-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, so/XUmcbgvHNUmjbrjhWc5t/HhndZjU43rEVcmSy8lvO68b5DqRBmbnLHHC9lbJe WjzufeFfZvMmx2aCSBU4IA== 0000836023-94-000012.txt : 19940518 0000836023-94-000012.hdr.sgml : 19940518 ACCESSION NUMBER: 0000836023-94-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940130 FILED AS OF DATE: 19940502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RALPHS GROCERY CO CENTRAL INDEX KEY: 0000836023 STANDARD INDUSTRIAL CLASSIFICATION: 5411 IRS NUMBER: 311241926 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-22998 FILM NUMBER: 94525699 BUSINESS ADDRESS: STREET 1: 1100 W ARTESIA BLVD CITY: COMPTON STATE: CA ZIP: 90220 BUSINESS PHONE: 3108849000 MAIL ADDRESS: STREET 1: P.O. BOX 54143 CITY: LOS ANGELES STATE: CA ZIP: 90054 FORMER COMPANY: FORMER CONFORMED NAME: RALPHS ACQUISITION CO DATE OF NAME CHANGE: 19880817 10-K 1 RALPHS GROCERY 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: January 30, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 33-22998 RALPHS GROCERY COMPANY (Exact name of registrant as specified in its charter) Delaware 31-1241926 (IRS Employer Identification No.) (State or other jurisdiction of incorporation or organization) 1100 West Artesia Boulevard, Compton, California, 90220 (Address of principal executive offices) Registrant's telephone number, including area code:(310) 884-9000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (X) ---- No voting stock of the registrant is held by non-affiliates of the registrant. Number of shares of the registrant's Common Stock, $1.00 per value, outstanding as of January 30, 1994--100. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Registration Statement on Form S-1, Registration No. 33-47634, as amended, portions of Registration Statement on Form S-4, Registration No. 33-61812, portions of Annual Report on Form 10-K dated April 29, 1993 and portions of the Quarterly Report on Form 10-Q dated September 1, 1992, are incorporated by reference into Part IV. PART 1 ITEM 1. BUSINESS General Founded in 1873, Ralphs Grocery Company ("Ralphs" or the "Company") is one of the leading supermarket chains in Southern California. Ralphs operates 165 stores supported by its centrally located and efficient warehousing, distribution and manufacturing facilities. Ralphs is a wholly owned subsidiary of Ralphs Supermarkets, Inc. ("Holding Company"), a Delaware Corporation. The common stock of the Holding Company is held by The Edward J. DeBartolo Corporation - 60.34%; Camdev Properties, Inc. - - - 12.81%; Bank of Montreal - 10.13%; Banque Paribas - 10.13%; and Federated Department Stores, Inc. - 6.59%. Recapitalization Plan As part of a recapitalization plan implemented by the Company in 1992 and completed in 1993, (the "Recapitalization Plan") in 1993 the Company sold $150.0 million aggregate principal amount of its 9% Senior Subordinated notes due 2003 (the "Initial Notes") pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The proceeds of the Initial Notes were used to (i) purchase for cancellation $60.0 million aggregate principal amount of the Company's 14% Senior Subordinated Debentures due 2000 (the "14% Subordinated Debentures") from a noteholder who had made an unsolicited offer to sell such 14% Subordinated Debentures, (ii) defease the remaining $38.1 million aggregate principal amount of the 14% Subordinated Debentures, (iii) prepay $36.1 million of borrowings under the Company's $350.0 million 1992 term loan facility which had been entered into as part of the Recapitalization Plan and (iv) pay fees and expenses associated with such transactions and for other purposes. Pursuant to a registration rights agreement entered into with the purchasers of the Initial Notes, the Company offered to exchange up to $150.0 million aggregate principal amount of its 9% Series B Senior Subordinated Notes due 2003 (the "Exchange Notes") for the Initial Notes (the "Exchange Offer"). On June 24, 1993, the Company completed the exchange of $149.7 million aggregate principal amount of Exchange Notes for Initial Notes ($.3 million of Initial Notes remain outstanding). The terms of the Exchange Notes are substantially identical (including principal amount, interest rate and maturity) in all respects to the terms of the Initial Notes except that the Exchange Notes are freely transferable by the holders thereof (with certain exceptions). Business of the Company New Stores and Remodeling During the last five fiscal years, Ralphs has opened 46 new stores and remodeled 87 stores at a cost of approximately $283.6 million. A majority of these new and remodeled stores offer expanded produce and European-style seafood departments, service delicatessens, fresh bakeries and a broad selection of general merchandise. With enhanced decor reflecting contemporary interior design, these stores are designed to provide a quality shopping experience. At the end of the year ended January 30, 1994 ("Fiscal 1993"), 92% of Ralphs' stores were newly built or remodeled within the past seven years. The history of store openings, closings and remodelings since 1989 is set forth below:
Fiscal Year ----------------------------------- 1989 1990 1991 1992 1993 Beginning store count . 134 142 150 158 159 Stores opened . . . . . . 10 13 9 6 8 Stores closed or sold . . 2 5 1 5 2 Ending store count. . . . 142 150 158 159 165 Stores remodeled. . . . . 38 13 7 23 6
Ralphs selects most new store sites from developers' proposals. The sites, some of which are in high growth areas and others of which are in established areas, are researched and analyzed by Ralphs' personnel. Each site is monitored for population shifts, zoning changes, traffic patterns, nearby new construction and competitors stores, in an effort to determine sales potential. Ralphs actively participates with developers in order to obtain Ralphs' objectives for the site, including adequate parking and complimentary co-tenant mix. Remodeling usually involves enhancing a store's decor through fixture replacement, upgrading of service departments and improvements to lighting systems. In order to minimize the disruptive effect on sales, most stores are kept open during the remodeling period. The primary objectives of remodeling are to improve the attractiveness of stores, increase sales of higher margin product categories and, where feasible, to increase selling area. Since it has operated in Southern California for 121 years, Ralphs has many well-established store locations in highly populated metropolitan areas. Ralphs has pursued a strategy in recent years of acquiring strategic locations in high-growth master-planned communities. In response to the negative impact of the current economic climate on new home sales in Southern California, Ralphs' current new store development program reflects an increased emphasis on attractive development opportunities in more mature, highly populated areas. The Company plans to open 7 to 11 new stores and remodel 4 to 6 stores in fiscal 1994. Most of the new stores anticipated for fiscal 1994 are expected to open in the fourth quarter. Management believes that operating cash flow, supplemented by capital and operating leases, should be sufficient to meet Ralphs' operating needs and scheduled capital expenditures. Remodelings and openings, among other things, are subject to the availability of developers' financing, agreements with developers and landlords, local zoning regulations, construction schedules and other factors, including costs, often beyond Ralphs' control. Accordingly, there can be no assurance that the schedule will be met. Further, Ralphs expects increasing competition for new store sites, and it is possible that this competition might adversely affect the timing of its new store opening program. Some of the above mentioned factors adversely affected the anticipated store remodeling and opening schedule set forth in the Company's Annual Report on Form 10-K dated April 29, 1993. Merchandising and Marketing Management operates its stores under a single format which allows it to achieve operating economies. Every store uses the Ralphs name, however, each store is merchandised to appeal to the local community which it serves. Ralphs stocks between 20,000 and 30,000 merchandise items in its stores. Management believes that Ralphs offers a substantial supermarket product selection and that this is a significant aspect of its marketing offering. Ralphs emphasizes name-brand grocery products; quality and freshness in its produce, meat, seafood, delicatessen and bakery products; and broad selection in all departments. Service delicatessen departments are present in 163, on-premises bakery facilities are present in 151, floral departments are present in 165 and European-style seafood departments are present in 149 of Ralphs' stores. Ralphs' marketing strategy is to provide a combination of wide product selection, quality and freshness of perishable products, competitive prices and double coupons supporting Ralphs' advertising theme "Everything You Need. Everytime You Shop". In addition, Ralphs emphasizes store ambiance and cleanliness, fast and friendly service, the convenience of debit and credit card payment (including in-store branch banks) and 24-hour operations. In February 1994, Ralphs launched the Ralphs Savings Plan, a new marketing campaign specifically designed to enhance customer value. The Ralphs Savings Plan is comprised of six major components: Guaranteed Low Prices (GLPs), Price Breakers, Big Buys, Multi-Buys, Ralphs Brand Products and Double Coupons. GLPs guarantee low prices on approximately 600 to 1,000 high volume items that are surveyed and updated every four weeks. Price Breakers are weekly advertised items that offer significant savings. Big Buys are club size items at prices competitive to club store prices and Multi-Buys offer Ralphs' shoppers the opportunity to purchase club store quantities of regular sized items at prices competitive to club store prices. In conjunction with this new campaign Ralphs private label offering of over 2,000 products provides value to the customer. Private label sales represented 17.3% of sales at fiscal year-end. As part of Ralphs' effort to keep pace with its changing marketplace, customers are invited to comment on Ralphs' operations through "We'd Like to Know" cards available at each store. Several hundred cards are received each month. The cards are analyzed on an individual basis by store and district by senior management, enabling Ralphs to respond promptly to customer observations and suggestions. Information Systems and Technology Ralphs' management utilizes technology and industrial engineering methods to enhance operating efficiency. Every checkout lane in every Ralphs' store has a point of sale terminal. Information from these terminals is utilized to allocate shelf space, select merchandise based on the buying patterns of each store, reduce out-of-stocks and increase efficiency at the checkstand and in the warehouses. Industrial engineering methods are used to schedule labor thereby improving productivity at the store level and in warehousing and distribution operations. Ralphs was the first supermarket chain in the western United States to adopt scanning in all of its stores and has upgraded this equipment through the purchase of IBM 4680 point-of-sale computers. All Ralphs' stores use laser scanning equipment, operating through an integrated computer system, to scan the Universal Product Code, which provides prices and descriptions for most products. Ralphs has a Uniform Communications Standard purchase order system that electronically links Ralphs to major suppliers via computer. This system has enabled the automated processing of purchase orders which management believes reduces the lead time required for product purchases. In Fiscal 1993, Ralphs completed installation of an industry standard, direct store delivery receiving system for goods delivered directly by vendors. This system allows the receipt of each order to be recorded electronically, thereby confirming product retail price and purchase authorization. This system has reduced the incidence of billing errors and unauthorized deliveries. Industrial engineering standards have been established for all major work functions in Ralphs' stores, ranging from stocking to checkout. Performance of each major department in each store is measured weekly against these standards. Similar measurements are made in Ralphs' distribution, warehouse and manufacturing operations. Ralphs believes that its application of quantitative methods to the operation of the business has given it a competitive advantage and has better enabled management to run its business efficiently and to control costs. Distribution and Warehouse Operations Ralphs' distribution and warehouse facilities are all located in Southern California. In Fiscal 1993, approximately 82% of goods supplied to Ralphs' stores were provided through its own warehouse and distribution facilities; the remaining 18% were delivered directly by vendors to the stores. In November 1987, Ralphs opened a 17 million cubic foot highrise automated storage and retrieval system ("ASRS") warehouse for non-perishable items, at a cost of approximately $50.0 million. This facility significantly increased capacity and improved the efficiency of Ralphs' warehouse operations. The automated warehouse has a ground floor area of 170,000 square feet and capacity of approximately 50,000 pallets. Guided by computer software, ten-story high cranes move pallets from the receiving dock to programmed locations in the ASRS warehouse, while recording the location and time of storage. Goods are retrieved and delivered by the cranes to conveyors leading to the adjacent grocery "picking" warehouse where individual store orders are filled and shipped. The ASRS facility can hold substantially more inventory and requires fewer employees to operate than a conventional warehouse of equal size. This facility has reduced Ralphs' warehousing costs of non-perishable items markedly, enabling it to take advantage of advance buying opportunities and minimize "out-of-stocks." Ralphs engages in forward-buy purchases to take advantage of special prices or to delay the impact of upcoming price increases by purchasing and warehousing larger quantities of merchandise than immediately required. In mid-1992, Ralphs opened a 5.4 million cubic foot facility designed to process and store all perishable products (the "Perishables Service Center" or "PSC"). This facility cost approximately $35.0 million and has enabled Ralphs to have the ability to deliver perishable products to its stores on a daily basis, thereby improving the freshness and quality of these products. The facility contains an energy efficient refrigeration system and a computer system designed to document the location and anticipated delivery time of all inventory. The PSC has consolidated the operations of three existing facilities and holds more inventory than the facilities it replaced, thereby reducing Ralphs' warehouse distribution costs. All Ralphs' stores are within a three hour drive from the distribution and warehousing facilities. This geographical concentration combined with Ralphs' efficient order system shortens the lead time between the placement of a merchandise order and its receipt. As part of its distribution operations Ralphs operates a modern fleet of 193 tractors and 577 trailers, of which 183 tractors and 394 trailers are leased, with the remainder being owned by Ralphs. Manufacturing Food products manufactured or processed by Ralphs accounted for estimated sales of $301.7 million (11.1% of total sales) during Fiscal 1993. Wholesale sales to third parties of manufactured or processed products were approximately $2.5 million for the same period. By manufacturing or processing certain products, Ralphs is able to improve its merchandising mix, resulting in higher operating margins and enhanced quality control. Ralphs' manufacturing operations produce a variety of dairy and other products, including fluid milk, ice cream, yogurt and bottled waters and juices as well as packaged ice, cheese and salad preparations. Ralphs contracts with meat processors to provide a full line of whole and prefabricated cuts. Ralphs ceased operating its bakery operations during the second quarter of Fiscal 1993 at its 102,000 square foot facility in Los Angeles in conjunction with an increased emphasis on in-store bakeries. The Company provided a restructuring charge of approximately $7.1 million and $2.4 million during the year ended January 31, 1993 ("Fiscal 1992"), and Fiscal 1993, respectively, to record the costs of closing the bakery operation. The following table sets forth information concerning Ralphs' other manufacturing and processing facilities, all of which are owned: Building Facility Sq. Feet Location -------- ---------- --------- Milk processing . . . . . . 28,000 Compton Ice cream processing. . . . 9,000 Compton Delicatessen kitchen. . . . 23,000 Compton Competition The supermarket business is characterized by high sales volume, high inventory turnover and low gross profit margins. The business is highly competitive in Southern California. Principal competitive factors in the supermarket business include store locations, the combination of price and quality that give the consumer the greatest perceived value, availability and breadth of selection, quality of products and service, store environment, including cleanliness, and promotions. Ralphs' management believes, based on its marketing research, that consumers perceive Ralphs as offering a combination of convenience, competitive prices and a wide variety of quality products and services in a pleasant shopping environment. Ralphs' management believes that its competitive strengths are its desirable store locations and sites in combination with a strong consumer franchise, its commitment and ability to adapt new and existing technology to the supermarket business, its efficient manufacturing, warehousing and distribution facilities, its experienced management team and its well-trained employees. Ralphs competes with several large supermarket chains, including Vons, Lucky Stores, Alpha Beta Markets, Hughes and Stater Brothers and with other smaller supermarket chains, as well as independent grocery stores and warehouse club/discount merchandisers. Certain of Ralphs' competitors are larger in terms of capital and sales volume and may have greater financial resources and access to capital than does Ralphs. Employees
At January 30, 1994, Ralphs had 6,136 full-time and 8,776 part-time employees as follows: Union Nonunion Total ------ -------- ------ Hourly. . . . . . . . 13,573 259 13,832 Salaried. . . . . . . -- 1,080 1,080 ------ ------ ------ Total employees . . 13,573 1,339 14,912 ====== ====== ======
Ralphs has collective bargaining agreements with unions representing 13,573 of Ralphs' hourly employees. Ralphs' agreement with the International Brotherhood of Teamsters expires in September 1994 and its agreement with the United Food and Commercial Workers Union expires in October 1996. Ralphs believes it has good relations with its employees. Pursuant to its collective bargaining agreements, Ralphs contributes to various union-sponsored, multi-employer pension plans. Government Regulation Ralphs is subject to regulation by a variety of governmental agencies, including but not limited to the California Department of Alcoholic Beverage Control, the California Department of Agriculture, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments. ITEM 2. PROPERTIES Ralphs owns the locations of 41 and leases the locations of 124 of its 165 supermarkets. It owns 11 and leases five of its 16 distribution, warehouse and administrative facilities. Ralphs owns its three manufacturing and processing facilities. Ralphs' properties are located in six Southern California counties (Los Angeles, Orange, Ventura, San Bernardino, Riverside and San Diego). See Note 6 of the Notes to Consolidated Financial Statements of Ralphs included elsewhere in this Form 10-K. Ralphs believes that its properties are adequately maintained and are adequate for its business needs. On January 17, 1994, an earthquake in Southern California caused considerable damage in Los Angeles and surrounding areas. Several Ralphs supermarkets suffered earthquake damage with 54 stores completely shutdown on the morning of January 17th. Thirty-four stores reopened within one day and an additional 17 stores reopened within three days. Suffering major structural damage were three stores in the San Fernando Valley area of Los Angeles. All three stores have since reopened for business with the last reopening on April 15, 1994. Management believes that there was some negative impact on sales from the temporary disruption of business resulting from the earthquake. Ralphs is insured for earthquake losses. The pre-tax financial impact, net of insurance claims, is expected to be approximately $11 million and the Company has reserved for this loss in Fiscal 1993. The number of stores and facilities operated and the square feet of space at January 30, 1994 consisted of: Units Gross Space Selling Space ----- ----------- ------------- (in thousands) Stores. . . . . . . . 165 6,874.4 4,818.6 Distribution, warehouse and administrative facilities. . . . . 16 1,693.0 -- Manufacturing and processing facil- ities . . . . . . . 3 60.0 -- ---- ------- ------- TOTAL . . . . . . 184 8,627.4 4,818.6 ==== ======= ======= The number of stores by size classification as of January 30, 1994 is as follows: Average Average No. of Gross Selling Stores Gross Square Feet Square Feet Square Feet - - ------ ----------------- ----------- ----------- 1 23,000 -- 25,000 23,000 17,156 11 25,001 -- 30,000 28,634 19,120 23 30,001 -- 35,000 32,720 22,573 41 35,001 -- 40,000 37,458 25,849 57 40,001 -- 45,000 43,340 31,202 19 45,001 -- 50,000 46,603 31,860 13 50,001 -- 84,280 68,630 48,327 ITEM 3. LEGAL PROCEEDING In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against Ralphs and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in and to fix the price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14, and December 23, 1992 respectively. To date, the Court has yet to certify any of these classes, while a Demurrer to the complaints was denied. Ralphs intends to continue to vigorously pursue its defense in these actions. On March 25, 1991, George A. Koteen Associates, Inc. ("Koteen Associates") commenced an action in San Diego Superior Court alleging that Ralphs breached an alleged utility rate consulting agreement. In December 1992, a jury returned a verdict of $4,949,084 in favor of Koteen Associates and in March 1993, attorney's fees and certain other costs were awarded to the plaintiff. Ralphs has appealed the judgment and fully reserved in Fiscal 1992 against an adverse judgement. Environmental Matters In January 1991, the California Regional Water Quality Control Board for the Los Angeles Region (the "Regional Board") requested Ralphs to conduct a subsurface characterization of Ralphs' Atwater property. This request was part of an ongoing effort by the Regional Board, in connection with the U.S. Environmental Protection Agency (the "EPA"), to identify contributors to groundwater contamination in the San Fernando Valley. Significant parts of the San Fernando Valley, including the area where Ralphs' Atwater property is located, have been designated federal Superfund sites because of regional groundwater contamination. On June 18, 1991, the EPA made its own request for information concerning the Atwater property. Since that time, the Regional Board has requested further investigations. Because the Regional Board and the EPA are only collecting information at this time and have not given notice of any specific action or claim against Ralphs, it is not possible to estimate the amounts of any possible claims in connection with the Atwater property. In 1994, Ralphs completed the remediation of the mineral oil release at its bakery located at the Atwater property in Los Angeles. Ralphs' environmental consultants do not contemplate that there will be any further regulatory requirements with respect to this matter. The Company is involved in a number of other legal proceedings, none of which is expected to have a material impact on the financial conditions or business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. There is no established public trading market for the Company's common equity. (b) Holders. The Company is a wholly owned subsidiary of the Holding Company. (c) Dividends. In February 1994, the Board of Directors of the Company authorized a dividend of $10.0 million to be paid to the Holding Company and the Board of Directors of the Holding Company authorized distribution of this dividend to its shareholders subject to certain restrictive covenants in the instruments governing certain of Ralphs' indebtedness that impose limitation on the declarations or payment of dividends. The Company is currently seeking an amendment to the Credit Agreement dated as of July 22, 1992 as amended (the "1992 Credit Agreement") to allow the payment of the dividend to the Holding Company for distribution to the Holding Company's stockholders. The proposed fee for the amendment is approximately $500,000. The Holding Company and the stockholders of the Holding Company entered into a Registration Rights and Corporate Governance Agreement (the "Registration Rights Agreement") which provides for certain aspects of corporate governance of the Company and the Holding Company. Pursuant to the terms of the Registration Rights Agreement, Ralphs is obligated to provide the Holding Company, by dividend, pursuant to a services agreement or otherwise, with funds sufficient to enable the Holding Company to perform its duties as the holding company of Ralphs' stock and to perform its obligations set forth in the Registration Rights Agreement. ITEM 6. SELECTED FINANCIAL DATA The following table presents historical selected financial data derived from the audited financial statements of the Company for the fiscal years ended January 28, 1990, February 3, 1991, February 2, 1992, January 31, 1993 and January 30, 1994. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and related notes thereto, included elsewhere in this Form 10-K.
