentures
due 2007 of Holdings (the "Seller Debentures") and $18.5 million
initial accreted value of 13.625% Senior Discount Debentures due 2005
of Holdings (the "New Discount Debentures"). F4L Supermarkets, Ralphs
Supermarkets, Inc. ("RSI") and RSI's wholly owned subsidiary Ralphs
Grocery Company ("RGC") combined through mergers (the "Merger") in
which RSI remained as the surviving entity and changed its name to
Ralphs Grocery Company (referred to as the "Company" herein). The
financial statements reflect the preliminary allocation of the
purchase price as certain appraisals and other information needed to
complete the purchase price allocation have not been completed. The
allocation of the purchase price will be finalized in fiscal 1996.
The following unaudited pro forma information presents the
results of the Company's operations, adjusted to reflect interest
expense and depreciation and amortization, as though the Merger had
been consummated at the beginning of fiscal 1994.
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36 Weeks 36 Weeks
Ended Ended
October 8, September 17,
1995 1994
------------ -------------
(dollars in thousands, except share amounts)
Sales $3,713,726 $3,623,986
Restructuring charge -- (63,587)
Integration costs -- (57,639)
Loss before extraordinary charge (32,243) (129,689)
Net loss (32,243) (160,232)
Loss per share:
Loss before extraordinary charge (21.35) (86.28)
Net loss (21.35) (106.59)
The unaudited pro forma results of operations are not
necessarily indicative of the actual results of operations that would
have occurred had the purchase actually been made at the beginning of
fiscal 1994, or of the results which may occur in the future.
3. SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, which consist primarily 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 $19,459,000 and
$16,531,000 at October 8, 1995 and January 29, 1995, respectively, and
gross profit and operating income would have been greater by $934,000
and $2,928,000 for the 12 and 36 weeks ended October 8, 1995,
respectively, greater by $1,020,000 for the 12 weeks ended September
17, 1994 and less by $501,000 for the 36 weeks ended September 17,
1994.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the October 8, 1995
presentation.
Other
The Financial Accounting Standards Board has issued a new
standard on accounting for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets
to be held and used and long-lived assets and certain identifiable
intangibles to be disposed of (FASB Statement No. 121). The Company
will adopt the accounting standard in fiscal 1996. The Company does
not expect the change in accounting to have a material effect on the
Company's reported financial position or results of operations.
4. RESTRUCTURING CHARGE
During the quarter ended July 16, 1995, the Company has
recorded a $63.6 million one-time restructuring charge associated with
the closing of 39 stores and one warehouse facility. Pursuant to the
settlement agreement with the State of California, 24 Food 4 Less
stores (as well as 3 Ralphs stores) must be divested by December 31,
1995. Although not required by such settlement agreement, an
additional 15 under-performing stores are scheduled to be closed by
June 30, 1996. The restructuring charge consists of write-downs of
property, plant and equipment ($40.6 million) less estimated proceeds
($16.0 million); reserve for closed stores and warehouse facility
($16.1 million); write-off of the Alpha Beta trademark ($8.3 million);
write-off of other assets ($8.0 million); lease
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termination expenses ($4.0 million); and miscellaneous expenses ($2.6
million). The expected cash payments to be made in connection with
the restructuring charge total $7.2 million. It is expected that cash
payments will be made by June 30, 1996. The increase in the
restructuring charge over previous estimates was due primarily to the
addition of the $16.1 million reserve for the closure of the warehouse
and stores. The remaining increase resulted from the identification
of additional assets to be written-off. During the 36 weeks ended
October 8, 1995, the Company utilized $37.5 million of the reserve
for restructuring costs ($46.6 million of costs partially offset by
$9.1 million of proceeds from the divestiture of stores).
The charges consisted of write-downs of property, plant and
equipment ($23.1 million); write-off of the Alpha Beta trademark ($8.3
million); and write-off of other assets ($6.1 million). No additional
expenses are expected to be incurred in future periods in connection
with these closings. 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 addition of
the Riverside facility will likely result in an additional fourth
quarter restructuring charge, the amount of which has not yet been
finalized. (See Note 10 - "Subsequent Events.")
5. EXTRAORDINARY CHARGE
The extraordinary charge of $23.1 million recorded during the
quarter ended July 16, 1995 relates to the refinancing of F4L
Supermarkets' old credit facility, 10.45% Senior Notes due 2000 (the
"Old F4L Senior Notes"), 13.75% Senior Subordinated Notes due 2001
(the "Old F4L Senior Subordinated Notes") and Holdings' 15.25% Senior
Discount Notes due 2004 in connection with the Merger and the
write-off of their related debt issuance costs.
