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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
July 20, 1997 33-88894
FOOD 4 LESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0642810
(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 September 2, 1997, there were 17,207,882 shares of Common Stock outstanding.
There is no public market for the Common Stock.
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FOOD 4 LESS HOLDINGS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated balance sheets as of
February 2, 1997 and July 20, 1997............................. 2
Consolidated statements of operations for the 12 weeks ended
July 14, 1996 and July 20, 1997................................ 4
Consolidated statements of operations for the 24 weeks ended
July 14, 1996 and July 20, 1997................................ 5
Consolidated statements of cash flows for the 24 weeks ended
July 14, 1996 and July 20, 1997................................ 6
Consolidated statements of stockholders' deficit as of
February 2, 1997 and July 20, 1997............................. 8
Notes to consolidated financial statements........................ 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................16
Signatures........................................................17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
February 2, July 20,
ASSETS 1997 1997
---------- ----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 67,589 $ 58,777
Trade receivables, less allowances of $4,057 and
$3,617 at February 2, 1997 and July 20, 1997,
respectively 46,560 40,872
Notes and other receivables 531 489
Inventories 502,095 491,531
Patronage receivables from suppliers 4,433 2,419
Prepaid expenses and other 21,925 31,587
---------- ----------
Total current assets 643,133 625,675
INVESTMENTS IN AND NOTES RECEIVABLE FROM
SUPPLIER COOPERATIVES:
Associated Wholesale Grocers 7,020 6,797
Certified Grocers of California and others 4,945 4,945
PROPERTY AND EQUIPMENT:
Land 173,803 173,803
Buildings 188,311 192,310
Leasehold improvements 226,159 236,980
Fixtures and equipment 401,716 419,666
Construction in progress 51,117 62,093
Leased property under capital leases 200,199 209,765
Leasehold interests 112,398 111,386
---------- ----------
1,353,703 1,406,003
Less: Accumulated depreciation and amortization 301,477 341,828
---------- ----------
Net property and equipment 1,052,226 1,064,175
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $17,615 and $7,690 at February 2, 1997 and
July 20, 1997, respectively 88,889 51,247
Goodwill, less accumulated amortization of $99,057
and $115,321 at February 2, 1997 and
July 20, 1997, respectively 1,310,956 1,294,692
Other, net 24,824 20,365
---------- ----------
$3,131,993 $3,067,896
========== ==========
The accompanying notes are an integral part
of these consolidated balance sheets.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
February 2, July 20,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1997 1997
----------- -----------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 343,704 $ 329,735
Accrued payroll and related liabilities 106,764 108,185
Accrued interest 31,011 23,000
Other accrued liabilities 261,582 224,995
Income taxes payable 1,956 1,937
Current portion of self-insurance liabilities 48,251 48,251
Current portion of long-term debt 4,465 4,767
Current portion of obligations under capital leases 28,041 28,478
----------- -----------
Total current liabilities 825,774 769,348
SENIOR DEBT, net of current portion 1,263,142 1,312,118
OBLIGATIONS UNDER CAPITAL LEASES 126,336 128,226
SENIOR SUBORDINATED DEBT 671,222 689,747
HOLDINGS DEBENTURES 283,706 301,892
DEFERRED INCOME TAXES 21,074 20,874
SELF-INSURANCE LIABILITIES 91,332 89,801
LEASE VALUATION RESERVE 62,389 58,244
OTHER NON-CURRENT LIABILITIES 106,286 100,356
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Convertible Series A Preferred Stock, $.01 par value, 25,000,000
shares authorized; 16,683,244 shares issued at February 2,
1997 and July 20, 1997 (aggregate liquidation value of
$186.9 million and $193.3 million at February 2, 1997
and July 20, 1997, respectively) 161,831 161,831
Convertible Series B Preferred Stock, $.01 par value,
25,000,000 shares authorized; 3,100,000 shares issued
at February 2, 1997 and July 20, 1997 (aggregate liquidation
value of $34.7 million and $35.9 million at
February 2, 1997 and July 20, 1997, respectively) 31,000 31,000
Common Stock, $.01 par value, 60,000,000 shares authorized;
17,207,882 shares issued at February 2, 1997 and
July 20, 1997 172 172
Non-Voting Common Stock, $.01 par value, 25,000,000 shares
authorized; no shares issued at February 2, 1997 or
July 20, 1997 - -
Additional capital 56,091 54,643
Notes receivable from stockholders (592) (591)
Retained deficit (564,223) (647,816)
----------- -----------
(315,721) (400,761)
Treasury stock: 421,237 shares of common stock at
February 2, 1997 and 231,297 shares of common
stock at July 20, 1997 (3,547) (1,949)
----------- -----------
Total stockholders' deficit (319,268) (402,710)
----------- -----------
$ 3,131,993 $ 3,067,896
=========== ===========
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
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