Year Year Year Year Year Ended Ended Ended Ended Ended Jan. 28, Feb. 3, Feb. 2, Jan. 31, Jan. 30, 1990 1991(a) 1992 1993 1994 ------- -------- ------- ------- ------ (dollars in millions) Income Statement Data: Sales. . . . . . . . . . . $2,556.1 $2,799.1 $2,889.2 $2,843.8 $2,730.2 Cost of sales . . . . . . . 2,051.1 2,225.4 2,275.2 2,217.2 2,093.7 ------- -------- -------- -------- -------- Gross profit . . . . . . . 505.0 573.7 614.0 626.6 636.5 Selling,general & admin- istrative expenses. . . . 391.0 435.8 456.6 466.7 467.6 Provision for equity appreciation rights . . . 26.0 15.3 18.3 -- -- Amortization of excess of cost over net assets acquired. . . . . . . . . 11.7 11.0 11.0 11.0 11.0 Provision for restructuring(b) -- -- -- 7.1 2.4 Provision for postretirement benefits other than pensions . . . . . . . . -- 2.2 2.6 3.3 3.4 Provision for tax indem- nification payments to Federated. . . . . . . . -- -- 10.0 -- -- ------ ------- ------- ------ ------ Operating income(loss) . . 76.3 109.4 115.5 138.5 152.1 Other (income) expenses: Interest 130.9 128.5 130.2 125.6 108.8 (Gain)loss on disposal of assets. . . . . . . . . . 3.1 6.4 13.0(c) 2.6 1.9 Provision for legal settle- ment. . . . . . . . . . -- -- -- 7.5 -- Provision for earthquake losses (d). . . . . . . . -- -- -- -- 11.0 ------ ------- ------- ------ ------ Earnings(loss) before income taxes, cumulative effect of change in accounting and extraordinary item. . . . . (57.7) (25.5) (27.7) 2.8 30.4 Income tax expense (benefit). 12.0 12.8 13.5 8.3 (108.0)(e) ------ ------- ------- ------ ------ Earnings(loss) before cumula- tive effect of change in accounting and extraordinary item . . . . . . . . . . . (69.7) (38.3) (41.2) (5.5) 138.4 Cumulative effect of change in accounting for postretirement benefits other than pensions. -- (13.1) -- -- -- ------ ------- ------- ------ ------ Earnings(loss) before extra- ordinary item . . . . . . . (69.7) (51.4) (41.2) (5.5) 138.4 Extraordinary item--debt re- financing, net of tax benefit of $4.2 . . . . . . . . . . -- -- -- (70.6) -- ------ ------- -------- ------- ------ Net earnings(loss) $ (69.7) $(51.4) $(41.2) $(76.1) $138.4 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges (f). . . . . . . . --(g) --(g) --(g) 1.02 1.24 ==== ==== ==== ==== ==== Operating and Other Data: EBITDA (h) . . . . . . . . $ 188.8 $207.0 $225.8 $227.3 $230.2 EBITDA margin (i). . . . . 7.4% 7.4% 7.8% 8.0% 8.4% Depreciation and amortization (j). . . . . $ 81.6 $ 75.2 $ 76.6 $ 76.9 $74.5 Capital expenditures . . . $ 103.5 $ 87.6 $ 50.4 $102.7 $62.2 Ratio of EBITDA to interest expense . . . . . . . . . 1.44 1.61 1.73 1.81 2.12 Ratio of EBITDA to cash interest expense (k). . . 1.56 1.76 1.95 2.15 2.48 Ratio of total debt to EBITDA. . . . . . . . . . 5.26 4.78 4.11 4.39 4.34 Store Data: Stores open at end of period (l). . . . . . . . 142 150 158 159 165 Number of remodels (l) . . 38 13 7 23 6 Sales per selling square foot (l)(m) . . . . . . . $ 631 $ 649 $ 628 $ 617 $567 Balance Sheet Data (end of period): Total assets . . . . . . . $1,404.8 $1,406.4 $1,357.6 $1,388.5 $1,483.7 Total debt (n) . . . . . . 994.0 989.1 928.4 998.7 998.9 Stockholder's equity (deficit) . . . . . . . . $ 35.4 $ (16.0) $ (57.2)$ (133.3) $ 5.1 (a) The fiscal year was comprised of 53 weeks as compared to 52 weeks with respect to the other fiscal years presented. (b) Charge for expenses relating to closing of central bakery operations. (c) Includes approximately $12.2 million representing a reserve against losses related to the closing of three stores. (d) Represents reserve for losses, net of insurance claims, resulting from January 17, 1994 Southern California earthquake. (e) Includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993 (See Note 11 of the Notes to Consolidated Financial Statements). (f) For purposes of computing this ratio, earnings consist of earnings before income taxes, cumulative effect of change in accounting, extraordinary item and fixed charges. Fixed charges consist of interest expense (including amortization of self- insurance reserves discount), capitalized interest, amortization of deferred debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). (g) Earnings before income taxes, cumulative effect of change in accounting, extraordinary item and fixed charges were insufficient to cover fixed charges for fiscal 1989, 1990 and 1991 by $57.7 million, $25.5 million and $27.7 million, respectively. (h) EBITDA represents net earnings before taking into consideration interest expense, income tax expense, depreciation expense, amortization expense, provisions for equity appreciation rights, tax indemnification payments to Federated Department Stores, Inc. (See Item 13. "Certain Relationships and Related Transactions"), postretirement benefits, the LIFO provision, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, reserves for earthquake losses and loss on disposal of assets. (i) EBITDA margin represents EBITDA as a percentage of sales. (j) For fiscal 1989, 1990, 1991, 1992 and 1993 the amount includes amortization of the excess of cost over net assets acquired of $11.7 million, $11.0 million, $11.0 million, $11.0 million and $11.0 million respectively. (k) Excludes charges relating to amortization of debt issuance costs, self-insurance discount, lease valuation reserves and other miscellaneous charges which are categorized by Ralphs as non-cash interest expense. (l) Data relating to stores is expressed in actual numbers. (m) Sales per selling square foot are based on total store selling square footage at the end of the fiscal year. (n) Total debt includes long-term debt, current maturities of long-term debt, capital lease obligations and redeemable preferred stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview and Basis of Presentation The following discussion of Ralphs' financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.
Year Ended Year Ended Year Ended February 2, 1992 January 31,1993 January 30, 1994 ---------------- ---------------- ---------------- (dollars in millions) Income Statement Data: Sales. . . . . . . . . . $2,889.2 100.0% $2,843.8 100.0% $2,730.2 100.0% Cost of sales. . . . . . 2,275.2 78.8 2,217.2 78.0 2,093.7 76.7 -------- ------ -------- ------ -------- ------ Gross profit. . . . . 614.0 21.2 626.6 22.0 636.5 23.3 Selling, general and administrative expenses. 456.6 15.8 466.7 16.4 467.6 17.1 Provision for equity appreciation rights . . 18.3 0.6 -- -- -- -- Amortization of excess of cost over net assets acquired. . . . . . . . 11.0 0.4 11.0 0.4 11.0 0.4 Provision for restruct- uring (a) . . . . . . . -- -- 7.1 0.2 2.4 0.1 Provision for postretire- ment benefits other than pensions. . . . . . . . 2.6 0.1 3.3 0.1 3.4 0.1 Provision for tax indem- nification. . . . . . . 10.0 0.3 -- -- -- -- -------- ------ -------- ------ -------- ------ Operating Income. . . 115.5 4.0 138.5 4.9 152.1 5.6 Other expenses: Interest . . . . . . . 130.2 4.5 125.6 4.4 108.8 4.0 Loss on disposal of assets . . . . . . . 13.0 0.5 2.6 0.1 1.9 0.1 Provision for legal settlement. . . . . . -- -- 7.5 0.3 -- -- Provision for earthquake losses (b). . . . . . -- -- -- -- 11.0 0.4 -------- ------ -------- ------ -------- ------ Earnings(loss) before income taxes, and extra- ordinary item . . . . . (27.7) (1.0) 2.8 0.1 30.4 1.1 Income tax expense (benefit). . . . . . . . 13.5 0.4 8.3 0.3 (108.0) (4.0) -------- ------ -------- ------ -------- ------ Earnings(loss) before extraordinary item. . . (41.2) (1.4) (5.5) (0.2) 138.4 5.1 Extraordinary item--debt refinancing, net of tax benefit of $4.2 . . . . -- -- (70.6) (2.5) -- -- -------- ------ -------- ------ -------- ------ Net earnings(loss). . $ (41.2) (1.4)% $(76.1) (2.7)% $138.4 5.1% ==== ==== ==== ==== ==== === Other Data: EBITDA(c). . . . . . . . $ 225.8 7.8% $227.3 8.0% $230.2 8.4% Depreciation and amortization(d) . . . . 76.6 2.7 76.9 2.7 74.5 2.7 LIFO charge. . . . . . . 2.8 0.1 1.1 0.0 (2.1) (0.1) (a) Charge for expenses relating to closing of central bakery operation. (b) Represents reserve for losses, net of insurance claims, resulting from January 17, 1994 Southern California earthquake. (c) EBITDA represents net earnings before taking into consideration interest expense, income tax expense, depreciation expense, amortization expense, provisions for equity appreciation rights, tax indemnification payments to Federated Department Stores, Inc., postretirement benefits, the LIFO provision, extraordinary item relating to debt refinancing, provision for legal settlement, provision for restructuring, reserves for earthquake losses and loss on disposal of assets. (d) For the fiscal years ended 1991, 1992 and 1993 the amount includes amortization of excess cost over net assets acquired of $11.0 million, $11.0 million and $11.0 million, respectively.
Results of Operations Fiscal 1993 v. Fiscal 1992 Sales For the 52 weeks ended January 30, 1994 ("Fiscal 1993"), sales were $2.730 billion, a decrease of $113.6 million or 4.0% compared to the 52 weeks ended January 31, 1993 ("Fiscal 1992"). During Fiscal 1993, Ralphs opened eight new stores, four in Los Angeles County, two in Orange County and two in Riverside County, and remodeled six stores. Two of the eight new stores replaced the two stores closed during the fiscal year. Comparable store sales decreased 5.8%, which included an increase of 0.6% for replacement stores, from $2.823 billion to $2.659 billion in Fiscal 1993. Ralphs' sales continue to be adversely affected by the significant recession in Southern California, continuing competitive new store and remodeling activity and recent pricing and promotional changes by competitors. The recession, high unemployment and competitive store openings contributed to the declines in both total and comparable store sales. During the first quarter of fiscal year ending January 29, 1995 ("Fiscal 1994") comparable store sales were substantially similar to the fourth quarter of Fiscal 1993, except that during the last three weeks of the quarter comparable store sales were lower. The Company believes these lower comparable store sales levels were due to the impact on the consumer of property and income tax payments. Ralphs continued to take steps to mitigate the impact of the weak retailing environment in its markets. These actions included continuing the active remodeling program commenced in the fall of 1988. In February 1994, Ralphs launched the Ralphs Savings Plan, a new marketing campaign specifically designed to enhance customer value. Cost of Sales Cost of sales decreased $123.5 million or 5.6% from $2.217 billion in Fiscal 1992 to $2.094 billion in Fiscal 1993. As a percentage of sales, cost of sales declined to 76.7% in Fiscal 1993 from 78.0% in Fiscal 1992. The decrease in cost of sales as a percentage of sales was the result of savings in warehousing and distribution costs, the pass-through of increased operating costs and increases in relative margins where allowed by competitive conditions. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $.9 million or 0.2% from $466.7 million in Fiscal 1992 to $467.6 million in Fiscal 1993. As a percentage of sales, selling, general and administrative expenses increased from 16.4% in Fiscal 1992 to 17.1% in Fiscal 1993. The increase in selling, general and administrative expenses as a percent of sales was the result of several factors including the continuing soft sales environment. Increases in expense were partially offset by cost savings programs instituted by Ralphs. The Company is continuing its expense reduction program, which is showing positive results. Operating Income Operating income in Fiscal 1993 increased to $152.1 millon from $138.5 million in Fiscal 1992, a 9.8% increase. Operating margin increased in Fiscal 1993 to 5.6% from 4.9% in Fiscal 1992. This increase was primarily the result of the aforementioned improvements in Ralphs' cost of sales percentage. EBITDA improved to $230.2 million or 8.4% of sales in Fiscal 1993 from $227.3 million or 8.0% of sales in Fiscal 1992. Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. The United Food and Commercial Workers health and welfare benefit plans were overfunded and those employers who contributed to these plans are to receive a pro-rata share of the excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in Fiscal 1993 and the remainder will be recognized in Fiscal 1994. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels. Partially offsetting the reduction of health and welfare maintenance payments was a $6.0 million contract ratification bonus paid by the Company at the conclusion of contract negotiations with the United Food and Commercial Workers Union in Fiscal 1993. Interest Expense Net interest expense for Fiscal 1993 was $108.8 million, compared to $125.6 million for Fiscal 1992. On July 30, 1992 Ralphs initiated the Recapitalization Plan, which was completed during the first quarter of 1993. The Recapitalization Plan was designed to reduce interest expense and improve financial flexibility. See discussion of Recapitalization Plan under Item 1 of Part 1. Included as interest expenses during Fiscal 1993 was $92.8 million, representing interest expenses for the 14% Subordinated Debentures, the Initial Notes and Exchange Notes, the 10 1/4% Senior Subordinated Notes, the 1992 Credit Agreement, certain secured mortgage notes in the aggregate principal amount of $175.6 million and which bear interest at 9.65% (the "Mortgage Notes"), interest on capitalized and operating leases, and other collateralized and miscellaneous debts as compared to $105.5 million for Fiscal 1992. Also included in interest expense for Fiscal 1993 was $16.0 million representing certain other charges relating to amortization of debt issuance costs, self-insurance discount, lease valuation reserves and other miscellaneous charges (categorized by Ralphs as non-cash interest expense) as compared to $20.1 million for Fiscal 1992. Investment income has been offset against interest expenses. Earthquake Losses On January 17, 1994, an earthquake in Southern California caused considerable damage in Los Angeles and surrounding areas. Several Ralphs supermarkets suffered earthquake damage with 54 stores completely shutdown on the morning of January 17th. Thirty-four stores reopened within one day and an additional 17 stores reopened within three days. Suffering major structural damage were three stores in the San Fernando Valley area of Los Angeles. All three stores have since reopened for business with the last reopening on April 15, 1994. Management believes that there was some negative impact on sales resulting from the temporary disruption of business resulting from the earthquake. Ralphs is insured for earthquake losses. The pre-tax financial impact, net of insurance claims, is expected to be approximately $11 million and the Company has reserved for this loss in Fiscal 1993. Income Taxes In Fiscal 1993, the Company recorded the incremental impact of The Omnibus Budget Reconciliation Act of 1993 on net deductible temporary differences and increased its deferred income tax assets by a net amount of $109.1 million. Income tax expense (benefit) for Fiscal 1993 includes recognition of $109.1 million of deferred income tax benefit and $1.1 million current income tax expense for Fiscal 1993 (See Note 11 of the Notes to Consolidated Financial Statements). Net Earnings In Fiscal 1993, Ralphs reported net earnings of $138.4 million compared to a net loss of $76.1 million for Fiscal 1992. This increase in net earnings was primarily the result of the Company's recognition of $109.1 million of deferred income tax benefit for Fiscal 1993 and the following items recorded in Fiscal 1992: 1) the consummation of the Recapitalization Plan, which resulted in an extraordinary charge, net of tax benefit, of $70.6 million, 2) a provision of $7.1 million made for expenses related to the closure of the central bakery operation, (an additional charge of $2.4 million was recorded in Fiscal 1993) and 3) a provision of $7.5 million made for the maximum loss under a judgement rendered against the Company. Results of Operations Fiscal 1992 v. Fiscal 1991 Sales For the 52 weeks ended January 31, 1993, sales were $2.844 billion, a decrease of $45.4 million or 1.6% compared to Fiscal 1991 (the 52 weeks ended February 2, 1992). During Fiscal 1992, Ralphs opened six new stores, three in Los Angeles County, one in Riverside County, one in San Bernardino County and one in San Diego County, closed five stores and remodeled 23 stores. Comparable stores sales decreased 3.5%, which included an increase of 0.6% for replacement stores, from $2.859 billion to $2.759 billion in Fiscal 1992. Ralphs' sales continued to be adversely affected by the significant recession in Southern California, continuing competitive new store and remodeling activity and pricing and promotional changes by competitors. The recession, high unemployment and competitive store openings contributed to the declines in both total and comparable stores sales. An additional factor adversely affecting such sales was the unusually strong first quarter Fiscal 1991 performance which management attributes to the effect of the Persian Gulf crisis. Cost of Sales Cost of sales decreased $58.0 million or 2.5% from $2.275 billion in Fiscal 1991 to $2.217 billion in Fiscal 1992. As a percentage of sales, cost of sales declined to 78.0% in Fiscal 1992 from 78.8% in Fiscal 1991. The decrease in cost of sales as a percentage of sales was the result of the pass-through of increased operating costs, an increase in the mix of above average gross margin products and increases in relative margins where allowed by competitive conditions. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $10.1 million or 2.2% from $456.6 million in Fiscal 1991 to $466.7 million in Fiscal 1992. As a percentage of sales, selling, general and administrative expenses increased from 15.8% in Fiscal 1991 to 16.4% in Fiscal 1992. The increase in selling, general and administrative expenses as a percent of sales was the result of several factors including the continuing soft sales environment. Other factors impacting selling, general and administrative expenses during Fiscal 1992 were increases in union wage rates. These expense increases were partially offset by significant cost savings programs instituted by Ralphs. These programs were intensified in the third quarter of 1992 due to the prolonged period of soft sales experienced in Southern California. Operating Income Operating income in Fiscal 1992 increased to $138.5 million from $115.5 million in Fiscal 1991, a 20.0% increase. Operating margin increased in Fiscal 1992 to 4.9% from 4.0% in Fiscal 1991. This increase was primarily the result of the aforementioned improvements in Ralphs' cost of sales percentage and the vesting of then outstanding rights under Ralphs' 1988 Equity Appreciation Rights Plan. EBITDA improved to $227.3 million or 8.0% of sales in Fiscal 1992 from $225.8 million or 7.8% of sales in Fiscal 1991. Interest Expense Net interest expense for Fiscal 1992 was $125.6 million, including an adjustment of $2.3 million related to additional interest on self-insurance, compared to $130.2 million for Fiscal 1991. On July 30, 1992 Ralphs initiated the Recapitalization Plan, which was designed to reduce interest expense and improve financial flexibility. The first part of the Recapitalization Plan consisted of a tender offer for the 14% Subordinated Debentures (of which $301.9 million were tendered), the issuance of $300 million 10 1/4% Senior Subordinated Notes, and a new $470.0 million bank facility (consisting of a $350.0 million term loan and a $120.0 million working capital credit line). The 1992 Credit Agreement replaced the 1988 Credit Agreements, which were paid in full, including termination of existing interest rate swap agreements. Included as interest expenses during Fiscal 1992 was $105.5 million, representing interest expenses for the 14% Subordinated Debentures, the 10 1/4% Senior Subordinated Notes, the 1988 Credit Agreements, the 1992 Credit Agreement, certain secured mortgage notes in the aggregate principal amount of $176.0 million and which bear interest at 9.65% (the "Mortgage Notes"), interest on capitalized and operating leases, and other collateralized and miscellaneous debt as compared to $115.8 million for Fiscal 1991. Also included in interest expense for Fiscal 1992 was $20.1 million representing certain other charges relating to amortization of debt issuance costs, self-insurance discount, lease valuation reserves and other miscellaneous charges (categorized by Ralphs as non-cash interest expense) as compared to $14.4 million for Fiscal 1991. Investment income has been offset against interest expenses. In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate cap agreement with an effective date of November 6, 1992 and a three-year maturity. The interest rate cap hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal amount against increases in short-term rates. This agreement satisfies interest rate protection requirements under the 1992 Credit Agreement. In addition to the interest rate cap agreement, Ralphs entered into an interest rate swap agreement on $150.0 million notional principal amount. Under the interest rate swap agreement, Ralphs is required to pay interest at LIBOR fixed at the end of each six month calculation period and Ralphs will receive interest payments at LIBOR fixed at the beginning of each six month calculation period. An increase or decrease of one-half percent (0.5%) in the LIBOR interest rate during a six month calculation period would result in an increase or decrease in interest payments of $.375 million. This interest rate swap agreement has a three-year term expiring November 6, 1995. Ralphs is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, Ralphs does not anticipate nonperformance by the counterpart. Recapitalization Charges In Fiscal 1992 Ralphs incurred a non-recurring pre-tax charge totalling $74.7 million in connection with the retirement of the $400.0 million aggregate principal amount of the 14% Subordinated Debentures and the write-off of deferred financing costs related to the $400.0 million principal amount of the 14% Subordinated Debentures and the 1988 Credit Agreements, charges incurred to terminate interest rate swap agreements and costs related to a prospective equity offering. Incurrence of the non- recurring pre-tax charges resulted in a substantial reduction in income taxes payable in Fiscal 1992. See "Recapitalization Plan." Net Loss In Fiscal 1992, Ralphs reported a net loss of $76.1 million compared to a loss of $41.2 million for Fiscal 1991. This increase in the loss was primarily the result of the consummation of the Recapitalization plan, which resulted in an extraordinary charge, net of tax benefit of $70.6 million. In addition, a provision of $7.1 million was made for expenses related to the closing of the central bakery operation and a provision of $7.5 million was made for the maximum loss under a judgement rendered against the Company in December 1992. Liquidity and Capital Resources Ralphs' total long-term debt (including current maturities) at January 30, 1994 was $998.9 million. All mandatory principal reductions required by the various agreements were satisfied during Fiscal 1993. Management believes that operating cash flow, supplemented by capital and operating leases, should be sufficient to meet Ralphs' operating needs and scheduled capital expenditures and will enable Ralphs to service its debt in accordance with its terms. It is possible, however, that additional financing may be required and there is no assurance that such financing will be available, or, if available, will be on terms acceptable to Ralphs. Working capital was a deficit of $73.0 million at January 30, 1994. Supermarket operators typically require small amounts of working capital since inventory is generally sold prior to the time that payments to suppliers are due. Therefore, cash provided from operations is frequently used for non-current purposes such as investing and financing activities. Included in working capital was $71.0 million in current maturities on long-term debt. Ralphs' primary sources of liquidity during Fiscal 1993 were cash flow from operations and borrowings under the 1992 Credit Agreement. Cash flow provided from operating activities after payment of interest expense and before capital expenditures was $104.0 million for Fiscal 1993. Capital expenditures for Fiscal 1993 were $62.2 million. In Fiscal 1993, the Company recorded the incremental impact of The Omnibus Budget Reconciliation Act of 1993 on deductible temporary differences and increased its deferred income tax assets by a net amount of $109.1 million. The Company believes it is more likely than not that the recorded net deferred tax asset will be realized (see Note 11 of the Notes to Consolidated Financial Statements). The 1992 Working Capital Facility is a $120.0 million credit line which is available for working capital requirements and general corporate purposes. Up to $60.0 million of the 1992 Working Capital Facility may be used to support standby letters of credit and up to $10.0 million in the aggregate may be borrowed on same-day notice as swing-line loans. The letters of credit may be used to cover workers' compensation contingencies and for such other purposes as are permitted under the 1992 Credit Agreement. The 1992 Working Capital Facility is a non- amortizing line of credit available through the earlier of June 30, 1998 or the date the 1992 Credit Agreement is paid in full. Borrowings under the 1992 Working Capital Facility generally are required to be reduced to zero for 30 consecutive days in each period of twelve consecutive months. There were no borrowings under the Working Capital Facility as of January 30, 1994. The amount available under the 1992 Credit Agreement's Working Capital Facility was $68.9 million at January 30, 1994. Effective May 1, 1994, the letter of credit required by the State of California to support worker's compensation contingencies was increased from $41.7 million to $43.1 million. This increase reduces the amount available under the 1992 Working Capital Facility. During Fiscal 1993 cash used in investing activities was $45.5 million. This amount reflects increased capital expenditures related to store remodels and new store openings (including store acquisitions) and, to a lesser extent, expansion of other warehousing, distribution and manufacturing facilities and equipment, including data processing and computer systems. Cash used in financing activities was approximately $49.6 million for Fiscal 1993. This amount reflects the effects of the offering of the Initial Notes and the application of the proceeds therefrom. Reductions of capital lease obligations of $8.5 million reduced cash flow. During Fiscal 1993 cash provided from operating activities of $104.0 million, cash used in investing activities of $45.5 million and cash used in financing activities of $49.6 million, resulted in a net increase in cash and cash equivalents of $8.9 million at January 30, 1994 as compared to January 31, 1993. In recent years, Ralphs has utilized capital leases and off- balance sheet financing to fund a portion of its capital expenditures. Cash used in investing activities was $102.5 million for Fiscal 1992 and $41.9 million for Fiscal 1991. Cash provided from operating activities amounted to $53.7 million for Fiscal 1992 and $96.1 million for Fiscal 1991. Annual principal payments and maturities are as follows (in thousands):
Fiscal Fiscal Fiscal Fiscal Fiscal There- 1994 1995 1996 1997 1998 after ------ ------ ------ ------ ------ -------- 1992 Credit Agreement. . .$ 55,000 $ 65,000 $ 70,000 $ 70,000 $ 40,000 $ 0 Mortgage Notes . . . . . . 1,474 2,324 2,507 2,708 2,928 166,072 Initial Notes and Exchange Notes . . . . . . . . . . 0 0 0 0 0 150,000 10 1/4% Senior Subordinated Notes . . . . . . . . . . 0 0 0 0 0 300,000 Capitalized leases . . . . 11,052 10,423 8,802 9,008 7,478 14,387 Other senior debt. . . . . 3,449 3,825 2,447 0 0 0 ------ ------ ------ ------ ------ ------- $ 70,975 $ 81,572 $ 83,756 $ 81,716 $ 50,406 $630,459
Effect of Inflation Inflation has not had a major impact on the operations of Ralphs during the past three years. As is typical of the supermarket industry, Ralphs 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Information called for by this item is set forth in the Company's financial statements and supplementary data contained in this report. Specific financial statements and supplementary data can be found at the pages listed in the following index. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report. . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at January 31, 1993 and January 30, 1994 . . . . . . . . . . . . . . . . . . . . F-3 Years ended February 2, 1992, January 31, 1993, and January 30, 1994: Consolidated Statements of Operations . . . . . . . F-4 Consolidated Statements of Cash Flows . . . . . . . F-5 Consolidated Statements of Stockholders' Equity . . F-6 Notes to Consolidated Financial Statements. . . . . . . . . F-7 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with the Company's accountants on accounting and financial disclosure during the applicable periods. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information is provided with respect to the directors and executive officers of Ralphs as of May 2, 1994: YEARS OF RALPHS SERVICE ------------------- MANAGERIAL NAME AGE POSITION POSITIONS TOTAL - - ---------------------- --- -------------------------- --------- ----- Byron E. Allumbaugh 62 Chairman, Chief Executive 35 35 Officer and Director Alfred A. Marasca 52 President, Chief Operating 29 37 Officer and Director Terry Peets 49 Executive Vice President 17 17 Gene A. Brown 58 Senior Vice President, Human 28 29 Resources and Public Relations Edmund Kevin Davis 40 Senior Vice President, Sales 13 19 and Merchandising R.Alexander Detrick 52 Senior Vice President, 19 19 Corporate Strategy and Development Alan G. Gray 58 Senior Vice President, 33 43 Administration Jan Charles Gray 46 Senior Vice President, 19 30 General Counsel and Secretary Lee R. Mueller 53 Senior Vice President, 32 38 Store Operations Alan J. Reed 47 Senior Vice President & Chief 21 21 Financial Officer Jane Rice 52 Senior Vice President & Chief 10 10 Information Officer James A. Warren 59 Senior Vice President, 32 38 Distribution & Manufacturing Edward J. DeBartolo, 84 Director Edward J. DeBartolo,Jr. 47 Director Anthony W. Liberati 61 Director G.William Miller 69 Director David M. Petrone 49 Director Richard L. Posen 43 Director Richard S. Sokolov 44 Director Peter J. Solomon 55 Director Marie Denise DeBartolo York 43 Director The Board of Directors is classified into three classes, each class to have as equal a number of directors as possible. The Class A directors, Messrs. DeBartolo, Jr., Liberati, Sokolov and Mrs. DeBartolo York have been elected for a term that expires at the annual meeting of stockholders in 1995, the Class B directors, Messrs. DeBartolo, Miller and Petrone, have been elected for a term that expires at the annual meeting of stockholders in 1996, and the Class C directors, Messrs. Allumbaugh, Marasca, Posen and Solomon, have been elected for a term that expires at the annual meeting of stockholders in 1994. At each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term. Mr. Patrick W. Collins, Vice Chairman and Director, retired from Ralphs and resigned from the Board of Directors in February 1994. Composition of the Board of Directors of Ralphs and the Holding Company is identical at the present time, as are the officers of the two companies. Officers are elected annually and are subject to removal at any time, with or without cause, by the Board of Directors of the Holding Company or Ralphs, as the case may be. Mr. Allumbaugh has been Chairman and Chief Executive Officer since 1976 and a Director since 1988. He also is a Director of the H.F. Ahmanson Company, El Paso Natural Gas Company and Ultramar, Inc. Mr. Marasca has been President, Chief Operating Officer and a Director since February 1994. He was President from February 1993 to February 1994, Executive Vice President, Retail from 1991 until 1993 and Executive Vice President, Marketing from 1985 to 1991. Mr. Ralph H. Liebman, Executive Vice President, Support Group, retired from Ralphs in April 1994. Mr. Peets has been Executive Vice President since February 1994. He was Senior Vice President, Marketing from 1991 to February 1994, Senior Vice President, Merchandising from 1990 to 1991, Group Vice President, Merchandising from 1988 to 1990 and Group Vice President, Store Operations from 1987 to 1988. Mr. Brown has been Senior Vice President, Human Resources and Public Relations, since 1987. Mr. Davis has been Senior Vice President, Sales and Merchandising since February 1994. He was Group Vice President, Sales and Merchandising from 1992 to February 1994 and Vice President of Sales and Advertising from 1988 to 1992. Mr. Detrick has been Senior Vice President, Corporate Strategy and Development, since 1982. Mr. Alan G. Gray has been Senior Vice President, Administration since 1993. He was Group Vice President, Store Operations from 1985 to 1992 and Group Vice President, Administration from 1992 to 1993. Mr. Jan Charles Gray has been Senior Vice President, General Counsel and Secretary since 1988. He was Senior Vice President and General Counsel from 1985 to 1988 and Vice President and General Counsel from 1978 to 1985. Mr. Mueller has been Senior Vice President, Store Operations since 1993. He was Group Vice President, Store Operations from 1985 to 1993. Mr. Reed has been Senior Vice President and Chief Financial Officer since 1988. He was Senior Vice President, Finance from 1985 to 1988. Ms. Rice has been Senior Vice President and Chief Information Officer since February 1994. She was Group Vice President, Management Information Systems from 1993 to February 1994, Vice President, Management Information Services from 1992 to 1993 and Vice President, Information Services from 1988 to 1992. Mr. Warren has been Senior Vice President, Distribution and Manufacturing since 1993. He was Group Vice President, Distribution from 1986 to 1993. Mr. DeBartolo has been a Director since February 1994. He also is Chairman and Chief Executive Officer of EJDC, and has been a director of EJDC since 1944. He founded EJDC in 1944 and has been its Chief Executive Officer for nearly 50 years. Since April 1994 he has been Vice Chairman and a Director of the DeBartolo Realty Corporation. Mr. DeBartolo helped establish the International Council of Shopping Centers and is a member of the Urban Land Institute. In connection with a proceeding brought by the SEC in the United States District Court for the District of Columbia entitled SEC v. Paul A. Bilzerian et al., Mr. DeBartolo, without admitting or denying any allegations, consented to the entry of a permanent injunction on June 29, 1989 enjoining him from engaging in any transactions or course of business which would constitute or would aid and abet violations of certain specified federal securities laws and rules. Mr. DeBartolo is the father of Edward J. DeBartolo, Jr. Mr. DeBartolo, Jr., has been a Director since 1992. Since April 1994 he has been Chairman of the Board and a Director of the DeBartolo Realty Corporation. Since 1979 he has been President and Chief Administrative Officer and since 1973 he has been a Director of The Edward J. DeBartolo Corporation. Mr. DeBartolo, Jr., is the son of Edward J. DeBartolo. Mr. Liberati has been a Director since 1992. Since April 1994 he has been a Director of the DeBartolo Realty Corporation. Since 1982 he has been Senior Vice President, Corporate Planning/Finance and a Director of the Edward J. DeBartolo Corporation. Mr. Liberati serves as a Director of Pennsylvania Capital Bank. Mr. Miller has been a Director since 1990. Since 1983 he has been Chairman of G. William Miller & Co., Inc., a merchant banking firm. He is a former Secretary of the U.S. Treasury and a former Chairman of the Federal Reserve Board, and has served as Chairman and Chief Executive Officer of Federated Stores, Inc. from January 1990 to February 1992. Mr. Miller serves as a Director of the DeBartolo Realty Corporation, Federated Department Stores, Inc., Gulf Canada Resources Limited, Klienwort Benson Australian Income Fund, Inc. and Repligen Corporation. Mr. Petrone has been a Director since 1992. Mr. Petrone served as Vice Chairman of Wells Fargo & Co. from October 1986 to March 1992. Since March 1993, Mr. Petrone has been a principal in Petrone, Petri & Company, a firm engaged in real estate finance and investments. Mr. Petrone serves as a Director of Health Science Properties and Jacobs Engineering Group, Inc. Mr. Posen has been a Director since 1992. Since 1984 he has been a partner of the law firm of Willkie Farr & Gallagher. Willkie Farr & Gallagher acts as legal counsel to Ralphs from time to time. Mr. Sokolov has been a Director since 1992. Since April 1994 he has been President and Chief Executive Officer and a Director of the DeBartolo Realty Corporation. From 1986 to March 1994 he was Senior Vice President and General Counsel of The Edward J. DeBartolo Corporation. In connection with the proceeding brought by the Securities and Exchange Commission in the United States District Court for the District of Columbia entitled SEC v. Paul A. Bilzerian et al., Mr. Sokolov, without admitting or denying any allegations, consented to the entry of a permanent injunction on June 29, 1989 enjoining him from engaging in any transactions or courses of business which would constitute or would aid and abet violations of certain specified federal securities laws and rules. Mr. Solomon has been a Director since 1992. Since June 1991 he has been President of Peter J. Solomon Securities Corp. ("PSS") and since February 1989 he has been Chairman of the Peter J. Solomon Company Limited. From 1984 to May 1989, Mr. Solomon was Vice Chairman of Shearson Lehman Hutton, Inc. Mr. Solomon is also a director of Bradlees, Inc., Centennial Cellular Corp., Century Communications Corporation, Charrette Corporation, Culbro Corporation, Monro Muffler Brake, Inc., Office Depot, Inc., and Phillips-Van Heusen Corporation. PSS acts as financial advisor to Ralphs from time to time and was paid a fee in connection with the sale of the Initial Notes. Mrs. DeBartolo York has been a Director since February 1994. She is the Executive Vice President of Personnel and Corporate Marketing/Communications and a Director of The Edward J. DeBartolo Corporation. Mrs. DeBartolo York is the daughter of Edward J. DeBartolo. The Board of Directors of Ralphs has an Executive Committee, and Audit Committee and a Compensation Committee. The current members of the Executive Committee are Messrs. Allumbaugh, Marasca and Sokolov. The current members of the Audit Committee are Messrs. Liberati, Miller and Petrone. The current members of the Compensation Committee are Messrs. DeBartolo, Jr., Miller and Solomon. The Certificate of Incorporation, as amended, of Ralphs (the "Certificate") provides that the Directors of Ralphs are protected to the fullest extent permitted by Delaware law against monetary damages for breach of the directors' fiduciary duty of care to Ralphs and its stockholder, the Holding Company. This provision in the Certificate does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunction, rescission or other forms of non-monetary relief would remain available under Delaware law. In addition, each Director will continue to be subject to liability for breach of the director's duty of loyalty to the Holding Company, for acts or omissions not taken or made in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other laws, such as federal securities laws. Ralphs is insured for certain losses incurred in connection with Ralphs' indemnifying its directors and officers. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation for services rendered during the prior three fiscal years paid to the CEO and the six most highly compensated executive officers other than the CEO of Ralphs.