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6. LONG-TERM SENIOR DEBT AND SENIOR SUBORDINATED DEBT
The Company's long-term senior debt is summarized as follows:
October 8, January 29,
1995 1995
-------------- ------------
New Term Loans, principal due quarterly through
2003, with interest payable quarterly in arrears $ 594,873,000 $ --
Old Bank Term Loan, principal due quarterly through
January 1999, with interest payable monthly in arrears -- 125,732,000
10.45% Senior Notes, principal due 2004 with
interest payable semi-annually in arrears 520,326,000 --
10.45% Senior Notes, principal due 2000 with
interest payable semi-annually in arrears 4,674,000 175,000,000
Revolving loan -- 27,300,000
Notes payable in varying monthly installments,
including interest ranging from 11.5 percent to
18.96 percent. Final payments due through
November 1996. Secured by equipment with a net
book value of $24.9 million. 3,951,000 --
10.0% Secured Promissory Note, collateralized
by the stock of Bell, due June 1996, interest
payable quarterly through June 1996. 8,000,000 8,000,000
10.625% first real estate mortgage due 1998,
$12,000 of principal plus interest payable monthly
secured by land and building with a net book value of
$2.1 million. 1,466,000 1,498,000
10.8% notes payable, collateralized equipment,
due October 1995, $72,000 of principal plus
interest payable monthly, plus balloon payment of
$1,004,000 of principal and interest. 995,000 1,420,000
Other long-term debt 3,577,000 4,214,000
-------------- ------------
1,137,862,000 343,164,000
Less current portion 24,649,000 22,263,000
-------------- ------------
$1,113,213,000 $320,901,000
============== ============
Long Term Senior Debt
As part of the Merger financing, the Company entered into a
new credit agreement (the "New Credit Facility") with certain banks,
comprised of a $600 million term loan facility (the "New Term Loans")
and a revolving credit facility of $325 million (the "Revolving Credit
Facility") less amounts outstanding under a $150 million standby
letter of credit facility (the "Letter of Credit Facility").
At October 8, 1995, $594.9 million was outstanding under the
New Term Loans, there were no borrowings outstanding under the
Revolving Credit Facility, and $92.7 million of standby letters of
credit had been issued on behalf of the Company. A commitment fee of
one-half of one percent is charged on the average daily unused
portion of the Revolving Credit Facility; such commitment fees
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are due quarterly in arrears. Interest on borrowings under the New
Term Loans is at the bank's Base Rate (as defined) plus a margin
ranging from 1.50 percent to 2.75 percent or the adjusted Eurodollar
Rate (as defined) plus a margin ranging from 2.75 percent to 4.00
percent. At October 8, 1995, the weighted average interest rate on
the New Term Loans was 9.12 percent. Interest on borrowings under the
Revolving Credit Facility is at the bank's Base Rate (as defined) plus
a margin of 1.50 percent or the Adjusted Eurodollar Rate (as defined)
plus a margin of 2.75 percent.
On October 11, 1995, the Company entered into an interest rate
collar which effectively set interest rate limits on $300 million of
the Company's bank term debt. This interest rate collar, which was
effective as of October 19, 1995, limits the interest rate on $300
million to a range of 4.5% to 8.0% LIBOR for two years. This
agreement satisfies interest rate protection requirements under the
New Credit Facility.
Quarterly principal installments on the New Term Loans
continue to December 2003, with amounts payable in each year as
follows: $0.8 million in fiscal 1995, $19.5 million in fiscal 1996,
$46.6 million in fiscal 1997, $59.2 million in fiscal 1998, $62.8
million in fiscal 1999, $66.4 in fiscal 2000, $86.1 in fiscal 2001,
$102.9 in fiscal 2002 and $150.6 in fiscal 2003. The principal
installments can be accelerated from time to time by certain mandatory
prepayments which are required under the New Credit Facility. To the
extent that borrowings under the Revolving Credit Facility are not
paid earlier, they are due in December 2003. The common stock of the
Company and certain of its direct and indirect subsidiaries has been
pledged as security under the New Credit Facility.
The Company issued $350,000,000 of new 10.45% Senior Notes due
2004 (the "New F4L Senior Notes") and exchanged $170,326,000
principal amount of the Old F4L Senior Notes (together with the
New F4L Senior Notes, the "Senior Notes"), for an equal amount of the
New F4L Senior Notes, leaving an outstanding balance of $4,674,000 on
the Old F4L Senior Notes. The New Senior Notes are due on June 15,
2004 and the Old F4L Senior Notes are due in two equal sinking fund
payments on April 15, 1999 and 2000. The Senior Notes are senior
unsecured obligations of the Company and rank "pari passu" in right of
payment with other senior unsecured indebtedness of the Company.
However, the Senior Notes are effectively subordinated to all secured
indebtedness of the Company and its subsidiaries, including
indebtedness under the New Credit Facility. Interest on the New F4L
Senior Notes is payable semiannually in arrears on each June 15 and
December 15, commencing on December 15, 1995. Interest on the Old F4L
Senior Notes is payable semiannually in arrears on each April 15 and
October 15.
The New F4L Senior Notes may be redeemed, at the option of the
Company, in whole at any time or in part from time to time, beginning
in fiscal 2000, at a redemption price of 105.225 percent. The
redemption price declines ratably to 100 percent in fiscal 2003. In
addition, on or prior to June 15, 1998, the Company may, at its
option, use the net cash proceeds of one or more public equity
offerings to redeem up to an aggregate of 35 percent of the principal
amount of the New F4L Senior Notes originally issued, at a redemption
price equal to 110.450 percent, 108.957 percent, and 107.464 percent
of the principal amount thereof if redeemed during the 12 months
commencing on June 15, 1995, June 15, 1996, and June 15, 1997,
respectively, in each case plus accrued and unpaid interest, if any,
to the redemption date. The Old F4L Senior Notes may be redeemed
beginning in fiscal year 1996 at 104.48 percent, declining ratably to
100 percent in fiscal 1999.