12 Weeks 12 Weeks
Ended Ended
July 14, July 20,
1996 1997
------------ ------------
SALES $ 1,243,768 $ 1,271,726
COST OF SALES (including purchases from related parties
of $22,174 and $15,601 for the 12 weeks ended
July 14, 1996 and the 12 weeks ended
July 20, 1997, respectively) 991,224 1,010,600
------------ ------------
GROSS PROFIT 252,544 261,126
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 209,292 205,291
AMORTIZATION OF GOODWILL 8,983 8,132
------------ ------------
OPERATING INCOME 34,269 47,703
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 62,114 61,618
Amortization of deferred financing costs 1,732 711
------------ ------------
63,846 62,329
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY CHARGES (29,577) (14,626)
PROVISION FOR INCOME TAXES - -
------------ ------------
LOSS BEFORE EXTRAORDINARY CHARGES (29,577) (14,626)
EXTRAORDINARY CHARGES - -
------------ ------------
NET LOSS $ (29,577) $ (14,626)
============ ============
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (0.80) $ (0.40)
Extraordinary charges - -
------------ ------------
Net loss $ (0.80) $ (0.40)
============ ============
Average Number of Common Shares and
Equivalents Outstanding 36,991,126 36,991,126
============ ============
The accompanying notes are an integral part of
these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
24 Weeks 24 Weeks
Ended Ended
July 14, July 20,
1996 1997
------------ ------------
SALES $ 2,474,576 $ 2,547,948
COST OF SALES (including purchases from related
parties of $47,965 and $32,505 for the 24 weeks
ended July 14, 1996 and the 24 weeks ended
July 20, 1997, respectively) 1,984,107 2,023,869
------------ ------------
GROSS PROFIT 490,469 524,079
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 415,912 415,066
AMORTIZATION OF GOODWILL 16,185 16,264
------------ ------------
OPERATING INCOME 58,372 92,749
INTEREST EXPENSE:
Interest expense, excluding amortization
of deferred financing costs 122,715 124,869
Amortization of deferred financing costs 5,068 3,490
------------ ------------
127,783 128,359
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY CHARGES (69,411) (35,610)
PROVISION FOR INCOME TAXES - -
------------ ------------
LOSS BEFORE EXTRAORDINARY CHARGES (69,411) (35,610)
EXTRAORDINARY CHARGES - 47,983
------------ ------------
NET LOSS $ (69,411) $ (83,593)
============ ============
LOSS PER COMMON SHARE:
Loss before extraordinary charges $ (1.88) $ (0.96)
Extraordinary charges - (1.30)
------------ ------------
Net loss $ (1.88) $ (2.26)
============ ============
Average Number of Common Shares and
Equivalents Outstanding 36,991,126 36,991,126
============ ============
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
(IN THOUSANDS)
(UNAUDITED)
24 Weeks 24 Weeks
Ended Ended
July 14, July 20,
1996 1997
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES:
Cash received from customers $ 2,474,576 $ 2,547,948
Cash paid to suppliers and employees (2,298,404) (2,419,924)
Interest paid (106,490) (114,694)
Income taxes paid - (19)
Interest received 1,031 214
Other, net (116) (8,861)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 70,597 4,664
CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 20,537 11,685
Payment for purchase of property and equipment (55,840) (68,203)
Payment of acquisition costs, net of cash acquired (10,172) -
Other, net (3,191) (6,421)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (48,666) (62,939)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 94,625 717,798
Payments of long-term debt (56,791) (687,409)
Payments of capital lease obligations (12,551) (13,307)
Increase (decrease) in revolving loan, net (47,700) 37,200
Sale of treasury stock, net - 150
Deferred financing costs and other, net (5,980) (4,969)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (28,397) 49,463
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,466) (8,812)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67,983 67,589
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,517 $ 58,777
=========== ===========
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
(IN THOUSANDS)
(UNAUDITED)
24 Weeks 24 Weeks
Ended Ended
July 14, July 20,
1996 1997
--------- ---------
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (69,411) $ (83,593)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 79,926 80,288
Non-cash extraordinary charges - 39,122
Non-cash interest expense 15,891 18,186
Amortization of debt discount - 214
Loss (gain) on sale of assets 116 -
Change in assets and liabilities, net of effects from
acquisition of business:
Accounts and notes receivable 1,410 7,744
Inventories 36,497 10,564
Prepaid expenses and other 8,731 (13,074)
Accounts payable and accrued liabilities (6,990) (53,037)
Self-insurance liabilities 4,427 (1,531)
Deferred income taxes - (200)
Income taxes payable - (19)
--------- ---------
Total adjustments 140,008 88,257
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 70,597 $ 4,664
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Fixed assets acquired through the issuance of
capital leases $ 20,683 $ 20,527
========= =========
Retirement of capital leases $ - $ 4,893
========= =========
The accompanying notes are an integral part of these consolidated statements.