------------Long Compensation----------- Annual Compensation ---------Awards--------Payouts- ---------------------------------------- Restricted Other Annual Stock Options/ LTIP All other Name and Salary Bonuses Compensation Awards SARs Payouts Compensation Principal Position Year ($) ($) ($) ($) (#) ($) ($) (1) - - ------------------ ---- ------- --------- ------------ --------- -------- -------- ---------- Byron E. Allumbaugh, Chairman & Chief Executive Officer 1993 645,000 387,000 N/A N/A N/A N/A 38,575 1992 620,000 372,000 N/A N/A 587,753 N/A 31,886 1991 580,000 348,000 N/A N/A N/A N/A N/A Patrick W. Collins, Vice Chairman and Chief Operating Officer 1993 568,750 341,250 N/A N/A N/A N/A 16,062 1992 543,750 326,250 N/A N/A 308,812 N/A 14,886 1991 518,750 311,250 N/A N/A N/A N/A N/A Alfred A. Marasca, President 1993 340,000 204,000 N/A N/A N/A N/A 8,177 1992 296,250 148,125 N/A N/A 308,812 N/A 1,485 1991 280,500 140,000 N/A N/A N/A N/A N/A Ralph H. Liebman, Executive Vice President,Support Group 1993 296,250 148,125 N/A N/A N/A N/A 28,857 1992 281,250 140,625 N/A N/A 231,609 N/A 15,426 1991 266,250 133,125 N/A N/A N/A N/A N/A Alan J. Reed, Senior Vice President, Finance and Chief Financial Officer 1993 222,500 111,250 N/A N/A N/A N/A 12,904 1992 211,250 105,625 N/A N/A 154,406 N/A 9,569 1991 196,250 98,125 N/A N/A N/A N/A N/A Jan Charles Gray, Senior Vice President, General Counsel and Secretary 1993 207,500 103,750 N/A N/A N/A N/A 13,584 1992 196,250 98,125 N/A N/A 154,406 N/A 13,593 1991 181,250 90,625 N/A N/A N/A N/A N/A Terry Peets, Senior Vice President, Marketing 1993 192,500 96,250 N/A N/A N/A N/A 10,337 1992 182,500 91,250 N/A N/A 154,406 N/A 10,237 1991 171,250 85,625 N/A N/A N/A N/A N/A
(1) Represents (i) insurance premiums and the dollar value of the remainder of premiums paid under the Senior Executive Supplemental Benefit Plan, and (ii) Ralphs' contributions under the Ralphs Thrift Incentive Plan. The respective amount paid for Messrs. Allumbaugh, Collins, Marasca, Liebman, Reed, J. Gray and Peets are as follows: (A) Insurance premiums; $ 18,500, $13,270, $8,890, $26,250, $6,662, $7,250 and $4,210; (B) dollar value of remainder of premiums; $18,500, $0, $6,600, $0, $4,025, $4,500 and $4,210; (C) incentive plan contributions; $1,575, $2,792, $2,687, $2,607, $2,217, $1,834 and $1,917. OPTION/SAR GRANTS IN LAST FISCAL YEAR There were no grants of stock options or SARs in Fiscal 1993. AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1993 AND FISCAL YEAR-END OPTION/SAR VALUES
Value of Number of Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Value FY-End (#) FY-End ($) Shares Acquired Realized Exercisable/ Exercisable/ Name on Exercise (#)(1) ($) Unexercisable(2) Unexercisable(3) - - -------------------- ------------------ ---------- ---------------- --------------- Byron E. Allumbaugh. . . 70,000 1,961,646 235,102/ 0/ 562,651 5,884,935 Patrick W. Collins . . . 240,000 (4) 6,725,642 (4) 123,524/ 0/ 185,288 0 Alfred A. Marasca. . . . 9,000 252,212 61,762/ 0/ 319,050 2,017,692 Ralph H. Liebman . . . . 9,000 252,212 46,322/ 0/ 257,287 2,017,692 Alan J. Reed . . . . . . 7,000 196,165 30,882/ 0/ 179,524 1,569,316 Jan Charles Gray . . . . 5,000 140,118 30,882/ 0/ 163,524 1,120,939 Terry Peets . . . . . . 5,000 140,118 30,882/ 0/ 163,524 1,120,939 (1) Represents SARs exercised under the Ralphs 1988 Equity Appreciation Rights Plan. (2) Each number represents the aggregate number of Options and SARs outstanding, as currently exercisable/unexercisable. Options and SARs were granted under different plans, not in tandem. All SARs are free standing. (3) Represents value of SARs, based on a value of $28.0235 per SAR at the time of exercise. Outstanding options are not currently in-the-money, based on current estimates of the fair market value of the Common Stock. (4) Pursuant to the retirement provisions of the Equity Appreciation Rights Plan, Patrick W. Collins exercised all outstanding SARs, based on a value of $28.0235 per SAR at the time of exercise.
Executive Employment Contracts Ralphs has entered into employment contracts with Messrs. Allumbaugh, Marasca, Reed, J. Gray and Peets currently providing for their employment at annual base salaries of $650,000, $340,000, $225,000, $210,000 and $195,000 respectively. These employment contracts expire on April 30, 1996. Ralphs has also entered into employment contracts providing for aggregate base salaries of $906,000 with Messrs. Brown, Detrick, A. Gray, Mueller and Warren. Messrs. Collins and Liebman retired February and April of 1994, respectively. Each contract provides that the employee's employment and remuneration may be terminated by Ralphs (i) for cause based upon the employee's gross misconduct, felony conviction (other than a traffic or moving violation), serious breach of Ralphs policy or similar transgression; (ii) for failure to render services for a continuous period of 12 months due to disability; or (iii) for a material breach of the contract. An employee's remuneration under an employment contract will also be terminated upon the employee's voluntary resignation or retirement. Ralphs can advise an employee in writing that his services will no longer be required, which will be treated as a suspension of services. If a suspension of service occurs, the employee continues to be treated as an employee for all purposes for the term of the agreement. The employee is entitled to continued compensation until termination of the contract, subject to an offset equal to 50% of any compensation received from another business (except from businesses or investments previously owned by the employee before the date the suspension of services or termination for which there will be no deduction) or 100% if such business is a competing business (as defined in the employment contract). Retirement Plans Retirement Plan. The Ralphs Grocery Company Retirement Plan (the "Retirement Plan") is a defined benefit pension plan for salaried and hourly nonunion employees with at least one year of credited service (1,000 hours). Ralphs makes annual contributions to the Retirement Plan in such amounts as are actuarially required to fund the benefits payable to participants in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Supplemental Executive Retirement Plan. To allow Ralphs' retirement program to provide benefits based upon a participant's total compensation and without regard to other ERISA or tax code pension plan limitations, eligible executive employees of Ralphs participate in the Ralphs Grocery Company Supplemental Executive Retirement Plan (the "Supplemental Plan"). The Supplemental Plan also modifies the benefit formula under the Retirement Plan in other respects. The following table sets forth the combined estimated annual benefits payable in the form of a (single) life annuity under both the Retirement Plan and the Supplemental Plan (unreduced by the cash surrender value of any life insurance policies) to a participant in both plans who is retiring at a normal retirement date of January 1, 1994 for the specified final average salaries and years of credited service.
---------------Years of Credit Service----------------- Final Average Salary 15 20 25 30 35 - - -------------------- ---------- --------- --------- ---------- ---------- $ 100,000 $ 19,484 $ 25,978 $ 32,473 $ 38,967 $45,462 200,000 54,763 73,017 73,017 83,967 97,962 300,000 84,763 113,017 113,017 113,017 113,017 400,000 114,763 153,017 153,017 153,017 153,017 600,000 174,763 233,017 233,017 233,017 233,017 800,000 234,763 313,017 313,017 313,017 313,017 1,000,000 294,763 393,017 393,017 393,017 393,017 1,200,000 354,763 473,017 473,017 473,017 473,017
Messrs. Allumbaugh, Marasca, Reed, J. Gray and Peets have completed 35, 37, 20, 30 and 16 years of credited service, respectively. Messrs. Collins and Liebman retired with 24 and 42 years of credited service, respectively. Compensation covered by the plan includes both salary and bonus. The calculation of retirement benefits generally is based on average compensation for the highest five years of the ten years preceding retirement. The benefits earned by a participant under the Supplemental Plan are reduced by any benefits which the participant has earned under the Retirement Plan and may be offset under certain circumstances by the cash surrender value of life insurance policies maintained by Ralphs pursuant to the Split Dollar Life Insurance Agreements entered into by Ralphs and the executive. Benefits are not subject to any deduction for social security offset. Compensation Committee Interlocks and Insider Participation The following persons served as members of the Compensation Committee of the Board during Fiscal 1993: Edward J. DeBartolo, Jr., G. William Miller and Peter J. Solomon. Mr. Solomon is the President of Peter J. Solomon Securities Corp. ("PSS"), and is the Chairman of the Peter J. Solomon Company Ltd. PSS acts as financial advisor to Ralphs. Edward J. DeBartolo, Jr. is the President and a director of EJDC. In connection with the acquisition of a majority of the Holding Company's Common Stock on February 3, 1992, EJDC agreed to the EJDC Guaranty. See Item 13. "Certain Relationships and Related Transactions". The foregoing summaries of the various benefit plans and agreements described above are qualified by reference to such plans and agreements, copies of which have been filed as exhibits to this Annual Report on Form 10-K. Director Compensation Directors who are not employees of the Holding Company or of Ralphs are paid a fee of $15,000 per year for serving on the Board of Directors and $2,500 for each Board meeting attended. All directors are also reimbursed for their out-of-pocket travel and related expenses incurred in attending all Board and committee meetings. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT a) Security Ownership of Certain Beneficial Owners As of the date hereof, 100% of the outstanding capital stock of the Company is owned by the Holding Company and approximately 60.3% of the outstanding shares of Common Stock of the Holding Company (the "EJDC Holding Company Common Stock") are owned beneficially by EJDC. Consequently, EJDC will have the ability to exercise control over the business and affairs of the Holding Company by virtue of its continuing ability to elect a majority of the Holding Company's Board of Directors and its voting power with respect to actions requiring stockholder approval. By virtue of its ownership of the Common Stock of the Holding Company, EJDC will have the ability to exercise similar control over the business and affairs of Ralphs. EJDC, a corporation controlled by Mr. Edward J. DeBartolo, is primarily engaged in shopping mall and other real estate development activities. EJDC has pledged all the Holding Company Common Stock owned by it to secure a substantial loan facility. Significant principal payments commence in late-1995 under the EJDC Restructuring on a semi-annual basis with a maturity in 1998. EJDC has discussed the merits of a sale of its interest in The Holding Company with its financial and legal advisors and with management of Ralphs. EDJC has had certain discussions regarding a potential sale to a third party. Since Ralphs is outside of EJDC's core business, it is likely that its interest in The Holding Company will be sold at some time prior to the aforementioned maturity and such sale could take place at any time. In the absence of consents from Ralphs' lenders, such a sale would constitute an event of default under the 1992 Credit Agreement, the Mortgagee Notes and other indebtness of Ralphs and would permit the holders of in excess of $500 million of debt on the date hereof to require Ralphs to repurchase such debt. Neither the holders of the Exchange Notes, the Initial Notes nor the 10 1/4% Senior Subordinated Notes would have such rights unless such a sale were accompanied by certain other events. Furthermore, if EJDC were to default on indebtedness secured by the EJDC Holding Company Common Stock, EJDC's lenders might elect to foreclose on their collateral, including the EJDC Holding Company Common Stock, thereby causing a transfer in ownership of the shares and a change in control of the Holding Company (which might also occur upon a voluntary sale by EJDC). Such change in control would permit certain holders of a substantial amount of Ralphs indebtedness to require the repurchase of such indebtedness by Ralphs. The following table sets forth certain information regarding the beneficial ownership of the Holding Company Common Stock as of the date hereof. By virtue of their ownership of the Holding Company Common Stock, the following entities may be deemed to own a corresponding percentage of the Common Stock.
Shares Beneficially Owned (1) Name Address Number Percent - - --------------------------------- -------- -------- The Edward J. DeBartolo Corporation (2)(3) 15,440,600 60.34% 7620 Market Street Youngstown, Ohio 44512 Camdev Properties Inc. (2) 3,276,681 12.81 400 King Street West Suite 5800 Toronto, Ontario M5H 3Y8 Bank of Montreal (2) 2,591,815 10.13 700 Louisiana, Suite 4400 Houston, Texas 77002 Banque Paribas (2) 2,591,815 10.13 757 Seventh Avenue New York, New York 10019 Federated Department Stores, Inc. (2) 1,686,369 6.59 7 West Seventh Street Cincinnati, Ohio 45202 (1) Unless otherwise indicated in the footnotes to this table, each of the stockholders named in this table has sole voting and investment owner with respect to the shares shown as beneficially owned by it. (2) The principal stockholders have certain registration rights pursuant to the Registration Rights Agreement. (3) All shares indicated are owned of record by EJDC, which is indirectly controlled by Edward J. DeBartolo, who would be deemed to beneficially own the shares of Common Stock owned by EJDC. Edward J. DeBartolo, Jr. is the son of Edward J. DeBartolo.