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Scheduled maturities of principal of long-term senior debt at
October 8, 1995 are as follows:
Fiscal Year
-----------
1995 $ 3,499,000
1996 32,074,000
1997 46,761,000
1998 59,418,000
1999 63,051,000
Later years 933,059,000
--------------
$1,137,862,000
==============
Senior Subordinated Deb
The Company issued $100,000,000 of new 11% Senior Subordinated
Notes due 2005 (the "New RGC Notes") and (i) exchanged $142,192,000
principal amount of the RGC 9% Senior Subordinated Notes due 2003
(the "Old RGC 9% Notes") and $281,813,000 principal amount of the RGC
10.25% Senior Subordinated Notes due 2002 (the "Old RGC 10.25%
Notes," and together with the Old RGC 9% Notes, the "Old RGC Notes")
for an equal amount of New RGC Notes, (ii) purchased $7,530,000
principal amount of Old RGC 9% Notes and $15,151,000 principal amount
of Old RGC 10.25% Notes in conjunction with the offers, and (iii)
subsequently purchased $133,000 principal amount of Old RGC 9% Notes
and $964,000 principal amount of Old RGC 10.25% Notes subject to the
change of control provision, leaving an outstanding balance of
$145,000 on the Old RGC 9% Notes and an outstanding balance of
$2,072,000 on the Old RGC 10.25% Notes. The New RGC Notes are senior
subordinated unsecured obligations of the Company and are subordinated
in right of payment to all senior indebtedness, including the
Company's obligations under the New Credit Facility and the Senior
Notes. Interest on the New RGC Notes is payable semiannually in
arrears on each June 15 and December 15, commencing on December 15,
1995.
The New RGC Notes may be redeemed at the option of the
Company, in whole at any time or in part from time to time, beginning
in fiscal year 2000, at an initial redemption price of 105.5 percent.
The redemption price declines ratably to 100 percent in fiscal 2003.
In addition, on or prior to June 15, 1998, the Company may, at its
option, use the net cash proceeds of one or more public equity
offerings to redeem up to an aggregate of 35 percent of the principal
amount of the New RGC Notes originally issued, at a redemption price
equal to 111 percent, 109.429 percent, and 107.857 percent of the
principal amount thereof if redeemed during the 12 months commencing
on June 15, 1995, June 15, 1996, and June 15, 1997, respectively, in
each case plus accrued and unpaid interest, if any, to the redemption
date.
The Company exchanged $140,184,000 Old F4L Senior Subordinated
Notes for an equal amount of new 13.75% Senior Subordinated Notes due
2005 (the "New F4L Senior Subordinated Notes," and together with the
Old F4L Senior Subordinated Notes, the "13.75% Senior Subordinated
Notes") of the Company, leaving an outstanding balance of $4,816,000
on the Old F4L Senior Subordinated Notes. The 13.75% Senior
Subordinated Notes are senior subordinated unsecured obligations of
the Company and are subordinated in right of payment to all senior
indebtedness including the Company's obligations under the New Credit
Facility and the Senior Notes. Interest on the 13.75% Senior
Subordinated Notes is payable semiannually in arrears on each June 15
and December 15 commencing on December 15, 1995. The 13.75% Senior
Subordinated Notes may be redeemed beginning in fiscal year 1996 at a
redemption price of 106.111 percent. The redemption price declines
ratably to 100 percent in fiscal 2000.
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Financial Covenants
The New Credit Facility, among other things, requires the
Company to maintain minimum levels of net worth (as defined), to
maintain minimum levels of earnings, to maintain a hedge agreement to
provide interest rate protection, and to comply with certain ratios
related to fixed charges and indebtedness. In addition, the New
Credit Facility and the indentures governing the New F4L Notes, the
New RGC Notes and the New F4L Senior Subordinated Notes limit, among
other things, additional borrowings, dividends on, and redemption of,
capital stock and the acquisition and the disposition of assets. At
October 8, 1995, the Company was in compliance with the financial
covenants of its debt agreements. At October 8, 1995, dividends and
certain other payments are restricted based on terms in the debt
agreements.
The proceeds of the New Credit Facility and the new debt
issuances (as described above) were used as sources of financing for
the Merger. (See Footnote 2 -- "Organization and Acquisition").
7. CAPITAL CONTRIBUTIONS
Holdings made capital contributions to the Company of $282.1
million in the form of (i) RSI stock acquired through the issuance of
$131.5 million aggregate principal amount of the Seller Debentures and
$18.5 million initial accreted value of the New Discount Debentures,
(ii) RSI stock acquired with $100 million of cash proceeds from the
$140 million new equity financing at Holdings (the "New Equity
Investment") and (iii) $12.1 million in cash proceeds from the New
Equity Investment and the satisfaction by Holdings, through the
issuance of the New Discount Debentures, of $20 million in fees
otherwise payable by the Company in connection with the Merger and the
Financing.
8. DIVIDENDS
In connection with the Merger, the Company paid dividends to
Holdings of $6.9 million. The Company paid dividends to Holdings of
$3.4 million for the purchase, by Holdings, of shares of Holdings
common stock from stockholders who exercised statutory dissenters'
rights in connection with the merger of Holdings and its majority
stockholder Food 4 Less, Inc. There are no other shares subject to
statutory dissenters' rights. Up to $10 million of the Seller
Debentures were subject to an agreement (the "Put Agreement") between
The Yucaipa Companies ("Yucaipa") and a selling stockholder of RSI
common stock (the "Selling Stockholder") in which Yucaipa was required
to purchase up to $10 million of the Seller Debentures back from the
Selling Stockholder upon a put by the Selling Stockholder. On June
14, 1995, the Selling Stockholder put $10 million of the Seller
Debentures ("Put Debentures") to Yucaipa. Yucaipa then sold the Put
Debentures to Bankers Trust Company at a price of $6.5 million. As
part of the Put Agreement, Holdings was obligated to reimburse
Yucaipa for any losses or expenses incurred in connection with a put
by the Selling Stockholder. As such, the Company paid dividends to
Holdings of $3.5 million for the loss which Yucaipa incurred as a
result of the put by the Selling Stockholder. Holdings subsequently
recorded a $3.5 million discount to the Seller Debentures.