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FOOD 4 LESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Preferred Stock
Series A Series B Common Stock
---------------------- ----------------------- ----------------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
BALANCES AT FEBRUARY 2, 1997 16,683,224 $ 161,831 3,100,000 $ 31,000 17,207,882 $ 172
Payments on Stockholder's Notes - - - - - -
Sale of Treasury Stock - - - - - -
Net loss (unaudited) - - - - - -
---------- ---------- --------- ---------- ---------- ----------
BALANCES AT JULY 20, 1997 (UNAUDITED) 16,683,224 $ 161,831 3,100,000 $ 31,000 17,207,882 $ 172
========== ========== ========== ========== ========== ==========
Treasury Stock
------------------------
Number Stock- Total
of holders' Additional Retained Stockholders'
Shares Amount Notes Capital Deficit Deficit
------ ------ ----- ------- ------- -------
BALANCES AT FEBRUARY 2, 1997 (421,237) $ (3,547) $ (592) $ 56,091 $ (564,223) $ (319,268)
Payments on Stockholder's Notes - - 1 - - 1
Sale of Treasury Stock 189,940 1,598 - (1,448) - 150
Net loss (unaudited) - - - - (83,593) (83,593)
-------- ---------- ---------- ---------- ---------- ----------
BALANCES AT JULY 20, 1997 (UNAUDITED) (231,297) $ (1,949) $ (591) $ 54,643 $ (647,816) $ (402,710)
======== ========== ========== ========== ========== ==========
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
JULY 20, 1997
(UNAUDITED)
1. ORGANIZATION AND ACQUISITION
Food 4 Less Holdings, Inc. ("Holdings" or, together with its
subsidiaries, the "Company"), a Delaware corporation, owns all of the
outstanding capital stock of Ralphs Grocery Company, a Delaware
corporation ("Ralphs"). Ralphs is a retail supermarket company with a
total of 405 stores which are located in Southern California (342),
Northern California (27) and certain areas of the Midwest (36). The
Company is the largest supermarket operator in Southern California. The
Company operates the second largest conventional supermarket chain in
the region under the "Ralphs" name and the largest warehouse supermarket
chain in the region under the "Food 4 Less" name.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheet and statement of
stockholder's deficit of the Company as of July 20, 1997 and the
consolidated statements of operations and cash flows for the interim
periods ended July 14, 1996 and July 20, 1997 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 audited financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended February 2, 1997. The results of
operations for the interim periods are not necessarily indicative of the
results for a full fiscal year.
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 $24.3 million and $26.1 million at
February 2, 1997 and July 20, 1997, respectively, and gross profit and
operating income would have been greater by $2.5 million and $1.7
million for the 24 weeks ended July 14, 1996 and July 20, 1997,
respectively.
Income Taxes
The Company provides for income taxes in interim periods based on
the estimated effective income tax rate for the complete fiscal year.
Deferred taxes result from the future tax consequences associated with
temporary differences between the amount of assets and liabilities
recorded for tax and financial accounting purposes. A valuation
allowance for deferred tax assets is recorded to the extent the Company
cannot determine, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
that the ultimate realization of net deferred tax assets is more likely
than not.
For the period ended July 20, 1997, the estimated effective
income tax rate is less than the U.S. statutory rate primarily due to a
100% valuation allowance provided against the additional deferred tax
assets that arose from the current operating loss.