b) Security Ownership of Management As of the date hereof, no officer or director of the Company beneficially owns any equity securities of the Company. c) Changes in Control None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS EJDC guaranties Ralphs' obligations as a self-insurer of worker's compensation liabilities in the State of California (the "EJDC Guaranty"). In connection with the EJDC Guaranty, Ralphs unconditionally agreed to reimburse EJDC for any payments made under the EJDC Guaranty and for the cost of insurance up to $200,000 to cover liabilities incurred pursuant to the EJDC Guaranty. Further, Ralphs agreed to pay EJDC a guarantee fee of $33,500 for each month the EJDC Guaranty is in effect ($402,000 was paid in Fiscal 1993). In connection with the bankruptcy reorganization of Federated Department Stores, Inc. and its affiliates, Federated Department Stores, Inc. agreed to pay certain potential tax liabilities relating to Ralphs previously being a member of the affiliated group of companies comprising Federated and its subsidiaries. In consideration thereof, the Holding Company and Ralphs agreed to pay Federated Department Stores, Inc. a total of $10.0 million, payable $1.0 million on each of February 3, 1992, 1993, 1994, 1995 and 1996 and $5.0 million on February 3, 1997. The five $1.0 million installments are to be paid by Ralphs and the $5.0 million payments is the joint obligation of the Holding Company and Ralphs. In the event Federated Department Stores, Inc. is required to pay certain tax liabilities, the Holding Company and Ralphs have agreed to reimburse Federated Department Stores, Inc. up to an additional $10.0 million, subject to certain adjustments. This additional obligation, if any, is the joint and several obligation of the Holding Company and Ralphs. The $5.0 million payment and the potential $10.0 million payment will be paid in cash or stock of the Holding Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of the Notes to Financial Statements. In addition, EJDC and the other current holders of Common Stock are parties to an agreement providing for various aspects of corporate governance (the "Registration Rights Agreement") relating to the Holding Company and Ralphs. Pursuant to the Registration Rights Agreement, Ralphs is obligated to provide the Holding Company, by dividend, pursuant to a services agreement or otherwise, with funds sufficient to enable the Holding Company to perform its duties as the holding company of Ralphs' stock and to perform its obligations set forth in the Equity Registration Rights Agreement. Moreover, pursuant to a service agreement, dated February 3, 1992 (the "Service Agreement"), between Ralphs and the Holding Company, the Holding Company agreed to perform certain accounting, advisory, capital raising and other services for Ralphs and Ralphs agreed to pay to the Holding Company an amount equal to the Holding Company's direct and indirect costs of performing such services. Management believes that amounts to be paid under the Service Agreement will not be material to the business or financial condition of Ralphs. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (A) Documents filed as part of this report: (1) Financial Statements. See Financial Statements Index included in Item 8 of Part II of this form 10-K. (2) Financial Statement Schedules: Location in This Report ----------- Schedule V-Property, Plant & Equipment. . . . S-1 Schedule VI-Accumulated Depreciation and Amortization of Property, Plant & Equipment . . . . . . . . . . . . . . . . . S-2 Schedule VIII-Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . S-3 Schedule IX-Short-Term Borrowings . . . . . . S-4 (3) Exhibits See Index to Exhibits following signature page. A copy of the exhibits listed herein can be obtained by writing: Jan Charles Gray Senior Vice President, General Counsel & Secretary Ralphs Grocery Company P.O. Box 54143 Los Angeles, CA 90054 (B) Reports on Form 8-K Not applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 2, 1994 RALPHS GROCERY COMPANY By: /s/ Jan Charles Gray --------------------------------- Jan Charles Gray Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date - - ------------------------------- -------------------- -------------- /s/ Byron E. Allumbaugh Chairman of the May 2, 1994 - - ------------------------------- Board, Chief Executive Byron E. Allumbaugh Officer and Director (Principal Executive Officer) /s/ Alfred A. Marasca President, Chief May 2, 1994 - - ------------------------------- Operating Officer Alfred A. Marasca and Director /s/ Jan Charles Gray Senior Vice May 2, 1994 - - ------------------------------- President and General Jan Charles Gray Counsel and Secretary /s/ Alan J. Reed Senior Vice May 2, 1994 - - ------------------------------- President and Chief Alan J. Reed Financial Officer (Principal Financial Officer) /s/ Robert W. Gossman Group Vice May 2, 1994 - - ------------------------------- President and Robert W. Gossman Controller (Principal Accounting Officer) Signatures Title Date - - ------------------------------- ------------------ -------------- /s/ Edward J. DeBartolo Director May 2, 1994 - - ------------------------------- Edward J. DeBartolo /s/ Edward J. DeBartolo Jr. Director May 2, 1994 - - ------------------------------- Edward J. DeBartolo Jr. /s/ Anthony W. Liberati Director May 2, 1994 - - ------------------------------- Anthony W. Liberati /s/ G. William Miller Director May 2, 1994 - - ------------------------------- G. William Miller /s/ David M. Petrone Director May 2, 1994 - - ------------------------------- David M. Petrone /s/ Richard L. Posen Director May 2, 1994 - - ------------------------------- Richard L. Posen /s/ Richard S. Sokolov Director May 2, 1994 - - ------------------------------- Richard S. Sokolov /s/ Peter J. Solomon Director May 2, 1994 - - ------------------------------- Peter J. Solomon /s/ Marie Denise DeBartolo York Director May 2, 1994 - - ------------------------------- Marie Denise DeBartolo York RALPHS GROCERY COMPANY INDEX TO EXHIBITS The following exhibits are filed as a separate section of this report: Sequentially Exhibit No. Description of Exhibit Numbered Page - - ----------- ------------------------------------- ---------------- 10.27 Employment Agreements between Ralphs Grocery Company and each of Jan Charles Gray and Terry Peets, as amended The following exhibits are incorporated herein by reference: Exhibit No. Description of Exhibit Reference To - - ----------- ------------------------------------- ---------------- 3.1 Restated Certificate of Incorporation Exhibit 3.1 to Registration State- ment No. 33-47634 on Form S-1. 3.2 By-Laws Exhibit 3.2 to Registration State- ment No. 33-47634 on Form S-1. 10.1 Ralphs Grocery Company Retirement Exhibit 10.1 to Plan, as amended Registration State- ment No. 33-47634 on Form S-1. 10.2 Ralphs Grocery Company Supplemental Exhibit 10.2 to Retirement Plan, as amended Registration State- ment No. 33-47634 on Form S-1. 10.3 Outline of Benefits under the Ralphs Exhibit 10.3 to Grocery Company Senior Executive Registration State- Medical Plan ment No. 33-47634 on Form S-1. 10.4 Guidelines for the Ralphs Grocery Exhibit 10.4 to Company Management Incentive Plan Registration State- ment No. 33-47634 on Form S-1. 10.5 Ralphs Grocery Company Savings Plan Exhibit 10.5 to Plus Primary Registration State- ment No. 33-47634 on Form S-1. 10.6 Ralphs Grocery Company Savings Plan Exhibit 10.6 to Plus Basic Registration State- ment No. 33-47634 on Form S-1. 10.7 Tax Indemnification Agreement Exhibit 10.7 to Registration State- ment No. 33-47634 on Form S-1. 10.8 Comprehension Settlement Agreement Exhibit 10.8 to Registration State- ment No. 33-47634 on Form S-1. 10.9 Tax Election Agreement Exhibit 10.9 to Registration State- ment No. 33-47634 on Form S-1. 10.10 Indenture between Ralphs Grocery Company Exhibit 10.10 to and United States Trust Company, as Registration State- Trustee, dated as of August 26, 1988, ment No. 33-47634 including form of 14% Senior Subordin- on Form S-1. ated Debentures due 2000 attached as Exhibit A thereto, with respect to the 14% Senior Subordinated Debentures due 2000 10.11 Supplemental Indenture between Ralphs Exhibit 4.2 to Grocery Company and United States Registrant's Quart- Trust Company of New York, as Trustee, erly Report on Form dated as of May 29, 1992, with respect 10-Q dated September to the 14% Senior Subordinated Debent- 1, 1992 and filed on ures due 2000 September 2, 1992 10.12 Amended Restated Ralphs Grocery Company Exhibit 10.11 to 1988 Equity Appreciation Rights Plan Registration State- and Equity Appreciation Rights Agree- ment No. 33-47634 ment on Form S-1. 10.13 Ralphs Supermarkets, Inc. Non-qualified Exhibit 10.12 to Stock Option Plan Registration State- ment No. 33-47634 on Form S-1. 10.14 Registration Rights and Corporate Exhibit 10.13 to Governance Agreement, as amended Registration State- ment No. 33-47634 on Form S-1. 10.15 Agreement of Assumption and Guarantee Exhibit 10.14 to of Workers' Compensation Liabilities Registration State- ment No. 33-47634 on Form S-1. 10.16 Reimbursement Agreement Exhibit 10.15 to Registration State- ment No. 33-47634 on Form S-1. 10.17 Ralphs Grocery Company 1988 Credit Exhibit 10.16 to Agreements Registration State- ment No. 33-47634 on Form S-1. 10.18 Commitment Letter relating to 1992 Exhibit 10.17 to Credit Agreement Registration State- ment No. 33-47634 on Form S-1. 10.19 Credit Agreement, dated as of July 22, Exhibit 10.19 to 1992 (the "1992 Credit Agreement"), Registrant's Annual among Ralphs Grocery Company, Bankers Report on Form 10-K Trust Company and the Lenders named filed on April 29,1993 therein 10.20 First Amendment and Limited Waiver, Exhibit 10.20 to dated as of March 19, 1993, to the Registrant's Annual 1992 Credit Agreement Report on Form 10-K filed on April 29,1993 10.21 Ralphs Grocery Company Promissory Notes, Exhibit 10.18 to Deeds of Trust and Security Agreements Registration State- with Metropolitan Life Insurance ment No. 33-47634 Company, as amended on or prior to on Form S-1. May 1, 1992 10.22 Amendments dated as of July 30, 1992 and Exhibit 10.22 to March 30, 1993, to Ralphs Grocery Company Registrant's Annual Promissory Notes, Deeds of Trust and Report on Form 10-K Security Agreements with Metropolitan filed on April 29,1993 Life Insurance Company, as amended 10.23 Employment Agreements between Ralphs Exhibit 10.19 to Grocery Company and each of Byron Registration State- Allumbaugh, Patrick Collins, Alfred ment No. 33-47634 Marasca and Ralph Liebman on Form S-1. 10.23(a) Employment Agreement between Ralphs Exhibit 10.23(a) to Grocery Company and Alan Reed, as Registrant's Annual amended Report on Form 10-K filed on April 29,1993 10.24 Indenture between Ralphs Grocery Exhibit 4.3 to Grocery Company and United States Trust Registrant's Quarterly Company, as Trustee, dated as of July Report on Form 10-Q 29, 1992, with respect to the 10 1/4% dated September 1, Senior Subordinated Notes due 2002 1992 and filed on September 2, 1992 10.25 Indenture between Ralphs Grocery Company Exhibit 4.1 to and United States Trust Company, as Registration Statement Trustee dated as of March 30, 1993 No. 33-61812 on (the "1993 Indenture") with respect to Form S-4 the Initial Notes and the Exchange Notes 10.26 Supplemental Indenture dated as of Exhibit 4.2 to June 23, 1993, to the 1993 Indenture Registration Statement No.33-61812 on Form S-4 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ------ Independent Auditor's Report. . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at January 31, 1993 and January 30, 1994. . . . . . . . . . . . . . . . F-3 Years ended February 2, 1992, January 31, 1993 and January 30, 1994: Consolidated Statements of Operations. . . . . . . F-4 Consolidated Statements of Cash Flows. . . . . . . F-5 Consolidated Statements of Stockholder's Equity. . F-6 Notes to Consolidated Financial Statements. . . . . . . F-7 Financial Statement Schedules Schedule V - Property, Plant and Equipment . . . . S-1 Schedule VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment . . S-2 Schedule VIII - Valuation and Qualifying Accounts. S-3 Schedule IX - Short-Term Borrowings. . . . . . . . S-4 Independent Auditors' Report The Board of Directors and Stockholders Ralphs Grocery Company: We have audited the consolidated financial statements of Ralphs Grocery Company and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ralphs Grocery Company and subsidiary as of January 30, 1994 and January 31, 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended January 30, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 2 to the consolidated financial statements, Ralphs Grocery Company changed its method of accounting for income taxes in the fiscal year ended February 2, 1992 to adopt the provisions of the Financial Accounting Standard Board's Statement of Financial Standards No. 109, "Accounting for Income Taxes." KPMG Peat Marwick Los Angeles, California April 8, 1994 RALPHS GROCERY COMPANY CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
January 31, January 30, 1993 1994 ASSETS ---------- ---------- Current Assets: Cash and cash equivalents. . . . . . . . $ 46,192 $ 55,080 Accounts receivable. . . . . . . . . . . 19,117 30,420 Inventories. . . . . . . . . . . . . . . 207,023 202,354 Prepaid expenses and other current assets 16,543 18,111 --------- --------- Total current assets . . . . . . . . 288,875 305,965 Property, plant and equipment, net . . . 610,665 601,897 Excess of cost over net assets acquired, net . . . . . . . . . . . . . . . . . . 387,410 376,414 Beneficial lease rights, net . . . . . . 60,757 55,553 Deferred debt issuance costs, net. . . . 27,999 26,583 Deferred income taxes. . . . . . . . . . -- 109,125 Other assets . . . . . . . . . . . . . . 12,792 8,113 --------- --------- Total assets . . . . . . . . . . . . $1,388,498 $1,483,650 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Current maturities of long-term debt . . $ 66,465 $ 70,975 Short-term debt. . . . . . . . . . . . . 31,100 -- Bank overdrafts. . . . . . . . . . . . . 37,061 37,716 Accounts payable . . . . . . . . . . . . 120,709 138,554 Accrued expenses . . . . . . . . . . . . 127,788 101,543 Current portion of self-insurance reserves. . . . . . . . . . . . . . . . 27,732 30,138 --------- --------- Total current liabilities . . . . . 410,855 378,926 Long-term debt . . . . . . . . . . . . . 932,226 927,909 Self-insurance reserves. . . . . . . . . 45,247 49,872 Lease valuation reserve. . . . . . . . . 35,941 32,575 Other non-current liabilities. . . . . . 97,526 89,299 --------- -------- Total liabilities . . . . . . . . . 1,521,795 1,478,581 Stockholder's equity: Common stock, $1 par value per share. Authorized 1,000 shares; issued and outstanding, 100 shares at January 31, 1993 and January 30, 1994. . . . . . . . -- -- Additional paid-in capital . . . . . . . 175,548 175,548 Accumulated deficit. . . . . . . . . . . (308,845) (170,479) --------- -------- Total stockholder's equity. . . . . (133,297) 5,069 Commitments and contingencies (See Notes --------- -------- 2 and 8) Total liabilities and stockholder's equity. . . . . . . . . . . . . . . $1,388,498 $1,483,650 ========== ==========
See accompanying notes to consolidated financial statements. F-3 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended February 2, 1992 January 31, 1993 January 30, 1994 $(000) % $(000) % $(000) % -------- ------ -------- ----- --------- ------ Sales. . . . . . . 2,889,222 100.0 2,843,816 100.00 2,730,157 100.00 Cost of sales. . . 2,275,237 78.8 2,217,197 78.0 2,093,727 76.7 ---------- ----- ---------- ----- ---------- ------ Gross profit . . 613,985 21.2 626,619 22.0 636,430 23.3 Selling, general and administrative expenses . . . . 456,602 15.8 466,737 16.4 467,630 17.1 Provision for equity appreciation rights 18,321 0.6 -- -- -- -- Amortization of excess of cost over net assets acquired. . 10,996 0.4 10,997 0.4 10,996 0.4 Provision for restructuring. . . -- -- 7,100 0.2 2,374 0.1 Provision for post- retirements benefits other than pensions. 2,627 0.1 3,275 0.1 3,370 0.1 Provision for tax indemnification pay- ments to Federated Department Stores, Inc. . . . . . . . 10,000 0.3 -- -- -- -- ------- ---- ------ ----- ------- ---- Operating income 115,439 4.0 138,510 4.9 152,060 5.6 Other expenses: Interest. . . . . 130,206 4.5 125,611 4.4 108,755 4.0 Loss on disposal of assets. . . . 12,967 0.5 2,607 0.1 1,940 0.1 Provision for legal settlement . . . -- -- 7,500 0.3 -- -- Provision for earth- quake losses . . -- -- -- -- 11,048 0.4 ------- ---- -------- ---- ------- ---- Earnings (loss) before income taxes and extraordinary item. (27,734) (1.0) 2,792 0.1 30,317 1.1 Income tax expense (benefit) . . . . . 13,506 0.4 8,346 0.3 (108,049) (4.0) -------- ---- ------- ---- ------- ---- Earnings (loss) before extraordinary item . (41,240) (1.4) (5,554) (0.2) 138,366 5.1 Extraordinary item- debt refinancing, net of tax benefit of $4,173. . . . . . -- -- (70,538) (2.5) -- -- ------ ---- ------ ---- ------ ---- Net earnings (loss) . (41,240) (1.4) (76,092) (2.7) 138,366 5.1 ==== === ==== === ==== === See accompanying notes to consolidated financial statements. F-4 RALPHS GROCERY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Year End Year End Year End February 2, January 31, January 30, 1992 1993 1994 ----------- ---------- ----------- Cash flows from operating activities: Net earnings (loss) . . . . . . . . $ (41,240) $ (76,092) $ 138,366 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization. . . 76,552 76,873 74,452 Amortization of discounts and deferred debt issuance costs. . . 8,564 20,978 9,768 LIFO charge (credit) . . . . . . . 2,829 1,115 (2,054) Loss on sale of assets . . . . . . 12,967 6,841 4,314 Provision for equity appreciation rights. . . . . . . . . . . . . . 18,321 -- -- Provision for postretirement benefits 2,627 3,275 3,370 Provision for tax indemnification payments to Federated Department Stores, Inc.. . . . . . . . . . . 10,000 -- -- Provision for legal settlement . . -- 7,500 -- Other changes in assets and liabilities: Accounts receivable. . . . . . . . 20,660 6,376 326 Inventories at replacement cost. . (21,523) (13,682) 6,724 Prepaid expenses and other current assets. . . . . . . . . . . . . . (4,446) 3,703 (1,658) Other assets . . . . . . . . . . . 2,133 (616) 4,449 Interest payable . . . . . . . . . (1,448) (13,393) (4,822) Accounts payable and accrued liabilities . . . . . . . . . . . 1,606 23,054 (1,622) Income taxes payable . . . . . . . 822 (527) (1,480) Deferred tax asset . . . . . . . . -- -- (109,125) Business interruption credit . . . -- -- (581) Earthquake losses. . . . . . . . . -- -- (11,048) Self insurance reserves. . . . . . 6,575 8,456 7,031 Other liabilities. . . . . . . . . 1,095 (170) (12,407) ------- ------- -------- Cash provided by operating activities. . . . . . . . . . . . 96,094 53,691 104,003 Cash flows from investing activities: Capital expenditures . . . . . . . (50,355) (102,697) (62,181) Proceeds from sale of property, plant and equipment . . . . . . . 8,498 219 16,700 ------- ------- -------- Cash used in investing activities. (41,857) (102,478) (45,481) Cash flows from financing activities: Net borrowings under lines of credit 29,000 2,100 (31,100) Redemption of preferred stock . . . -- (3,000) -- Capitalized financing and acquisition costs. . . . . . . . . . . . . . . (573) (22,426) (5,108) Increase (decrease) in bank over- drafts. . . . . . . . . . . . . . (7,193) (8,865) 655 Proceeds from issuance of long- term debt . . . . . . . . . . . . 2,000 668,269 150,000 Principal payments on long-term debt. . . . . . . . . . . . . . . (75,361) (577,902) (164,081) ------- ------- -------- Cash provided by (used in) financing activities. . . . . . . (52,127) 58,176 (49,634) ------- ------- -------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . 2,110 9,389 8,888 Cash and cash equivalents at begin- ning of period . . . . . . . . . . . 34,693 36,803 46,192 ------- ------- -------- Cash and cash equivalents at end of period. . . . . . . . . . . . . . $ 36,803 $ 46,192 $ 55,080 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 RALPHS GROCERY COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (dollars in thousands)