9. STOCK OPTIONS
The Company's parent, Holdings, established the Food 4 Less
Holdings, Inc. 1995 Stock Option Plan (the "Plan") to grant officers
and other key employees of the Company the opportunity to acquire
Holdings common stock and to create an incentive for such persons to
remain in the employ of the Company. The Plan is administered by a
committee (the "Committee") which consists of selected members of the
Holdings' Board of Directors. The Committee may grant both incentive
and non-qualified stock options and each such option shall be
evidenced by a written Stock Option Agreement between the option
holder and Holdings. Each individual Stock Option Agreement may
differ from person to person, but must comply with the terms and
conditions of the Plan.
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The cumulative aggregate number of shares of common stock to
be issued under the Plan may not exceed 3,000,000 plus any shares
acquired by Holdings by repurchase of shares of common stock
previously issued to certain officers and other key employees under a
prior stock incentive program of Holdings.
The exercise price of each incentive stock option shall be
determined by the Committee, but, in the case of each incentive stock
option, shall not be less than 100% of the fair market value of the
common stock on the date of grant. The exercise price of each
non-qualified stock option is determined by the Committee at its
discretion.
The Committee determines the date that a particular option
shall become exercisable provided, however, that each option shall
become exercisable in full no later than five years after such option
is granted, and each option shall become exercisable as to at least
20% of the shares of common stock covered thereby on each anniversary
of the date such option is granted. The options are exercisable in
whole or in part and the expiration date which is determined on an
option-by-option basis by the Committee cannot exceed 10 years from
the date of issuance of such option.
Prior to the Merger, RSI had 1,500,000 Equity Appreciation
Rights ("EARs") outstanding that were granted under the 1988 Equity
Appreciation Rights Plan, as amended, to certain officers and key
employees of RGC. In connection with the Merger, a portion of the EAR
payment in the amount of $10 million was canceled in exchange for
the issuance of certain non-qualified stock options (collectively, the
"Reinvestment Options"). In addition to the Reinvestment Options,
Holdings granted stock options to certain management employees of the
Company and to one senior executive officer of Holdings. Compensation
expense was not recorded as the cancellation of the EAR liabilities in
consideration of the Reinvestment Options was deemed by management to
reflect fair and equal value. Each of the options granted in
connection with the Merger will expire on June 14, 2005. All of the
Reinvestment Options were fully exercisable upon the date of issuance.
At October 8, 1995, stock options covering 2,415,000 shares of
Holdings common stock, all of which were granted in connection with
the Merger, were the only options issued under the Plan and none of
these options had been exercised or canceled. Each of such stock
options has an exercise price of $10, which has been adjusted with
respect to each option holder to reflect the cancellation of the EAR
payments.
10. SUBSEQUENT EVENTS
On November 1, 1995, the Company entered into an agreement
with Smith's Food & Drug Centers, Inc. ("Smith's") to sublease (for
approximately 23 years, with renewal options through 2043) Smith's one
million square foot distribution center and creamery facility in
Riverside, California and to acquire certain operating assets and
inventory at that facility. The Company will pay approximately
$15 million for the operating assets (plus the cost of certain
additional assets based on a physical count) and will pay Smith's
cost, less certain discounts, for the inventory to be acquired (which
was valued at approximately $13.3 million based on inventory levels at
November 12, 1995). The Company will pay annual base rent of
approximately $8.8 million under the sublease. The transaction is
scheduled to be completed on or before January 29, 1996. This
transaction will delay and modify the previously planned integration
for the existing Ralphs and Food 4 Less warehouse facilities; however,
the Company believes the transaction will result in increased
operating efficiencies, cost offsets and reduced capital expenditures.
The acquisition of the Riverside facility, which is subject to certain
conditions, including the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act, will result in an
additional fourth quarter restructuring charge, the amount of which
has not yet been finalized.
On October 20, 1995, the holder (the "Holder") of the 13 5/8%
Senior Discount Debentures due 2005 of Holdings (the "New Discount
Debentures") sold $193,363,000 principal amount of the New Discount
Debentures at a price equal to 77% of the accreted value thereof. The
sale of the New Discount Debentures was effected by BT Securities
Corporation ("BT Securities"). BT Securities received a fee in the
amount of 2% ($2.1 million) of the aggregate accreted value of the New
Discount
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Debentures. Holdings reimbursed the Holder for such fee and other
expenses of the sale as contemplated by a registration rights
agreement executed concurrently with the consummation of the Merger.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On June 14, 1995, Food 4 Less Supermarkets, Inc. ("F4L Supermarkets")
completed its acquisition of Ralphs Supermarkets, Inc. ("RSI") and its wholly
owned subsidiary, Ralphs Grocery Company ("RGC"). The acquisition was effected
through the merger of F4L Supermarkets with and into RSI (the "RSI Merger"),
followed by the merger of RGC with and into RSI (the "RGC Merger" and, together
with the RSI Merger, the "Merger"). The surviving corporation in the Merger
was renamed Ralphs Grocery Company (the "Company"). Concurrently with the
consummation of the Merger, the Company received a significant equity
investment from its parent, Food 4 Less Holdings, Inc. ("Holdings") and
refinanced a substantial portion of the existing indebtedness of F4L
Supermarkets and RGC. See "Liquidity and Capital Resources."