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Loss Per Common Share
Loss per common share is computed based on the weighted average
number of shares outstanding during the applicable period. Fully diluted
loss per share has been omitted as it is anti-dilutive for all periods
presented.
Reclassifications
Certain prior period amounts in the consolidated financial
statements have been reclassified to conform to the July 20, 1997
presentation.
New Accounting Standards
In February 1997, Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("SFAS No. 128") was issued. SFAS No. 128 is
effective for earnings per share calculations for periods ending after
December 15, 1997. The new method of calculating earnings per share will
have no effect on the Company's historical earnings per share.
In June 1997, Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") was issued.
Adoption of this statement will not have a material effect on historical
results of operations.
3. RESTRUCTURING CHARGE
During the 24 weeks ended July 20, 1997, the Company utilized
$1.9 million and $3.0 million of the remaining restructuring reserve
related to the fiscal 1995 $75.2 and $47.9 million restructuring
charges, respectively. The amounts utilized primarily include
write-downs of property and equipment ($1.2 million) and payments for
lease obligations ($3.5 million).
4. DEBT
During the first quarter of fiscal 1997, Ralphs issued $155
million principal amount of 11% Senior Subordinated Notes due 2005 (the
"1997 11% Senior Subordinated Notes"), with terms substantially
identical to Ralphs' existing 11% Senior Subordinated Notes, at a price
of 105.5% of their principal amount, resulting in gross proceeds of
$163.5 million. The proceeds were used to redeem all of Ralphs' $145
million principal amount of 13.75% Senior Subordinated Notes at a price
of 106.1% of their principal amount and to pay the related accrued
interest through the redemption date, which was April 28, 1997. The
remaining proceeds were used to pay fees and expenses associated with
the issuance of the 1997 11% Senior Subordinated Notes.
During the first quarter of fiscal 1997, the Company also amended
and restated its existing credit facility ("Old Credit Facility") to
lower interest margins and allow more flexibility with respect to
application of proceeds from certain assets sales and capital
expenditures. The amended and restated credit facility (the "New Credit
Facility") consists of a $200.0 million Term Loan A Facility and a
$350.0 million Term Loan B Facility (together, the "Term Loans") and a
$325.0 million Revolving Credit Facility ("Revolving Facility") under
which working capital loans may be made and commercial or standby
letters of credit in the maximum of $150.0 may be issued.
Borrowings under the New Credit Facility bear interest at the
bank's Base Rate (as defined) plus a margin ranging from 0.25 percent to
1.75 percent or the Eurodollar Rate (as defined) plus a margin ranging
from 1.25 percent to 2.75 percent. At July 20, 1997, $549.1 million was
outstanding under the Term Loans, $136.6 was outstanding under the
Revolving Facility, and $77.3 million of standby Letters of Credit had
been issued on behalf of the Company. At July 20, 1997, the weighted
average interest rate on the Term Loans was 7.82 percent and the
interest rate on the Revolving Facility was 7.72 percent. Quarterly
principal installments on the Term Loans continue to 2004, with
principal amounts due as follows:
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$2.6 million in fiscal 1997, $3.5 million in fiscal 1998, $25.5 million
in fiscal 1999, $62.6 million in fiscal 2000, $87.5 million in fiscal
2001 and $368.3 million thereafter.
As a result of the refinancings described above, the Company
recorded extraordinary charges in the first quarter of fiscal 1997 of
approximately $48.0 million, consisting of the call premium on the
13.75% Senior Subordinated Notes and the write-off of deferred financing
costs associated with the Old Credit Facility and the 13.75% Senior
Subordinated Notes.