Common Stock -------------------- Additional Outstanding Paid-In Accumulated Shares Amount Capital Deficit Total ----------- ------- ----------- ----------- -------- Balances at February 3, 1991 . . . . . . . 100 $ -- $ 175,548 $(191,513) $(15,965) Net Loss . . . . . . . -- -- -- (41,240) (41,240) ---- ------- --------- --------- -------- Balances at February 2, 1992 . . . . . . . 100 -- 175,548 (232,753) (57,205) Net Loss . . . . . . . -- -- -- (76,092) (76,092) ---- ------- --------- --------- -------- Balances at January 31, 1993 . . . . . . . 100 -- 175,548 (308,845) (133,297) Net Earnings . . . . . -- -- -- 138,366 138,366 ---- ------- --------- --------- -------- Balances at January 30, 1994. . . . . . . 100 $ -- $ 175,548 $(170,479) $ 5,069 ==== ======= ========= ======== ===== See accompanying notes to consolidated financial statements. F-6 RALPHS GROCERY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION At February 2, 1992, Ralphs Grocery Company, ("Ralphs") was an indirect wholly owned subsidiary of Federated Stores, Inc. ("Federated"). Two wholly owned subsidiaries of Federated, Federated Holdings III, Inc. ("Holdings III") and Allied Stores Corporation ("Allied") directly owned the common stock of Ralphs, approximately 84% and 16% respectively. In January 1990 Holdings III and Allied, and certain other subsidiaries of Federated, each filed petitions for relief under Chapter 11, Title 11 of the United States Code ("Chapter 11"). In March 1990, Federated filed a petition for relief under Chapter 11. Pursuant to the plans of reorganization for Federated and certain of its subsidiaries, Ralphs Supermarket, Inc. (the "Holding Company") was formed to hold the outstanding shares of common stock of Ralphs. On February 3, 1992, Holdings III and Allied contributed their shares of Ralphs to the Holding Company in exchange for the issuance by the Holding Company of Holding Company shares in the same proportion in Ralphs shares were owned ("Internal Reorganization"). For financial reporting purposes, the Holding Company's investment in Ralphs was recorded at predecessor cost. For Federal tax purposes, a new basis was established at the Holding Company as more fully described in Note 11. Under the plans of reorganization for Federated, Holdings III and certain other subsidiaries of Federated (the "FSI Plan"), all Holding Company shares of common stock held by Holdings III were to be distributed to certain creditors of Federated and Holdings III, including The Edward J. DeBartolo Corporation ("EJDC"), Bank of Montreal ("BMO"), Banque Paribas ("BP") and Camdev Properties Inc. ("Camdev"), and Federated. The FSI Plan was confirmed by the Bankruptcy Court in January 1992 and was consummated on February 3, 1992. Under the plan of reorganization of Allied and certain affiliates including Federated Department Stores, Inc. (the "Allied-Federated Plan"), a portion of Allied's Holding Company shares were to be distributed to BMO and BP. The Allied-Federated Plan was confirmed by the Bankruptcy Court in January 1992 and was consummated shortly after the FSI Plan. Thus, following consummation of both the FSI Plan and the Allied-Federated Plan and the transfer on July 19, 1993 of the shares of common stock in Holding Company held by Federated Stores, Inc. to Camdev, Ralphs is a wholly owned subsidiary of the Holding Company which in turn is owned by the following entities: F-7 Approximate Percent Ownership of Holding Company Common Stock As of July 19, 1993 ------------------- EJDC. . . . . . . . . . . . . . . . . . 60.4% BMO . . . . . . . . . . . . . . . . . . 10.1% BP. . . . . . . . . . . . . . . . . . . 10.1% Camdev. . . . . . . . . . . . . . . . . 12.8% Federated Department Stores, Inc (as successor by merger to Allied). . 6.6% Pursuant to certain agreements entered into contemporaneously with the effectiveness of the FSI Plan and the Allied-Federated Plan, certain income tax liabilities of Ralphs, Federated, Allied, Federated Department Stores, Inc. and other affiliates have been settled with the Internal Revenue Service. In addition, Ralphs and certain affiliates including Federated Department Stores, Inc., Allied and Federated (the "Affiliated Group") entered into an agreement (the "Tax Indemnity Agreement") pursuant to which Federated Department Stores, Inc. agreed to pay certain tax liabilities, if any, relating to Ralphs being a member of the Affiliated Group. The Tax Indemnity Agreement provides a formula to determine the amount of additional tax liabilities through February 3, 1992 that Ralphs would be obligated to pay the Affiliated Group. However, such additional liability, if any, is limited to $10 million subject to certain adjustments. Under the Tax Indemnity agreement, the Holding Company and Ralphs have agreed to pay Federated Department Stores, Inc. $1.0 million each year for five years starting on February 3, 1992, and an additional $5.0 million on February 3, 1997. These total payments of $10.0 have been recorded in Ralphs' financial statements at February 2, 1992. The five $1.0 million installments are to be paid by Ralphs and the $5.0 million is the joint obligation of the Holding Company and Ralphs. Also, in the event Federated Department Stores, Inc. is required to pay certain tax liabilities on behalf of Ralphs, the Holding Company and Ralphs have agreed to reimburse Federated Department Stores, Inc. up to an additional $10.0 million, subject to certain adjustments. This additional obligation is the joint and several obligation of the Holding Company and Ralphs. The $5.0 million payment and the potential $10.0 million payment may be paid, at the option of the Holding Company and Ralphs, in cash or newly issued Holding Company Common Stock. F-8 In connection with the consummation of the FSI Plan and the Allied-Federated Plan, Ralphs and certain parties entered into an agreement (the "Comprehensive Settlement Agreement") pursuant to which the parties thereto, among other things, agreed to deliver releases to the various parties to the Comprehensive Settlement Agreement as well as certain additional parties. Under the Comprehensive Settlement Agreement, Ralphs received general releases from Allied, Federated, Federated Department Stores, Inc. and certain other affiliates which released it from any and all claims which could have been asserted by the parties thereto prior to the effective dates of FSI Plan and the Allied-Federated Plan other than for claims arising under the Comprehensive Settlement Agreement, the FSI Plan, the Allied-Federated Plan and the Tax Indemnity Agreement. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Reporting Period Ralphs' fiscal year ends on the Sunday closest to January 31. Fiscal year-ends are as follows: February 2, 1992 (Fiscal 1991) January 31, 1993 (Fiscal 1992) January 30, 1994 (Fiscal 1993) (b) Cash and Cash Equivalents For purposes of the statements of cash flows, Ralphs considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (c) Inventories Inventories are stated at the lower cost or market. Cost is determined primarily using the last-in, first-out (LIFO) method. The replacement cost of inventories exceeded the LIFO inventory cost by $15.535 million and $17.589 million at January 30, 1994 and January 31, 1993, respectively. (d) Property, Plant and Equipment Property, plant and equipment are stated at cost. Property and equipment held under capital leases are stated at the present value of the minimum lease payments at the inception of the lease. Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of assets. Plant and equipment held under capital leases and leasehold F-9 improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Useful lives range from 10 to 40 years for buildings and improvements and 3 to 20 years for fixtures and equipment. Interest is capitalized in connection with the construction of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Interest cost capitalized during fiscal 1991, 1992 and 1993 was $.510 million, $1.074 million, and $.740 million, respectively. (e) Deferred Debt Issuance Costs Direct costs incurred as a result of financing transactions are capitalized and amortized over the terms of the applicable debt agreements using the effective interest method. (f) Pre-opening Costs Pre-opening costs of new stores are deferred and expensed at the time the store opens. (g) Self Insurance Reserves Ralphs is self-insured for a portion of workers' compensation, general liability and automobile accident claims. Ralphs establishes reserve provisions based on an independent actuary's review of claims filed and an estimate of claims incurred but not yet filed. (h) Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired, resulting from the May 3, 1988 acquisition of Ralphs is being amortized using the straight-line method over 40 years. Accumulated amortization aggregated $52.4 million and $63.4 million at January 31, 1993 and January 30, 1994, respectively. (i) Acquired Leases Beneficial lease rights and lease valuation reserves are recorded based on differences between contractual rents under existing lease agreements and the fair value of entering such lease agreements as of the May 3, 1988 acquisition of Ralphs. Beneficial lease rights are amortized using the straight- line method over the terms of the leases. Lease valuation reserves are amortized using the interest method over the terms of the leases. F-10 (j) Discounts and Promotional Allowances Promotional allowances and vendor discounts are recorded as a reduction of cost of sales in the accompanying statements of operations. Allowance proceeds received in advance are deferred and recognized over the period earned. (k) Income Taxes Through February 2, 1992, Ralphs operated under a tax-sharing agreement with Federated and was included in the consolidated Federal tax returns of Federated. Through January 28, 1990, Ralphs was included in the combined state tax returns of Federated; however, Ralphs filed separate state tax returns subsequent to January 28, 1990. Under the tax-sharing agreement, tax-sharing payments were made to Federated based on the amount that Ralphs would be liable for had Ralphs filed separate tax returns, taking into account applicable carryback and carryforward provision of the tax laws. Subsequent to February 2, 1992, the Holding Company is responsible for filing tax returns with the Internal Revenue Service and state taxing authorities. Ralphs is included in the tax filings of the Holding Company. Prior to February 3, 1992 Ralphs paid alternative minimum tax to Federated under its tax sharing agreement. As a result of the Internal Reorganization, Ralphs will not be entitled to offset its future Federal regular tax liability with the payments made to Federated. Effective for the fiscal year ended February 2, 1992, Ralphs adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." At the date of adoption such change had no impact on the consolidated financial results. F-11 (l) Postretirement Medical Benefits Effective for the fiscal year ended February 3, 1991, Ralphs adopted SFAS 106, "Employers' Accounting for Postretirement Benefits other Than Pensions", which requires that the cost of postretirement benefits other than pensions be recognized in the financial statements over an employee's service with Ralphs. (m) Reclassification Certain amounts in the accompanying financial statements have been reclassified to conform to the current year's presentation. (n) Consolidation Policy The consolidated financial statements include the accounts of Ralphs Grocery Company and its wholly owned subsidiary, collectively referred to as the Company. All material intercompany balances and transactions are eliminated in consolidation. (o) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (i) Cash and short-term investments The carrying amount approximates fair value because of the short maturity of those instruments. (ii) Long-term debt The fair value of Ralphs' long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to Ralphs for debt of the same remaining maturities. (iii) Interest Rate Swap Agreements The fair value of interest rate swap agreements is the estimated amount that Ralphs would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current credit-worthiness of F-12 the swap counterparties. (3) Property, Plant and Equipment
Property, plant and equipment is summarized as follows:
January 31, January 30, 1993 1994 ----------- ---------- (dollars in thousands) Land. . . . . . . . . . . . . . . $ 156,487 $ 159,904 Buildings and improvements. . . . 180,639 191,179 Leasehold improvements. . . . . . 149,273 161,341 Fixtures and equipment. . . . . . 349,697 354,626 Capital leases. . . . . . . . . . 69,058 86,964 --------- --------- 905,154 954,014 Less: Accumulated depreciation. . (266,127) (312,746) Less: Accumulated capital lease amortization. . . . . . . . . . (28,362) (39,371) --------- --------- Property, plant and equipment, net . . . . . . . . . . . . . . $ 610,665 $ 601,897 ========= =========
(4) Accrued Expenses
Accrued expenses are summarized as follows: January 31, January 30, 1993 1994 ----------- ---------- (dollars in thousands) Accrued wages, vacation and sick leave. . . . . . . . . . . $ 38,238 $ 34,763 Taxes other than income tax . . . 13,285 11,084 Interest. . . . . . . . . . . . . 15,912 11,090 Other . . . . . . . . . . . . . . 60,353 44,606 -------- -------- $ 127,788 $ 101,543 ======== ========
F-13 (5) Long-term Debt Long-term debt is summarized as follows: January 31, January 30, 1993 1994 ----------- ---------- (dollars in thousands) First mortgage notes payable in monthly installments, commencing June 1, 1994 of $1,553,000 including interest at an effective rate of 9.651%; interest only payable monthly prior to June 1, 1994. Final payment due June 1, 1999. Secured by land and buildings with a net book value of $190.8 million. . . . . . . . . . . . . $178,482 $178,013 Notes payable in varying monthly installments including interest ranging from 11.5% to 18.96%. Final payment due through November 30, 1996. Secured by equipment with a net book value of $30.0 million . . . . . . . . . . . . . 17,920 9,721 Capitalized lease obligations at interest rates ranging from 7.25% to 14% maturing at various dates through 2009 (note 6) . . . . . . 54,181 61,150 Note payable to bank . . . . . . . 350,000 300,000 Senior Subordinated Debentures, 14% due 2000. . . . . . . . . . . 98,108 -- Initial Notes and Exchange Notes . -- 150,000 Senior Subordinated Debentures, 10 1/4%, due 2002 . . . . . . . . 300,000 300,000 ------- ------- Total long-term debt . . . . . . . 998,691 998,884 Less current maturities. . . . . . (66,465) (70,975) ------- ------- Long-term debt . . . . . . . . . . $932,226 $927,909 ======== ======== During the third quarter of 1992, the Company implemented a recapitalization plan (the "Recapitalization Plan") which was completed during the first quarter of 1993 by the Company's offering of $150.0 million aggregate principal amount of its 9% Senior Subordinated notes due 2003 (the "Initial Notes") in private placement under the Securities Act of 1933, as amended (the "Securities Act"). The proceeds of the Initial Notes were used to F-14 (i) purchase for cancellation of $60.0 million aggregate principal amount of the Company's 14% Senior Subordinated Debentures due 2000 (the "14% Subordinated Debentures") from a noteholder who had made an unsolicited offer to sell such 14% Subordinated Debentures, (ii) defease the remaining $38.1 million aggregate principal amount of the 14% Subordinated Debentures, (iii) prepay $36.1 million of borrowings under the Company's $350.0 million 1992 term loan facility entered into as part of the Recapitalization Plan and (iv) pay fees and expenses associated with such transactions and for other purposes. As part of a registration rights agreement entered into with the initial purchasers of the Initial Notes, the Company agreed to offer to exchange up to $150.0 million aggregate principal amount of the Exchange Notes for all of the outstanding Initial Notes (the "Exchange Offer"). The terms of the Exchange Notes are substantially identical (including principal amount, interest rate and maturity) in all respects to the terms of the Initial Notes except that the Exchange Notes are freely transferable by the holders thereof (with certain exceptions) and are not subject to any covenant upon the Company regarding registration under the Securities Act. On June 24, 1993, the Company completed the Exchange Offer exchanging $149.7 million aggregate principal amount of Exchange Notes for Initial Notes ($.3 million of Initial Notes remain outstanding). The note payable to bank and working capital line, under the 1992 Credit Agreement, are secured by first priority liens on Ralphs' inventory and receivables, servicemarks and registered trademarks, equipment (other than equipment located at facilities subject to existing liens in favor of equipment financiers) and after-acquired real property interests and all existing real property interests (other than those that are subject to prior encumbrances) and bears interest at the rates, as selected by Ralphs as follows: (i) 1 3/4% over the prime rate, or (ii) 2 3/4% over the Eurodollar Rate. Interest calculated pursuant to (i) above is payable quarterly, otherwise interest is payable quarterly or at the selected borrowings option maturity. During the 52 weeks ended January 30, 1994, interest rates under these borrowings ranged from 5.9375% to 7.75%. Ralphs is required to pay an annual administrative fee of $300,000 pursuant to the 1992 Credit Agreement as well as a commitment fee of 0.5% on the average daily amounts available for borrowing under the $120.0 million working capital credit line. F-15 The 1992 Credit Agreement, which includes a $350.0 million term loan and $120.0 million working capital credit line, also supports up to $60.0 million of letters of credit which reduce the available borrowings on the credit line. The 1992 Credit Agreement is subject to quarterly principal payment requirements, which commenced on March 31, 1993, with payment in full on June 30, 1998. As of January 30, 1994, $51.1 million of letters of credit were outstanding, with $68.9 million available under the working capital credit line. In the fourth quarter of Fiscal 1992, Ralphs entered into an interest rate cap agreement with an effective date of November 6, 1992 and a three-year maturity. The interest rate cap hedges the interest rate in excess of 6.5% LIBOR on $105.0 million principal amount against increases in short-term rates. This agreement satisfies interest rate protection requirements under the 1992 Credit Agreement. In addition to the interest rate cap agreement, Ralphs entered into an interest rate swap agreement on $150.0 million notional principal amount. Under the interest rate swap agreement, Ralphs is required to pay interest at LIBOR fixed at the end of each six month calculation period and Ralphs will receive interest payments at LIBOR fixed at the beginning of each six month calculation period. An increase or decrease of one- half percent (0.5%) in the LIBOR interest rate during a six month calculation period would result in an increase or decrease in interest payments of $.375 million. This interest rate swap agreement has a three-year term expiring November 6, 1995. Ralphs is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, Ralphs does not anticipate nonperformance by the counterpart. The Initial Notes and Exchange Notes are unsecured obligations of Ralphs subordinated in right of payment to amounts due on the aforementioned senior debt. Interest at 9% is payable each April 1 and October 1 through April 1, 2003, when the notes mature. The 10 1/4% Senior Subordinated Debentures are unsecured obligations of Ralphs subordinated in right of payment to amounts due on the senior debt. Interest at 10 1/4% is payable each January 15 and July 15 through July 15, 2002, when the debentures mature. The aforementioned debt agreements contain various restrictive covenants pertaining to net worth levels, limitations on additional indebtedness and capital expenditures, financial ratios and dividends. F-16 The aggregate maturities on long-term debt for each of the five years subsequent to fiscal 1992 as follows: (dollars in thousands) 1994. . . . . . . . . . . . . . $ 70,975 1995. . . . . . . . . . . . . . 81,572 1996. . . . . . . . . . . . . . 83,756 1997. . . . . . . . . . . . . . 81,716 1998. . . . . . . . . . . . . . 50,406 1999 and thereafter . . . . . . 630,459 __________ $ 998,884 ========== (6) Leases Ralphs has leases for retail store facilities, warehouses and manufacturing plants for periods up to 30 years. Generally, the lease agreements include renewal options for five years each. Under most leases, Ralphs is responsible for property taxes, insurance, maintenance and expense related to the lease property. Certain store leases require excess rentals based on a percentage of sales at that location. Certain equipment is leased by Ralphs under agreements ranging from 3 to 15 years. The agreements usually do not include renewal option provisions. Minimum rental payments due under capital leases and operating leases subsequent to fiscal 1993 are as follows:
Capital Operating Leases Leases Total ------- --------- ---------- (dollars in thousands) 1994. . . . . . . . . . . . . . $ 17,043 $ 57,264 $ 74,307 1995. . . . . . . . . . . . . . 15,172 55,424 70,596 1996. . . . . . . . . . . . . . 12,381 53,998 66,379 1997. . . . . . . . . . . . . . 11,607 51,124 62,731 1998. . . . . . . . . . . . . . 9,286 47,211 56,497 1999 and thereafter . . . . . . 18,247 321,149 339,396 --------- --------- --------- Total minimum lease payments. . 83,736 $586,170 $669,906 ========= ========= Less amounts representing interest . . . . . . . . . . . (22,586) --------- Present value of net minimum lease payments . . . . . . . . 61,150 Less current portion of lease obligations. . . . . . . . . . (11,052) --------- Long-term capital lease obligations. . . . . . . . . . $ 50,098 =========
F-17 Total rent expense is summarized as follows:
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended February 2, January 31, January 30, 1992 1993 1994 ----------- ---------- ---------- (dollars in thousands) Capital Leases Contingent rentals. . . . . . . $ 2,358 $ 2,443 $ 2,241 Rentals from subleases. . . . . (2,133) (2,144) (2,048) Operating Leases Minimum rentals . . . . . . . . 42,156 49,001 54,965 Contingent rentals. . . . . . . 4,081 5,058 3,645 Rentals from subleases. . . . . (1,057) (1,123) (1,150) --------- --------- --------- $ 45,405 $ 53,235 $57,653 ========= ========= ========
(7) Self-Insurance Ralphs is a qualified self-insurer in the State of California for worker's compensation and for automobile liability. For fiscal 1991, 1992 and 1993 self insurance loss provisions amounted to (in thousands) $25,549, $25,950 and $30,323, respectively. (8) Commitments and Contingencies In December 1992, three California state antitrust class action suits were commenced in Los Angeles Superior Court against Ralphs and other major supermarket chains located in Southern California, alleging that they conspired to refrain from competing in and to fix the price of fluid milk above competitive prices. Specifically, class actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C. Pfeifle on December 7, December 14, and December 23, 1992 respectively. Ralphs intends to vigorously pursue its defense in these actions. On March 25, 1991, George A. Koteen Associates, Inc. ("Koteen Associates") commenced an action in San Diego Superior Court alleging that Ralphs breached an alleged utility rate consulting agreement. In December 1992, a jury returned a verdict of $4,949,084 in favor of Koteen Associates and in March 1993, attorney's fees and certain other costs were awarded to the plaintiff. Ralphs has appealed the judgment and fully reserved in Fiscal 1992 against an adverse judgement. F-18 Environmental Matters In 1993, Ralphs completed the remediation of the mineral oil release at its bakery located at the Atwater property in Los Angeles. Ralphs' environmental consultants do not contemplate that there will be any further regulatory requirements with respect to this matter. Ralphs is a party to several pending legal proceedings and claims incurred in the normal course of business. In the opinion of management, based in part on the advice of counsel, these matters are adequately covered by insurance or will not have a material effect on Ralphs' financial position or results of operations. F-19 (9) Redeemable Preferred Stock Ralphs' non-voting preferred stock consisted of 10,000,000 shares of authorized $.01 par value preferred stock. At February 3, 1991 and February 2, 1992, 170,000 shares of Class A Preferred Stock and 130,000 shares of Class B preferred stock were issued and outstanding. All of the outstanding shares of preferred stock were redeemed by Ralphs during February 1992 at their initial issuance price of $3.0 million. (10) Equity Appreciation Rights Plans Effective August 26, 1988, Ralphs adopted an Equity Appreciation Plan ("1988 Plan"), whereby certain officers received equity rights representing, in aggregate, the right to receive 15% of the increase in the appraised value (as defined in the 1988 Plan) of the Ralphs' equity over an initial value of $120.0 million. The 1988 Plan was amended in January 1992 by agreement among Ralphs and the Equity Rights holders ("Amended Plan"). Under the Amended Plan, all outstanding Equity Rights are vested in full are no longer subject to forfeiture by the holders, except in the event a holder's employment is terminated for cause within the meaning of the Amended Plan. The appraised value or Ralphs' equity is to be determined as of May 1 each year by an investment banking company engaged for this purpose utilizing the methodology specified in the Amended Plan (which is unchanged from that specified in the 1988 Plan); however, under the Amended Plan the appraised value of Ralphs' equity for purposes of the plan may not be less than $400.0 million nor exceed $517.0 million. The amount of equity rights redeemable at any given time is defined in each holders' separate agreement. On exercise of an equity right, the holder will be entitled to receive a pro rata percentage of any such increase in appraised value. In addition, the Amended Plan provides for the possible additional further payment to the holder of each exercised Equity Right of an amount equal to the "Deferred Value" of such Equity Right as defined in the Amended Plan. Ralphs did not incur any expense under the Equity Appreciation Rights Plan in fiscal 1992 and fiscal 1993.