The Company's results of operations for the 36 weeks ended October 8,
1995 include 19 weeks of the operations of F4L Supermarkets prior to the
Merger and 17 weeks of operations of the combined Company. Management believes
that the Company's results of operations for periods ending after the
consummation of the Merger are not directly comparable to its results of
operations for periods ending prior to such date. This lack of comparability
is attributable to several factors, including the size of the combined Company
(since the Merger is expected to approximately double F4L Supermarkets' annual
sales volume), the addition of 174 conventional stores to the Company's overall
store mix and the material changes in the Company's capital structure.
The Merger is being accounted for as a purchase of RGC by F4L
Supermarkets. As a result, all financial statements for periods subsequent to
June 14, 1995, the date the Merger was consummated, will reflect RGC's assets
and liabilities at their estimated fair market values as of June 14, 1995. The
purchase price in excess of the fair market value of RGC's assets will be
recorded as goodwill and amortized over a 40-year period. The purchase price
allocation reflected in the Company's unaudited balance sheet at October 8,
1995 is based on management's preliminary estimates. The actual purchase
accounting adjustments, including adjustments to loss contingency accruals,
will be determined within one year following the Merger and may vary from the
preliminary estimates at October 8, 1995.
At October 8, 1995, the Company operated 291 conventional supermarkets
and 59 Food 4 Less warehouse stores in Southern California. It also operated
65 additional stores in Northern California and certain areas of the Midwest.
Following the Merger, the Company commenced the process of converting the
Company's Alpha Beta, Boys and Viva stores to the Ralphs format and also began
converting selected Ralphs stores to the Food 4 Less warehouse format. As of
October 8, 1995, 111 former Alpha Beta, Boys or Viva stores had been converted
to the Ralphs format and four former Ralphs stores had been converted to the
Food 4 Less warehouse format, with an additional six former Ralphs stores
currently being converted.
At October 8, 1995, the Company's bakery, creamery and deli
manufacturing operations and the management of major corporate departments had
been consolidated. The full integration of the Company's administrative
departments is expected to be completed by the end of fiscal 1995. The
previously planned integration and consolidation of the Company's warehousing
and distribution facilities into three primary facilities will be delayed and
modified as a result of the agreement with Smith's to lease its Riverside,
California distribution and creamery facility. (See Note 10 -- "Subsequent
Events.")
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RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating
results of the Company for the 12 and 36 weeks ended October 8, 1995 and
September 17, 1994:
12 WEEKS ENDED 36 WEEKS ENDED
-------------- --------------
OCTOBER 8, 1995 SEPTEMBER 17, 1994 OCTOBER 8, 1995 SEPTEMBER 17, 1994
--------------- ------------------ --------------- ------------------
(DOLLARS IN MILLIONS)
(UNAUDITED)
Sales $1,207.1 100.0% $598.7 100.0% $2,688.0 100.0% $1,767.6 100.0%
Gross profit 241.1 20.0 103.0 17.2 509.9 19.0 310.1 17.5
Selling, general, administrative
and other, net 225.0 18.6 88.2 14.7 480.0 17.9 255.4 14.4
Amortization of excess costs over
net assets acquired 10.0 0.9 1.8 0.3 16.5 0.6 5.3 0.3
Restructuring charge -- -- -- -- 63.6 2.4 -- --
Operating income (loss) 6.1 0.5 13.1 2.2 (50.2) -1.9 49.4 2.8
Interest expense 55.8 4.6 16.0 2.7 104.7 3.9 47.4 2.7
Loss (gain) on disposal of assets 0.1 -- (0.5) -0.1 (0.3) -- (0.4) --
Provision for earthquake losses -- -- -- -- -- -- 4.5 0.3
Provision for income taxes -- -- 0.9 0.2 0.5 -- 2.9 0.2
Loss before extraordinary charge (49.8) -4.1 (3.3) -0.6 (155.1) -5.8 (5.0) -0.3
Extraordinary charge -- -- -- -- 23.1 0.9 -- --
Net loss $(49.8) -4.1 $(3.3) -0.6 $(178.2) -6.6 $(5.0) -0.3
Sales. Sales per week increased $50.7 million, or 101.6%, from $49.9
million in the 12 weeks ended September 17, 1994 to $100.6 million in the 12
weeks ended October 8, 1995 and increased $25.6 million, or 52.1%, from $49.1
million in the 36 weeks ended September 17, 1994 to $74.7 million in the 36
weeks ended October 8, 1995. The increase in sales for the 12 and 36 weeks
ended October 8, 1995, was primarily attributable to the addition of 174
conventional supermarkets acquired through the Merger. The sales increase was
partially offset by a comparable store sales decline of 3.0% and 2.4% for the
12 and 36 weeks ended October 8, 1995, respectively. Excluding stores
scheduled for divestiture or closing, the comparable store sales decreased 1.9%
and 1.4% for the 12 and 36 weeks ended October 8, 1995, respectively.
Management believes that the decline in comparable store sales is partially
attributable to additional competitive store openings and remodels in Southern
California, as well as the Company's own new store openings and conversions.