5. RELATED PARTY TRANSACTIONS
During the 12 weeks ended July 20, 1997 and July 14, 1996, the
Company purchased $15.6 million and $22.2 million, respectively, in
inventory from Certified Grocers. During the 24 weeks ended July 20,
1997 and July 14, 1996, the Company purchased $32.5 million and $48.0
million, respectively, in inventory from Certified Grocers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the selected unaudited operating results
of the Company for the 12 and 24 weeks ended July 14, 1996 and July 20, 1997,
respectively:
12 Weeks Ended 24 Weeks Ended
--------------------------------- ----------------------------------
July 14, 1996 July 20, 1997 July 14, 1996 July 20, 1997
---------------- -------------- --------------- ------------------
(in millions)
(unaudited)
Sales $1,243.8 100.0% $1,271.7 100.0% $2,474.6 100.0% $2,547.9 100.0%
Gross profit 252.5 20.3 261.1 20.5 490.5 19.8 524.1 20.6
Selling, general and
administrative expenses 209.3 16.8 205.3 16.1 415.9 16.8 415.1 16.3
Amortization of goodwill 9.0 0.7 8.1 0.6 16.2 0.7 16.3 0.6
Operating income 34.3 2.8 47.7 3.8 58.4 2.4 92.7 3.6
Interest expense 63.8 5.1 62.3 4.9 127.8 5.2 128.4 5.0
Provision for income taxes - - - - - - - -
Loss before extraordinary
charges (29.6) (2.4) (14.6) (1.1) (69.4) (2.8) (35.6) (1.4)
Extraordinary charges - - - - - - 48.0 1.9
Net loss $(29.6) (2.4)% $(14.6) (1.1)% $(69.4) (2.8)% $(83.6) (3.3)%
Sales. Sales for the 12 weeks ended July 20, 1997 increased $27.9
million to $1,271.7 million from $1,243.8 million for the 12 weeks ended July
14, 1996 and increased $73.3 million to $2,547.9 million in the 24 weeks ended
July 20, 1997 from $2,474.6 million in the 24 weeks ended July 14, 1996. The
increases in sales were primarily attributable to 2.0 percent and 3.0 percent
increases in comparable store sales for the 12 and 24 week periods ended July
20, 1997, respectively, and the continued success of new store openings,
partially offset by store closings. Since the beginning of fiscal 1996, 28
stores have been opened and 32 stores have been closed and a total of 55 stores
have been remodeled. The second quarter of fiscal 1997 represents the fifth
consecutive quarter that the Company has achieved positive comparable store
sales. The increases in comparable store sales reflect consumers' favorable
response to the Company's "First in Southern California" marketing program,
which focuses on the Company's lower price program in conjunction with its
premier offering of quality, selection and customer service, as well as its
continuing remodeling program.
Gross Profit. Gross profit increased as a percentage of sales from 20.3
percent in the 12 weeks ended July 14, 1996 to 20.5 percent in the 12 weeks
ended July 20, 1997 and increased as a percentage of sales from 19.8 percent in
the 24 weeks ended July 14, 1996 to 20.6 percent in the 24 weeks ended July 20,
1997. The increase in gross profit margin reflects a reduction in warehousing
and distribution costs as a result of the consolidation of the Company's
distribution operations, as well as a reduction in the cost of goods sold as the
benefits of product procurement programs instituted by the Company are realized.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $209.3 million and $205.3 million for the
12 weeks ended July 14, 1996 and July 20, 1997, respectively, and were $415.9
million and $415.1 million for the 24 weeks ended July 14, 1996 and July 20,
1997, respectively. SG&A decreased as a percentage of sales from 16.8 percent to
16.1 percent for the 12 weeks ended July 14, 1996 and July 20, 1997,
respectively, and decreased as a percentage of sales from 16.8 percent to 16.3
percent for the 24 weeks ended July 14, 1996 and July 20, 1997, respectively.
The reduction in SG&A as a percentage of sales reflects the continued results of
tighter expense and labor controls at the store level and continued
administrative cost reductions. Additionally, 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
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("UFCW") and recognized pension suspension credits of $4.8 million and $6.8
million in the 24 weeks ended July 14, 1996 and the 24 weeks ended July 20,
1997, respectively.
Operating Income. Primarily as a result of the factors discussed above,
the Company's operating income increased from $34.3 million in the 12 weeks
ended July 14, 1996 to $47.7 million in the 12 weeks ended July 20, 1997 and
increased from $58.4 million in the 24 weeks ended July 14, 1996 to $92.7
million in the 24 weeks ended July 20, 1997.
Loss Before Extraordinary Charges. Primarily as a result of the factors
discussed above, the Company's loss before extraordinary charges decreased from
$29.6 million in the 12 weeks ended July 14, 1996 to $14.6 million in the 12
weeks ended July 20, 1997 and decreased from $69.4 million in the 24 weeks ended
July 14, 1996 to $35.6 million in the 24 weeks ended July 20, 1997.