The amount of Equity Rights redeemable for each of the five years subsequent to fiscal 1993 are as follows: (dollars in thousands) 1994. . . . . . . . . . . . . . . . . $ 7,251 1995. . . . . . . . . . . . . . . . . 7,251 1996. . . . . . . . . . . . . . . . . 7,251 1997. . . . . . . . . . . . . . . . . 5,185 1998. . . . . . . . . . . . . . . . . 13,318 -------- $ 40,256 ========
F-20 (11) Income Taxes Income tax expense (benefit) consists of the following:
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended February 2, January 31, January 30, 1992 1993 1994 ----------- ---------- ---------- (dollars in thousands) Current Federal . . . . . . . . . . . . $ 9,224 $ 4,173 $ (2,424) State . . . . . . . . . . . . . 4,282 -- 3,500 --------- --------- ---------- $ 13,506 $ 4,173 $ 1,076 --------- --------- ---------- Deferred Federal . . . . . . . . . . . . $ -- $ -- $(109,125) State . . . . . . . . . . . . . -- -- -- --------- --------- ---------- $ -- $ -- $(109,125) --------- --------- ---------- Total income tax expense (benefit). . . . . . . . . . $ 13,506 $ 4,173 $(108,049) ========= ========= ========
Income tax expense (benefit) has been classified in the accompanying statements of operations as follows: 1991 1992 1993 ----------- ---------- ---------- Earnings before extraordinary items . . . . . . . . . . . . . . $ 13,506 $ 8,346 $(108,049) Extraordinary item. . . . . . . . -- (4,173) -- --------- --------- ---------- Net tax expense (benefit) . . . . $ 13,506 $ 4,173 $(108,049) ========= ========= ========
The differences between income tax expense and income taxes computed using the top marginal U.S. Federal income tax rate of 34% for both Fiscal 1991 and 1992 and, for Fiscal 1993, of 35% applied to earnings (loss) before income taxes (including, in Fiscal 1992, the extraordinary loss of $74.8 million) were as follows: F-21
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended February 2, January 31, January 30, 1992 1993 1994 ----------- ---------- ---------- (dollars in thousands) Amount of expected expense (benefit) computed using the statutory Federal rate. . . . $ (9,430) $ (24,450) $ 10,611 Utilization of financial operating loss . . . . . . . . -- -- (10,611) Amortization of excess cost over net assets acquired . . . 3,356 3,356 -- State income taxes, net of Federal income tax benefit . 4,282 -- 3,500 Accounting limitation (recognition) of deferred tax benefit. . . . . . . . . . 6,139 20,041 (109,125) Alternative minimum tax . . . . 9,224 4,173 625 Other, net. . . . . . . . . . . (65) 1,053 (3,049) --------- --------- --------- Total income tax expense (benefit). . . . . . . . . . $ 13,506 $ 4,173 $(108,049) ========= ========= =======
Ralphs' deferred tax assets, recorded under SFAS 109, were comprised of the following: 52 Weeks 52 Weeks Ended Ended January 31, January 30, 1993 1994 -------------- ----------- (dollars in thousands) Deductible intangible assets $ -- $ 56,000 Net operating loss carryforward and tax credit. . . . . . . . . . . 5,907 40,125 Self insurance accrual . . . . . . . 8,951 43,000 Software basis difference and amortization. . . . . . . . . . . . 9,320 -- Fees collected in advance. . . . . . 5,572 -- Property, plant and equipment basis difference and depreciation . . . . 25,914 21,000 Equity appreciation rights . . . . . -- 16,000 Favorable lease basis differences. . -- 16,000 State deferred taxes . . . . . . . . -- 17,000 Other. . . . . . . . . . . . . . . . 16,539 40,000 --------- --------- 72,203 249,125 Less valuation allowance. . . . . . (72,203) (140,000) --------- --------- Total $ -- $ 109,125 ========= =========
On October 15, 1992, Ralphs filed an election with the Internal Revenue Service under Section 338(h)(10). Under this Section, Ralphs is required to restate, for Federal tax purposes, its assets and liabilities to fair market value as of February 3, 1992. The effect of this transaction is to record a new Federal tax basis to reflect a change of control for Federal tax purposes resulting from the Internal Reorganization. No change of control for financial reporting purposes was affected. In August, 1993, The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted. The Act increased the Federal income tax rate from 34 to 35 percent for filers whose taxable income exceeded $10.0 million. In the current year, the effect of the Federal income tax rate change was to increase the net deferred tax assets. In addition, the Act also provided for the deductibility of certain intangibles, including costs in excess gross assets acquired. The Act has significantly impacted the aggregate deferred tax asset position of Ralphs at January 30, 1994. Ralphs elected to retroactively apply certain provisions of the Act related to the February 3, 1992 change of control for Federal tax purposes. As such, approximately $610.7 million in excess of cost over net assets acquired became fully deductible for Federal tax purposes. This amount is deductible over 15 years. This excess in the tax basis and financial statement basis of excess of cost over net assets acquired aggregated $153.0 million at January 30, 1994. During the year ended January 30, 1994, Ralphs has recorded the incremental impact of the Act on deductible temporary differences and increased its deferred income tax assets by a net amount of $109.1 million. The decision to reduce the valuation allowance was based upon several factors. Specific among them, was the Company's completion of its restructuring plan which effectively reduced estimated interest expense by approximately $9.0 as compared to the year ended January 31, 1993. In addition, the January 31, 1993 operating results were negatively effected by several charges including provisions for restructuring, legal settlements and a loss on retirement of debt all aggregating approximately $90 million on a pre-tax basis. Although there can be no assurance as to future taxable income, the Company believes that, based upon the above mentioned events, as well as the Company's expectation of future taxable income, it is more likely than not that the recorded deferred tax asset will be realized. In order to realize the net deferred tax asset currently recorded, Ralphs will need to generate sufficient future taxable income, assuming current tax rates, of approximately $300.0 million. At January 30, 1994, the Company has Federal net operating loss (NOL) carryforwards of approximately $115.0 million and Federal and state Alternative Minimum Tax Credit carryforwards of approximately $2.1 million which can be used to offset Federal taxable income and regular taxes payable, respectively. The NOL carryforwards begin expiring in 2008. F-23 During the past two fiscal years, the Company has generated Federal taxable losses of approximately $115.0 million versus financial pre-tax losses of approximately $42.0 million for the same periods. These differences result principally from excess tax versus financial amortization on certain intangible assets (excess of cost over net assets acquired), as well as several other originating temporary differences. (12) Employee Benefit Plans Ralphs has a defined benefit pension plan covering substantially all employees not already covered by collective bargaining agreements with at least one year of credit service (defined at 1,000 hours). Ralphs' policy is to fund pension costs at or above the minimum annual requirement.
The following actuarially determined components were included in the net pension expense: 52 Weeks 52 Weeks 52 Weeks Ended Ended Ended February 2, January 31, January 30, 1992 1993 1994 ----------- ---------- ---------- (dollars in thousands) Service cost. . . . . . . . . . . $1,806 $ 2,076 $ 2,228 Interest cost on projected benefit obligation . . . . . . . . . . . 2,079 2,471 2,838 Actual return on assets . . . . . (3,291) (2,794) (2,695) Net amortization and deferral . . 992 237 (46) ------- ------- ------- Net pension expense. . . . . . $1,586 $ 1,990 $ 2,325 ======= ======= =======
F-24
The funded status of Ralphs' pension plan, (based on December 31, 1992 and 1993 asset values), is as follows: January 31, January 30, 1993 1994 ----------- ----------- (dollars in thousands) Actuarial present value of benefit obligations: Vested benefit obligation. . . . . . . $18,608 $29,659 Accumulated benefit obligation . . . . 20,887 29,950 Projected benefit obligation . . . . . 33,378 42,690 Plan assets at fair value . . . . . . . . 30,684 32,968 ------- ------- Projected benefit obligation in excess of Plan Assets . . . . . . . . . . . . . (2,694) (9,722) Unrecognized net gain . . . . . . . . . . (1,959) 4,567 Unrecognized prior service cost . . . . . 46 (1,778) Unrecognized net asset. . . . . . . . . . -- -- ------- ------- Accrued pension cost. . . . . . . . . $(4,607) $(6,933) ======= =======
Service costs for fiscal 1991, 1992 and 1993 were calculated using a rate of increase in future compensation levels of 6% and discount rate of 8.5%. Certain assumptions will be revised to reflect future trends in fiscal 1994. The discount rate will be reduced to 7.75% to reflect current decline in interest rates and the rate of increase in future compensation levels will be 5% for fiscal 1994. A long-term rate of return on assets of 9% was used for fiscal 1992 and 1993. Plan assets consist primarily of debt securities, guaranteed interest contracts and a money market fund. Plan benefits are based primarily on years of service and on average compensation during the last years of employment. On February 23, 1990, Ralphs adopted a Supplemental Executive Retirement Plan covering certain key officers of Ralphs. Earned vested benefits under the Plan were $4,246,300 at December 31, 1992 and $5,075,000 at December 31, 1993. Under certain circumstances, the cash surrender value of certain split-dollar life insurance policies purchased under split-dollar life insurance agreement will offset Ralphs' obligations under the Supplemental Executive Retirement Plan. F-25 Ralphs participates in multi-employer pension plans and health and welfare plans administered by various trustees for substantially all union employees. Contributions to these plans are based upon negotiated contractual rates. The United Food and Commercial Workers health and welfare benefit plans were overfunded and those employers who contributed to these plans are to receive a pro-rata share of the excess reserve in these health care benefit plans through a reduction in current maintenance payments. Ralphs share of the excess reserve was approximately $24.5 million of which $11.8 million was recognized in FY 1993 and the remainder will be recognized in FY 1994. Since employers are required to make contributions to the benefit funds at whatever level is necessary to maintain plan benefits, there can be no assurance that plan maintenance payments will remain at current levels.
The expense related to these plans is summarized as follows: 52 Weeks 52 Weeks 52 Weeks Ended Ended Ended February 2, January 31, January 30, 1992 1993 1994 ----------- ----------- ---------- (dollars in thousands) Multi-employer pension plans . . $ 7,370 $ 7,973 $17,687 ======= ======= ======= Multi-employer health and welfare . . . . . . . . . . . . $73,250 $71,183 $45,235 ======= ======= =======
Ralphs maintains the Ralphs Grocery Company Savings Plan Plus--Prime and the Ralphs Grocery Savings Plan Plus - Basic (collectively referred to as the"401(k) Plan") covering substantially all employees who are not covered by collective bargaining agreements and who have at least one year of credited service (defined at 1,000 hours). The 401(k) Plan provided for both pre-tax and after-tax contributions by participating employees. With certain limitations, participants may elect to contribute from 1% to 10% of their annual compensation on a pre-tax basis to the Plan. Ralphs has committed to match a minimum of 20% of an employee's contribution to the 401(k) Plan that do not exceed 5% of the employee's compensation. Expenses under the 401(k) Plan for fiscal 1991, 1992 and 1993 were $377,335, $407,961 and $431,774, respectively. Ralphs has an executive incentive compensation plan which covers approximately 39 key employees. Benefits to participants are earned based on a percentage of base compensation upon attainment of a targeted formula of earnings. Expense under this plan for fiscal 1991, 1992 and 1993 was $2.4 million, $2.5 million and $2.6 million, respectively. Ralphs has also adopted an incentive plan for certain members of management. Benefits to participants are earned based on a percentage of base compensation upon attainment of a targeted formula of earnings. Expense under this plan for fiscal 1991, 1992 and 1993 was $2.8 million, $2.8 million and $3.0 million, respectively. F-26 The aforementioned incentive plans may be cancelled by the Board of Directors at any time. Ralphs sponsors a postretirement medical benefit plan (Postretirement Medical Plan) covering substantially all employees who are not members of a collective bargaining agreement and who retire under certain age and service requirements. The Postretirement Medical Plan is a traditional type medical plan providing outpatient, inpatient and various other covered services. Such benefits are funded from Ralphs' general assets. The calendar year deductible is $1,180 per individual, indexed to the Medical Consumer Price Index. On February 3, 1991, Ralphs adopted Statement of Financial Accounting Standards (SFAS) 106, "Employees' Accounting for Postretirement Benefits other Than Pension," which required that the cost of future benefits under the Postretirement Medical Plan be recognized in the financial statements over an employee's service with Ralphs. At the beginning of fiscal 1990, Ralphs elected to immediately recognize the transition obligation in accordance with the provision of SFAS 106. Previously, expenses were recognized as paid.