Notwithstanding these factors, comparable store sales in fiscal 1995 have
improved relative to recent years.
Gross Profit. Gross profit increased as a percentage of sales from
17.2% in the 12 weeks ended September 17, 1994 to 20.0% in the 12 weeks ended
October 8, 1995 and increased from 17.5% in the 36 weeks ended September 17,
1994 to 19.0 in the 36 weeks ended October 8, 1995. The increase in gross
profit margin was primarily attributable to the addition of 174 conventional
supermarkets which diluted the effect of the Company's warehouse stores (which
have lower gross margins than the Company's conventional supermarkets) on its
overall gross margin for the period. Gross profit during the 12 and 36 weeks
ended October 8, 1995 was also impacted by certain one-time costs associated
with the integration of the Company's operations. See "Operating Income
(Loss)."
Selling, General, Administrative and Other, Net. Selling, general,
administrative and other expenses ("SG&A") were $88.2 million and $225.0
million for the 12 weeks and $255.4 million and $480.0 million for the 36 weeks
ended September 17, 1994 and October 8, 1995, respectively. SG&A increased as
a percentage of sales from 14.7% to 18.6% and from 14.4% to 17.9% for the same
periods. The increase in SG&A as a percentage of sales was due primarily to
the addition of 174 conventional supermarkets acquired through the
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Merger. The additional conventional supermarkets diluted the effect of the
Company's warehouse stores (which have lower SG&A than the Company's
conventional supermarkets) on its SG&A margin for the period. SG&A during the
12 and 36 weeks ended October 8, 1995 was also impacted by certain one-time
costs associated with the integration of the Company's operations. See
"Operating Income (Loss)."
Restructuring Charge. During the quarter ended July 16, 1995, the
Company recorded a $63.6 million charge associated with the closing of
39 stores and one warehouse facility. Pursuant to the settlement agreement
with the State of California, 24 Food 4 Less stores (as well as 3 Ralphs
stores) must be divested by December 31, 1995. Although not required by such
settlement agreement, an additional 15 under-performing stores are scheduled to
be closed by June 30, 1996. The restructuring charge consists of write-downs
of property, plant and equipment ($40.6 million) less estimated proceeds ($16.0
million); reserve for closed stores and warehouse facility ($16.1 million);
write-off of the Alpha Beta trademark ($8.3 million); write-off of other assets
($8.0 million); lease termination expenses ($4.0 million); and miscellaneous
expenses ($2.6 million). The expected cash payments to be made in connection
with the restructuring charge total $7.2 million. It is expected that cash
payments will be made by June 30, 1996. The increase in the restructuring
charge over previous estimates was due primarily to the addition of the $16.1
million reserve for the closure of the warehouse and stores. The remaining
increase resulted from the identification of additional assets to be written-
off. During the 36 weeks ended October 8, 1995, the Company utilized $37.5
million of the reserve for restructuring costs ($46.6 million of costs
partially offset by $9.1 million of proceeds from the divestiture of stores).
The charges consisted of write-downs of property, plant and equipment ($23.1
million); write-off of the Alpha Beta trademark ($8.3 million); and write-off
of other assets ($6.1 million). No additional expenses are expected to be
incurred in future periods in connection with these closings. 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
addition of the Riverside facility will likely result in an additional fourth
quarter restructuring charge, the amount of which has not yet been finalized.
(See Note 10 -- "Subsequent Events.")
Operating Income (Loss). In addition to the factors discussed above,
operating income for the 12 and 36 weeks ended October 8, 1995 was impacted by
approximately $28 million and $58 million, respectively, for costs associated
with the conversion of stores and integration of the Company's operations.
Management anticipates these costs to continue during fiscal 1995 until the
integration plan is completed. During the 12 and 36 week periods, these
costs related primarily to (i) markdowns on clearance inventory at the
Company's Alpha Beta, Boys and Viva stores being converted to the Ralphs
format, (ii) the stepped-up advertising campaign promoting the store conversion
program and (iii) incremental labor costs associated with the training of
Company personnel following store conversions.
Interest Expense. Interest expense (including amortization of
deferred financing costs) was $16.0 million and $55.8 million for the 12 weeks
and $47.4 million and $104.7 million for the 36 weeks ended September 17, 1994
and October 8, 1995, respectively. The increase in interest expense was
primarily due to the increased indebtedness incurred in conjunction with the
Merger (see "Liquidity and Capital Resources").
Provision for Earthquake Losses. On January 17, 1994, Southern
California experienced 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 36 weeks ended September 17, 1994.
Loss Before Extraordinary Charge. Primarily as a result of the
factors discussed above, the Company's loss before extraordinary charge
increased from $3.3 million in the 12 weeks ended September 17, 1994 to $49.8
million in the 12 weeks ended October 8, 1995, and from $5.0 million in the 36
weeks ended September 17, 1994 to $155.1 million in the 36 weeks ended October
8, 1995.
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Extraordinary Charge. The extraordinary charge of $23.1 million
recorded during the quarter ended July 16, 1995 relates to the refinancing of
the F4L Supermarkets Old Credit Facility, 10.45% Senior Notes due 2000, and the
13.75% Senior Subordinated Notes due 2001 and the Food 4 Less Holdings, Inc.