Extraordinary Charges. Extraordinary charges of $48.0 million were
recorded during the 12 weeks ended April 27, 1997. These charges relate to the
call premium on the 13.75% Senior Subordinated Notes and the write-off of
deferred financing costs associated with the Old Credit Facility and the 13.75%
Senior Subordinated Notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, amounts available under the Company's $325.0
million revolving facility ("Revolving 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 expenditure, working
capital and debt service requirements for the remainder of fiscal 1997.
At July 20, 1997, borrowings of $136.6 million under the Revolving
Facility and $77.3 million of standby letters of credit were outstanding. The
level of borrowings under the Company's Revolving Facility is dependent upon
cash flows from operations, the timing of disbursements, seasonal requirements
and capital expenditure activity. The Company is required to reduce loans
outstanding under the Revolving Facility to $110.0 million for a period of not
less than 30 consecutive days during the twelve consecutive month-period ended
on the last day of fiscal 1997. The Company complied with this requirement in
the second quarter of fiscal 1997. At August 22, 1997, the Company had $131.5
million available for borrowing under the Revolving Facility.
During the 24-week period ending July 20, 1997, cash provided by
operating activities was approximately $4.7 million compared to $70.6 million in
the 24-week period ending July 14, 1996. The decline in cash from operating
activities in the current quarter is primarily due to the timing of payments of
accounts payable and accrued liabilities, prepaid expenses and accrued interest.
These reductions in cash were partially offset by an improvement in operating
income of approximately $34.4 million. The improvement in operating income can
primarily be attributed to strong comparable store sales, a reduction in
warehousing and distribution costs resulting from the consolidation of the
company's distribution operations, and a reduction in cost of goods sold as the
benefits of product procurement programs are realized. The Company's principal
use of cash in its operating activities is inventory purchases. The Company's
high inventory turnover rate generally allows it to finance a substantial
portion of its inventory through trade payables, thereby reducing its short-term
borrowing needs.
Cash used by investing activities was $62.9 million for the 24-week
period ending July 20, 1997. Investing activities consisted primarily of capital
expenditures of $68.2 million. The capital expenditures were financed primarily
from cash provided by operating and financing activities.
The capital expenditures in the 24-week period ending July 20, 1997, as
discussed above, relate to 11 new stores (two of which had been completed at
July 20, 1997) and the remodeling of 57 stores (31 of which had been completed
at July 20, 1997). The Company currently anticipates that its aggregate capital
expenditures for fiscal 1997 will be approximately $140.0 million (net of
expected capital leases) and will include eight new stores and 58 remodels.
Consistent with past practices, the Company intends to finance these capital
expenditures primarily with cash provided
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by operations, borrowings under the Revolving Facility and through leasing
transactions. At August 22, 1997, the Company had approximately $12.0 million of
unused equipment leasing facilities. No assurance can be given that sources of
financing for capital expenditures will be available or sufficient to finance
its anticipated capital expenditure requirements; however, management believes
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 on short-term operating profitability. However, management also believes
that the construction of new stores is an important component of its future
operating strategy. Consequently, management believes that if these programs
were substantially reduced, future operating results, 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 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.
The Company continues to monitor and evaluate the performance of
individual stores as well as operating markets in relation to its overall
business objectives. As a result of this evaluation, alternative strategies may
be considered by the Company which could result in the disposition of certain
assets.
Cash provided by financing activities was $49.5 million for the 24-week
period ending July 20, 1997, resulting primarily from refinancing activities.
Refinancing activities consisted of the issuance of the 1997 11% Senior
Subordinated Notes to refinance Ralphs' 13.75% Senior Subordinated Notes and the
refinancing and amendment of the Old Credit Facility. In total, financing
activities consisted primarily of proceeds of $717.8 million from the issuance
of long-term debt and net borrowings of $37.2 million under the Revolving
Facility, partially offset by principal payments of long-term debt of $687.4
million and capital lease payments of $13.3 million.
During the first quarter of fiscal 1997, Ralphs issued the 1997 11%
Senior Subordinated Notes with terms substantially identical to Ralphs' existing
11% Senior Subordinated Notes at a price of 105.5% of their principal amount,
resulting in gross proceeds of $163.5 million. The proceeds were used to redeem
all of Ralphs' $145 million principal amount of 13.75% Senior Subordinated Notes
at a price of 106.1% of their principal amount and to pay the related accrued
interest through the redemption date, which was April 28, 1997. The remaining
proceeds were used to pay fees and expenses associated with the issuance of the
1997 11% Senior Subordinated Notes.