15.25% Senior Discount Notes due 2004 in connection with the Merger and the
write-off of related debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company and Holdings utilized total new financing proceeds of
approximately $525 million to consummate the Merger, which included the
issuance of preferred stock by Holdings to a group of investors led by Apollo
Advisors, L.P. for cash proceeds of approximately $140 million (the "New Equity
Investment"). In addition, the Company entered into a new credit facility (the
"New Credit Facility") pursuant to which, upon the closing of the Merger, it
incurred $600 million under the term loan portion of the New Credit Facility
(the "New Term Loans") and approximately $91.6 million under the standby letter
of credit facility (the "Letter of Credit Facility"). The Company also issued
$350 million aggregate principal amount of new 10.45% Senior Notes due 2004
(the "New F4L Senior Notes") and $100 million aggregate principal amount of new
11% Senior Subordinated Notes due 2005 (the "New RGC Notes") pursuant to public
offerings (the "Public Offerings").
The proceeds from the New Credit Facility, Public Offerings and the
New Equity Investment and the issuance by Holdings of $59.0 million initial
accreted value of 13.625% Senior Discount Debentures due 2005 (the "New
Discount Debentures") for cash, $41.0 million in initial accreted value of
additional New Discount Debentures as Merger consideration and $131.5 million
aggregate principal amount of 13.625% Senior Subordinated Pay-In-Kind
Debentures due 2007 (the "Seller Debentures"), provided the sources of
financing required to consummate the Merger and to repay outstanding bank debt
of approximately $176.5 million at F4L Supermarkets and $228.9 million at RGC,
to repay existing mortgage debt of $174.0 million (excluding prepayment fees)
at RGC and to pay $84.4 million to the holders of the Senior Discount Notes due
2004 of Holdings (the "Discount Notes") (excluding related fees). Proceeds
from the New Credit Facility and the Public Offerings were used to pay the cash
portions of F4L Supermarkets' exchange offers and consent solicitations with
respect to (i) the 10.25% Senior Subordinated Notes due 2002 of RGC (the "Old
RGC 10.25% Notes,") and the 9% Senior Subordinated Notes due 2003 of RGC (the
"Old RGC 9% Notes," and together with the old RGC 10.25% Notes, the "Old RGC
Notes") (collectively, the "RGC Exchange Offers"), and (ii) the 10.45% Senior
Notes due 2000 of F4L Supermarkets (the "Old F4L Senior Notes") and the 13.75%
Senior Subordinated Notes due 2001 of F4L Supermarkets (the "Old F4L Senior
Subordinated Notes") (collectively, the "F4L Exchange Offers," and together
with the RGC Exchange Offers, the "Exchange Offers"), as well as the Change of
Control Offer (as defined below) and accrued interest on all exchanged debt
securities in the amount of $27.8 million, to pay $17.8 million to the holders
of the RGC Equity Appreciation Rights and to loan $5.0 million to an affiliate
for the benefit of such holders, to pay approximately $137.1 million of fees
and expenses of the Merger and the related financing and to pay $3.4 million to
purchase shares of common stock of Holdings from certain dissenting
shareholders. The Company assumed certain existing indebtedness of F4L
Supermarkets and RGC in connection with the Exchange Offers, pursuant to which
(i) holders of the Old RGC Notes exchanged approximately $424.0 million
aggregate principal amount of Old RGC Notes for an equal principal amount of
New RGC Notes, (ii) holders of the Old F4L Senior Notes exchanged approximately
$170.3 million aggregate principal amount of Old F4L Senior Notes for an equal
principal amount of New F4L Senior Notes, and (iii) holders of the Old F4L
Senior Subordinated Notes exchanged approximately $140.2 million aggregate
principal amount of Old F4L Senior Subordinated Notes for an equal principal
amount of new 13.75% Senior Subordinated Notes due 2005. In addition, pursuant
to the terms of the indentures governing the Old RGC Notes, the consummation of
the Merger required the Company to make an offer to purchase all of the
outstanding Old RGC Notes that were not exchanged in the RGC Offers (the
"Change of Control Offer"). The Change of Control Offer resulted in the
purchase of an additional $1.1 million of outstanding Old RGC Notes.
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The New Credit Facility provides for a revolving credit facility of
$325 million (the "Revolving Credit Facility") less amounts outstanding under a
$150 million standby Letter of Credit Facility. At October 8, 1995, there were
no borrowings under the Revolving Credit Facility and $92.7 million of standby
letters of credit had been issued under the Letter of Credit Facility. Under
the terms of the New Credit Facility, the Company is required to repay $1.6
million of the New Term Loans in fiscal 1995. The level of borrowings under
the Company's Revolving Credit Facility is dependent upon cash flows from
operations, the timing of disbursements, seasonal requirements and capital
expenditure activity. At November 20, 1995, the Company had $152.7 million
available for borrowing under the Revolving Credit Facility.
On October 11, 1995, the Company entered into an interest rate collar
which effectively set interest rate limits on $300 million of the Company's
bank term debt. This interest rate collar, which was effective as of October
19, 1995, limits the interest rate on $300 million to a range of 4.5% to 8.0%
LIBOR for two years. This agreement satisfies interest rate protection
requirements under the New Credit Facility.
Cash flow from operations, amounts available under the Revolving
Credit Facility and lease financing 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 for the remainder of 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.
During the 36 week period ending October 8, 1995, cash provided by
operating activities was approximately $101.1 million compared to $63.0 million
for the 36 weeks ending September 17, 1994. The increase in cash from
operating activities is due primarily to changes in operating assets and
liabilities for the 36 weeks ending October 8, 1995, partially offset by a
decrease in operating income due primarily to the impact of certain costs
associated with the integration of the Company's operations subsequent to
the Merger. 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 October 8, 1995, this resulted in
a working capital deficit of $145.9 million.