During the first quarter, the Company also amended and restated its Old
Credit Facility to lower interest margins and allow more flexibility with
respect to application of proceeds from certain asset sales and capital
expenditures. The amended and restated credit facility (the "New Credit
Facility") consists of a $200.0 million Term Loan A Facility and a $350.0
million Term Loan B Facility (together, the "Term Loans") and a $325.0 million
Revolving Credit Facility ("Revolving Facility") under which working capital
loans may be made and commercial or standby letters of credit in the maximum of
$150.0 million may be issued.
Quarterly principal installments on the Term Loans continue to 2004,
with principal amounts due as follows: $2.6 million in fiscal 1997, $3.5 million
in fiscal 1998, $25.5 million in fiscal 1999, $62.6 million in fiscal 2000,
$87.5 million in fiscal 2001 and $368.3 million thereafter.
As a result of the refinancings described above, the Company recorded
extraordinary charges in the first quarter of fiscal 1997 of approximately $48.0
million, consisting of the call premium on the 13.75% Senior Subordinated Notes
and write-off of deferred financing costs associated with the Old Credit
Facility and the 13.75% Senior Subordinated Notes.
Holdings has outstanding $131.6 million accreted value of Discount
Debentures and $170.3 million principal amount of Pay-In-Kind Debentures.
Holdings is a holding company which has no assets other than the capital stock
of Ralphs. Holdings will be required to commence semi-annual
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cash payments of interest on the Discount Debentures and the Pay-In-Kind
Debentures commencing December 15, 2000 in the amount of approximately $61
million per annum. Subject to the limitations contained in its debt instruments,
Ralphs intends to make dividend payments to Holdings in amounts which are
sufficient to permit Holdings to service its cash interest requirements. Ralphs
may pay other dividends to Holdings in connection with certain employee stock
repurchases and for routine administrative expenses.
The Company is highly leveraged. At July 20, 1997, the Company's total
long-term indebtedness (including current maturities) and stockholders' deficit
were $2.5 billion and $402.7 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 Facility and its other sources of liquidity (including lease
financing), will be adequate to meet its anticipated requirements for working
capital, capital expenditures, other long-term liabilities and debt service
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.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
When used in this report, the words "believe," "estimate," "expect,"
"project" and similar expressions, together with other discussion of future
trends or results, are intended to identify forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from those projected. These forward-looking statements
speak only as of the date hereof. All of these forward-looking statements are
based on estimates and assumptions made by management of the Company which,
although believed to be reasonable, are inherently uncertain and difficult to
predict; therefore, undue reliance should not be placed upon such estimates. The
following important factors, among others, could cause the Company's results of
operations to be adversely affected in future periods: (i) increased competitive
pressures from existing competitors and new entrants, including price-cutting
strategies, store openings and remodels; (ii) loss or retirement of key members
of management or the termination of the Company's Consulting Agreement with
Yucaipa; (iii) inability to negotiate more favorable terms with suppliers; (iv)
increases in interest rates or the Company's cost of borrowing or a default
under any material debt agreements; (v) inability to develop new stores in
advantageous locations or to successfully convert or remodel additional stores;
(vi) prolonged labor disruption; (vii) deterioration in general or regional
economic conditions, particularly in Southern California, the Company's
principal operating region; (viii) adverse state or federal legislation or
regulation that increases the costs of compliance, or adverse findings by a
regulator with respect to existing operations; (ix) loss of customers or sales
weakness; (x) adverse determinations in connection with pending or future
litigation or other material claims against the Company; (xi) inability to
achieve future sales levels or other operating results that support its programs
to reduce costs; (xii) the unavailability of funds for capital expenditures;
(xiii) increases in labor costs; (xiv) inability to control inventory levels;
and (xv) operational inefficiencies in distribution or other Company systems.
Many of such factors are beyond the control of the Company. There can be no
assurance that the Company will not incur new or additional unforeseen costs in
connection with the ongoing conduct of its business. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. In addition, assumptions
relating to budgeting, marketing, advertising, litigation and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure or other budgets, which may in turn affect the Company's
financial position and results of operations.
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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 Los Angeles, State
of California.
Dated: September 2, 1997 FOOD 4 LESS HOLDINGS, INC.
/s/ John T. Standley
--------------------------
John T. Standley
Senior Vice President and
Chief Financial Officer
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