Cash used for investing activities was $422.2 million for the 36 weeks
ended October 8, 1995. Investing activities consisted primarily of $356.3
million of acquisition costs associated with the Merger and capital
expenditures of $68.5 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 and financing activities.
The capital expenditures discussed above were made to build 11 new
stores (8 of which had been completed at October 8, 1995), to remodel 7 stores
(all of which had been completed at October 8, 1995) and convert 111
conventional format stores to the Ralphs banner in conjunction with the Merger
(all of which had been completed at October 8, 1995) and convert ten Ralphs
stores to the Food 4 Less warehouse format (4 of which had been completed at
October 8, 1995). The Company also acquired three stores in Northern
California during the 12 weeks ended October 8, 1995. The Company currently
anticipates that its aggregate capital expenditures for fiscal 1995 will be
approximately $141.5 million. The remaining portion of the fiscal 1995
capital expenditure budget (approximately $70 million) will be used to (i)
complete construction of the 3 new stores in process at October 8, 1995 and
begin construction on an additional 11 stores scheduled to open during the
first half of fiscal 1996, (ii) complete the conversion of 15 supermarkets
from the Ralphs format to Food 4 Less warehouse stores and (iii) complete the
transition of the La Habra based data center to the data center located in the
main office in Compton. Consistent with past practices, the Company intends
to finance these capital expenditures primarily with cash provided by
operations and through leasing transactions. At November 15, 1995, the
Company had approximately $13.5 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 changes in business conditions and cash
flow requirements. Management believes that if the Company were to
substantially reduce or postpone these programs, there would be no substantial
impact
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on short-term operating profitability. However, management also
believes that the construction of new 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 which the Company could make to expand within its existing markets
or to enter other markets. The Company has grown through acquisition 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.
Currently the Company is focusing on the integration of its operations
following the Merger. For a discussion of the costs associated with the
sublease of the Riverside warehouse see Note 10 - "Subsequent Events."
Cash provided by financing activities was $366.3 million for the 36
weeks ended October 8, 1995. Financing activities consisted primarily of the
following; (i) proceeds from issuance of new debt in the amount of $956.2
million including proceeds of $600 million under the New Credit Facility,
proceeds of $350 million from the issuance of New F4L Senior Notes and proceeds
of $100 million from the issuance of New RGC Notes net of issuance costs of
$93.8 million and (ii) proceeds from cash capital contributions by Holdings of
$12.1 million. These sources were partially offset by principal payments on
long-term debt of $559.6 million including: $125.7 million under the old credit
agreement, $228.9 million under the old RGC term loan; and $174.0 million in
real estate loans.
The Company is a wholly-owned subsidiary of Holdings. Holdings has
$100 million initial accreted value of the New Discount Debentures and $131.5
million principal amount of the Seller Debentures outstanding. Holdings is a
holding company which has no assets other than the capital stock of the
Company. Holdings will be required to commence semi-annual cash payments of
interest on the New Discount Debentures and the Seller Debentures commencing
five years from their date of issuance in the amount of approximately $61
million per annum. Subject to the limitations contained in its debt
instruments, the Company intends to make dividend payments to Holdings in
amounts which are sufficient to permit Holdings to service its cash interest
requirements. The Company may pay other dividends to Holdings in connection
with certain employee stock repurchases and for routine administrative
expenses. In connection with the resale of the New Discount Debentures by the
holder thereof (the "Holder") on October 20, 1995, a fee in the amount of 2%
($2.1 million) of the aggregate accreted value of the New Discount Debentures
was paid to BT Securities Corporation for effecting the sale. Holdings
reimbursed the Holder for such fee and other expenses of the sale as
contemplated by a registration rights agreement executed concurrently with the
consummation of the Merger. See "Note 10" of the Notes to Consolidated
Financial Statements.
The Company is highly leveraged. At October 8, 1995, the Company's
total long-term indebtedness (including current maturities) and stockholder's
equity were $2.0 billion and $164.8 million, respectively. Based upon current
levels of operations and anticipated cost savings and future growth, the
Company believes that its cash flow from operations, together with available
borrowings under the Revolving Credit Facility and its other sources of
liquidity (including lease financing), will be adequate to meet its anticipated
requirements for working capital, capital expenditures, integration costs and
interest payments. There can be no assurance, however, that the Company's
business will continue to generate cash flow at or above current levels or that
future cost savings and growth can be achieved.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Distribution Center Transfer Agreement, dated as of
November 1, 1995, by and between Smith's Food & Drug
Centers, Inc., a Delaware corporation, and Ralphs
Grocery Company, relating to the Riverside,
California property.
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 Los Angeles, State
of California.
Dated: November 22, 1995 RALPHS GROCERY COMPANY
/s/ Greg Mays
--------------------------------
Greg Mays
Executive Vice President
Finance & Administration
Chief Financial Officer
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RALPHS GROCERY COMPANY
INDEX TO EXHIBITS
The following exhibits are filed as a separate section of this report:
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
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10.1 Distribution Center Transfer Agreement, dated as of November 1,
1995, by and between Smith's Food & Drug Centers, Inc., a Delaware
corporation, and Ralphs Grocery Company, relating to the
Riverside, California property.