The net periodic cost of the Postretirement Medical Plan includes the following components: 52 Weeks 52 Weeks 52 Weeks Ended Ended Ended February 2, January 31, January 30, 1992 1993 1994 ----------- ----------- ---------- (dollars in thousands) Service cost. . . . . . . . . . $1,323 $1,908 $1,767 Interest cost . . . . . . . . . 1,304 1,367 1,603 Return on plan assets . . . . . -- -- -- Net amortization and deferral . -- -- -- ------ ------ ------ Net postretirement benefit cost $2,627 $3,275 $3,370 ====== ====== ======
F-27
The funded status of the postretirement benefit plan is as follows: 52 Weeks 52 Weeks Ended Ended January 31, January 30, 1993 1994 ----------- ---------- (dollars in thousands) Accumulated postretirement benefit obligation: Retirees. . . . . . . . . . . . . $ 2,218 $ 1,237 Fully eligible plan participants. 441 357 Other active plan participants. . 16,675 16,062 Plan assets at fair value . . . . -- -- ------- ------- Funded status . . . . . . . . . . (19,334) (17,656) Plan assets in excess of projected obligations . . . . . . . . . . -- -- Unrecognized gain (loss). . . . . 1,694 6,302 Unrecognized prior service cost . -- -- ------ -------- Accrued postretirement benefit obligation. . . . . . . . . . . $(21,028) $(23,958)
Service cost was calculated using a medical cost trend of 10.5% for fiscal 1992 and 1993. Certain assumptions will be revised to reflect future trends. The discount rate will be reduced to 7.75% in 1994 to reflect current decline in interest rates. The long term rate of return of plan assets is not applicable as the plan is not funded. F-28 The effect on a one-percent increase in the medical cost trend would increase the fiscal 1993 service and interest cost of 24%. The accumulated postretirement benefit obligation at January 30, 1994 would also increase by 31%. (13) Quarterly Results (unaudited) Quarterly results for fiscal 1992 and 1993 are as follows:
Extraordinary Item,net of Net Gross Operating Income income tax Earnings/ Sales Profit Income Taxes benefit (Loss) ----- ------ --------- ------ ---------- ----- (dollars in millions) FY 1992 Quarters 12 weeks ended 04/26/92. .$ 677.0 $146.7 $ 35.1 $ 3.9 $ -- $ 2.2 12 weeks ended 07/19/92. . 660.3 143.5 33.0 3.9 -- 1.7 12 weeks ended 10/11/92. . 631.4 137.0 28.8 1.3 (55.8) (58.6) 16 weeks ended 01/31/93. . 875.1 199.4 41.6 (.8) (14.8) (21.4) ------- ------ ------ ----- ----- ------ Total. . . . . . . . . .$2,843.8 $626.6 $138.5 $ 8.3 $(70.6) $(76.1) ======== ====== ====== ===== ====== ====== FY 1993 Quarters 12 weeks ended 04/25/93. .$ 632.4 $142.4 $ 31.4 $ 1.0 $ -- $ 3.9 12 weeks ended 07/18/93. . 629.0 145.2 36.8 (1.0) -- 12.9 12 weeks ended 10/10/93. . 612.8 141.5 31.7 -- -- 7.0 16 weeks ended 01/30/94. . 856.0 207.4 52.2 (108.0) -- 114.6 ------- ------ ------ ----- ----- ------ Total. . . . . . . . . .$2,730.2 $636.5 $152.1 $(108.0) $ -- $138.4 ======== ====== ====== ===== ====== ======
(14) Supplemental Cash Flow Information
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended February 2, January 31, January 30, 1992 1993 1994 ---------- ---------- ---------- (dollars in thousands) Supplemental cash flow disclosures: Interest paid, net of amounts capitalized. . . . . . . . . . $115,159 $118,391 $ 93,738 Income taxes paid. . . . . . . . $ 12,643 $ 7,169 $ 2,423 Capital lease assets and obligations assumed. . . . . . $ 3,847 $ -- $ 15,395
F-29 (15) Stock Option Plan On February 3, 1992, 3,162,235 options for Common Stock of the Holding Company were granted under the Ralphs Nonqualified Stock Option Plan. All options were vested, but not exercisable, on the date of the grant. Options granted to certain officers become exercisable at the rate of 20% on each September 30 of calendar years 1992 through 1996. Options granted to other officers become exercisable as to 10% of the grant on each of September 30, 1992 and 1993, 15% on each of September 30, 1994 through September 30, 1997, and 20% on September 20, 1998. The following table summarizes the Ralphs Non- qualified Stock Option Plan.
Number of Options Price Range --------- ----------- Options Outstanding at January 30, 1994: Beginning of year. . . . . . . . . 3,162,235 $20.21 Granted. . . . . . . . . . . . . . -- -- Exercised. . . . . . . . . . . . . -- -- Cancelled. . . . . . . . . . . . . -- -- Expired. . . . . . . . . . . . . . -- -- --------- -------- End of year . . . . . . . . . . 3,162,235 $20.21 --------- -------- Exercisable at end of year. . . . . . 811,760 -- --------- -------- Available for grant at end of year. . -- -- --------- -------- Options Outstanding at January 31, 1993: Beginning of year. . . . . . . . . -- -- Granted. . . . . . . . . . . . . . 3,162,235 $20.21 Exercised. . . . . . . . . . . . . -- -- Cancelled. . . . . . . . . . . . . -- -- Expired. . . . . . . . . . . . . . -- -- --------- -------- End of year . . . . . . . . . . 3,162,235 $20.21 --------- -------- Exercisable at end of year. . . . . . 405,880 -- --------- -------- Available for grant at end of year. . -- -- --------- --------
F-30 The option price for outstanding options at January 30, 1994 assumes a grant date fair market value of Common Stock of the Holding Company equal to $20.21 per share, which represents the high end of a range of estimated values of the Common Stock of the Holding Company on February 3, 1992, the date of the grant. RALPHS GROCERY COMPANY SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT (in thousands)
Balance Other Balance beginning Changes- at end Description of Period Additions Retirements add(deduct) of Period - - --------------------- ---------- --------- ----------- ---------- -------- 52 Weeks ended January 30, 1994: Land. . . . . . . . . . $156,487 $ 4,206 $ -- $ (789) $ 159,904 Buildings & improvements 180,639 16,730 (6,290) 100 191,179 Leasehold improvements. 149,273 8,670 (159) 3,557 161,341 Fixtures & equipment. . 349,697 33,361 (30,299) 1,867 354,626 Capitalized leases. . . 69,058 15,395 (358) 2,869 86,964 -------- -------- -------- ------ -------- Total. . . . . . . . $905,154 $ 78,362 $(37,106) $7,604 $954,014 ======== ======== ======== ====== ======= 52 Weeks ended January 31, 1993: Land. . . . . . . . . . $145,344 $ 11,143 $ -- $ -- $156,487 Buildings & improvements 151,896 28,657 (31) 117 180,639 Leasehold improvements. 140,989 8,843 (442) (117) 149,273 Fixtures & equipment. . 317,832 48,336 (16,471) -- 349,697 Capitalized leases. . . 70,151 -- (668) (425) 69,058 -------- -------- -------- ------ -------- Total. . . . . . . . $826,212 $ 96,979 $(17,612) $ (425) $905,154 ======== ======== ======== ====== ======= 52 Weeks ended February 2, 1992: Land. . . . . . . . . . $143,410 $ 1,864 $ -- $ 70 (a) $145,344 Buildings & improvements 136,205 16,558 (15) (852)(a) 151,896 Leasehold improvements. 144,385 (11) (3,497) 112 140,989 Fixtures & equipment. . 301,482 31,944 (16,264) 670 317,832 Capitalized leases. . . 69,228 3,847 (2,924) -- 70,151 -------- -------- -------- ------ -------- Total. . . . . . . . $794,710 $ 54,202 $(22,700) $ -- $826,212 ======== ======== ======== ====== ======= - - ----------- (a) Reclassification to/from other accounts.
S-1 RALPHS GROCERY COMPANY SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (in thousands) Balance Other Balance beginning Changes- at end Description of Period Additions Retirements add(deduct) of Period - - -------------------- ---------- --------- ----------- ---------- --------- 52 Weeks ended January 30, 1994: Buildings & improvements $ 33,598 $10,117 $(2,640) $ (630) $40,445 Leasehold improvements. 49,549 6,691 (86) 9,082 65,236 Fixtures & equipment. . 182,980 40,301 (14,392) (1,824) 207,065 Capitalized leases. . . 28,362 8,434 (294) 2,869 39,371 -------- -------- -------- -------- -------- Total. . . . . . . . $294,489 $65,543 $(17,412) $9,497 $352,117 ======= ======= ======= ===== ==== 52 Weeks ended January 31, 1993: Buildings & improvements $24,514 $ 9,092 $ (8) $ -- $ 33,598 Leasehold improvements. 38,138 11,775 (364) -- 49,549 Fixtures & equipment. . 148,407 43,256 (8,683) -- 182,980 Capitalized leases. . . 21,271 7,759 (668) -- 28,362 -------- -------- -------- ------- -------- Total. . . . . . . . $232,330 $71,882 $(9,723) $ -- $294,489 ======== ======== ======== ======= ======== 52 Weeks ended February 2, 1992: Buildings & improvements $ 17,161 $ 7,366 $ (11) $ (2) $ 24,514 Leasehold improvements. 26,483 11,678 (23) -- 38,138 Fixtures & equipment. . 113,431 40,003 (5,029) 2 148,407 Capitalized leases. . . 13,009 8,271 (9) -- 21,271 -------- -------- -------- ------- ------- Total. . . . . . . . $170,084 $67,318 $(5,072) $ -- $232,330 ======== ======== ======== ====== ======
S-2 RALPHS GROCERY COMPANY SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Charged Balance Charged to to other Balance beginning costs and accounts- Deductions at end Description of Period Expenses describe(2) (payments) of Period - - -------------------- ---------- --------- ----------- ---------- --------- January 30, 1994: Self-Insurance Reserves (1). . . . . . $72,979 $30,323 $ 5,953 $(29,245) $80,010 Store Closure Reserves. $10,277 $ -- $ -- $ (763) $ 9,514 January 31, 1993: Self-Insurance Reserves (1). . . . . . $64,523 $25,950 $10,902 $(28,396) $72,979 Store Closure Reserves. $14,244 $ 1,838 $ -- $ (5,805) $10,277 February 2, 1992: Self-Insurance Reserves (1). . . . . . $57,948 $25,549 $ 5,620 $(24,594) $64,523 Store Closure Reserves. $ 2,000 $12,244 $ -- $ -- $14,244 - - ----------- (1) Includes short term portion. (2) Amortization of discount on self-insurance reserves to interest expense.
S-3 RALPHS GROCERY COMPANY SCHEDULE IX--SHORT-TERM BORROWINGS (in thousands, except interest rate data)
Maximum Average amount amount Weighted Weighted out- out- average Balance average standing standing interest at end interest during rate during Description of Period rate period (A) the period - - ---------------------- --------- -------- --------- --------- ---------- January 30, 1994: Working capital credit line. . . . . . . . . $ -- --% $51,900 $ 8,006 7.75% January 31, 1993: Working capital credit line. . . . . . . . . $31,100 7.75% $41,800 $13,851 7.82% February 2, 1992: Working capital credit line. . . . . . . . . $16,500 7.75% $34,900 $ 6,706 9.56% - - ----------- (A) Average interest rate for the year is computed by dividing the actual short-term expense by the average short-term debt outstanding.
S-4 EX-10.27 2 RALPHS GROCERY EMPLOYMENT AGREEMENT EXHIBIT 10.27 EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement"), made and entered into as ofthe first day of May, 1990, between RALPHS GROCERY COMPANY, a Delaware corporation, having its executive offices and a principal place of business in the City of Compton, California (hereinafter called the "Employer"), and JAN CHARLES GRAY (hereinafter called the "Employee"). It is agreed by and between the parties hereto as follows: ARTICLE I COMPENSATION 1.1 The Employer agrees to and does employ the Employee to perform his duties as Senior Vice President, General Counsel and Secretary or as determined by the Board of Directors of Employer for the period beginning May 1, 1990, and ending April 30, 1993. During said period the Employer agrees to pay the Employee total compensation in the annual amount of One Hundred Seventy Thousand Dollars ($170,000). The agreement as to said amount shall not preclude or in any way affect the grant by the Employer or the receipt by the Employee of increases in his total compensation, or of bonuses or other forms of additional compensation (including insurance and other employee plan benefits), such increases, bonuses and additional compensation, contingent or otherwise, to be determined solely in the discretion of the Board of Directors of the Employer or persons to whom such authority is delegated by the Board of Directors. 1.2 The total compensation provided in Section 1.1 hereof, shall be payable as current salary, in monthly installments, and at the same monthly rate as adjusted for any fraction of a month unexpired at the termination of the period of contract employment hereunder. 1.3 The term "period of contract employment", as used herein, means the period beginning May 1, 1990 and ending April 30, 1993, or on the last day of any renewal period, as hereinafter provided, or at the time of the previous death or termination of contract employment of the Employee. The term "termination of contract employment", as used herein, means either: (a) The failure of the parties before the close of business on May 1, 1993, to enter into a contract for the Employer's employment of the Employee and the cessation of the Employee's contract employment by the Employer as a result thereof; or (b) The failure of the Employee, during the period of contract employment, to render services to the Employer for a continuous period of twelve (12) months, because of the Employee's physical or mental disability during said period, and action by the Board of Directors of the Employer or persons to whom such authority is delegated by the Board of Directors to end the Employee's contract employment by reason thereof. If there should be any dispute between the parties as to the Employee's physical or mental disability at any time, such question shall be settled by the opinion of an impartial reputable physician agreed upon for the purpose by the parties or their representatives, or failing agreement within ten (10) days of a written request therefor by either party to the other, then one designated by the then president of the Los Angeles Medical Society. The certificate of such physician as to the matter in dispute shall be final and binding on the parties; or (c) Exercise by the Employee, at the time and in the manner provided in Section 2.4 hereof, of the option granted to the Employee by such Section 2.4; or (d) The voluntary resignation or retirement of the Employee; or (e) The termination of the Employee's employment by the Employer based upon the Employee's gross misconduct, felony conviction (other than a traffic or moving violation, such as driving while intoxicated), serious breach of Employer policy, as determined by the Board of Directors of the Employer; or (f) The material breach of the Agreement by the Employee. The term "renewal period", as used herein, means a period of renewal occurring at the end of the original term of the agreement as provided for by a written agreement of the parties extending the time for employment. ARTICLE II OTHER PROVISIONS 2.1 The Employee agrees that during the period of contract employment (a) he will faithfully and in conformity with the directions of the Board of Directors of the Employer, or of an officer of the Employer duly authorized by said Board, perform the duties of his employment hereunder, and that he will devote to the performance of said duties all such time and attention as they shall reasonably require, taking, however, from time to time (as the Employer agrees that he may) reasonable vacations; and (b) he will not, without the express consent of the Board of Directors of the Employer or persons to whom such authority is delegated by the Board of Directors, become actively associated with or engaged in any business during the period of contract employment other than that of the Employer, or a division, or subsidiary of the Employer that would detract from the performance of his duties to the Employer, and he will do nothing inconsistent with such duties. In the event that the Employee is in breach of the provisions of Clause (b) of the preceding sentence hereof, Employee shall promptly reimburse Employer for any monies paid by Employer in connection with the relocation of Employee during the period of the Agreement or contemplated by the signing of this Agreement, including, without limitation, any bonus or relocation expenses paid for or incurred by Employer including carrying costs for property purchased from or on behalf of Employee. In the event that the Employee is advised by the Employer in writing that his services will no longer be required during the remainder of the period of contract employment, this shall be treated as a suspension of services and Employee shall continue to be treated as an employee for all purposes, including eligibility for all employee benefits of Employee, and shall continue to be compensated by Employer (subject to the possible offset set forth below) during the remainder of the period of contract employment at the rate of "total compensation" to which Employee was entitled at time of suspension of services. For this purpose, "total compensa- tion" shall include any bonus earned by the Employee in the year of suspension of services of Employee. Employee shall be free to become actively engaged with another business but in such event, fifty percent (50%) of the compensation of any kind received from such other business (except from businesses or investments owned by Employee before the date of termination for which there will be no deduction) and one hundred percent (100%) of the compensation of any kind received from a "competing business" (as defined below), in each case attributable to the period of contract employment, shall be subtracted from any amounts otherwise due Employee from Employer. Employee agrees that he will not disclose to anyone outside of the Employer, or use in other than the Employer's business, confidential information relating to the Employer's business, in any way obtained by him while employed by the Employer, unless authorized by the Employer in writing. It is understood that violation of this provision would cause irreparable harm to the Employer and that Employer may seek to enjoin any such violation or to take any other applicable action. The Employee also agrees that he will not engage in any activity which would violate the Conflict of Interest or Business Ethics Statement signed from time to time by the Employee. 2.2 It is recognized by Employee and Employer that Employee's duties during the period of contract employment will entail thereceipt of confidential information concerning not only Employer's current operations and procedures but also its short-range and long-range plans. Employee agrees that, during the period of contract employment, Employee will not have an investment of $100,000 or more in a competing business (as hereinafter defined) and will not render personal services to such competing business in any manner, including, without limitation, as owner, partner, director, trustee, officer, employee, consultant or advisor thereof. If Employee shall breach the agreement contained in this Section 2.2, such breach may render Employee liable to Employer for damages therefor and entitle Employer to enjoin Employee from making such investment or from rendering such personal services. In addition, Employer shall have the right in such event to enjoin Employee from disclosing any confidential information concerning Employer to any such competing business, to enjoin any such competing business from receiving from Employee or using any such confidential information and/or to enjoin any such competing business from retaining or seeking to retain any other employees of Employer. As used in Section 2.1 and 2.2, a "competing business" shall be any business which: (a) at the time of determination, is substantially similar to the whole or a substantial part of the business at the end of the period of active employment, conducted by Employer, or any of its subsidiaries, or subsidiaries of subsidiaries, or divisions, or substantially similar to some substantial part ofsaid business; and (b) at the time of determination, is operating a store or stores which, during its or their fiscal year preceding the determination, in the aggregate had aggregate net sales, including sales in leased and licensed departments, in excess of $10,000,000, which store or stores is or are located in a city or within a radius of twenty-five (25) miles from the outer limits of a city where Employer, or any of its subsidiaries, or subsidiaries of subsidiaries, or divisions is operating a store or stores which, during its or their fiscal year preceding the determination, in the aggregate had aggregate net sales, including sales in leased and licensed departments, in excess of $10,000,000; and (c) had aggregate net sales at all its locations,including sales in leased and licensed departments and sales by its divisions and subsidiaries, during its fiscal year preceding that in which the Employee made such investment herein, or first rendered personal services thereto, following his termination of service, in excess of $25,000,000. 2.3 The Employer agrees that during the period of active employment the Employee shall be allowed reasonable traveling expenses and shall be furnished office space, assistance and accommodations suitable to the character of his position with the Employer and adequate for the performance of his duties hereunder. 2.4 This Agreement shall not be assignable by the Employer without the written consent of the Employee, except that, if the Employer shall merge or consolidate with or into, or transfer substantially all of its assets, including goodwill, to another corporation or other form of business organization, this Agreement shall bind and run to the benefit of the successor of the Employer resulting from such merger, consolidation, or transfer; provided, however, that if any such merger, consolidation, or transfer shall be with, into, or to any corporation or other form of business organization other than a subsidiary of the Employer or a corporation having substantially the same common stockholders as the Employer, the Employee at any time thereafter shall have the right, at his option, on not less than thirty (30) days' written notice to the Employer or its successors, to terminate the period of contract employment. The Employee may not assign, pledge, or encumber his interest in this Agreement, or any part thereof, without the written consent of the Employer. 2.5 The Employer agrees that in the event of war or a national emergency, the Employee will, at his request, be granted a leave of absence for military or governmental service, and during said period of leave of absence shall be paid such compensation as may be fixed by, or with the authority of, the Board of Directors of the Employer. During any such leave of absence, the Employee shall, except in respect to his rights to the compensation herein provided and his obligation to perform active duties of the Employer be deemed, for the purposes of this Agreement, to be in the active employment of the Employer. 2.6 This Agreement and all questions arising in connection therewith shall be governed by the laws of the State of California. 2.7 This Agreement comprises the entire agreement between the parties hereto and as of May 1, 1990, supersedes, cancels and annuls the Agreement dated August 1, 1988, between Employer and Employee and any rights of employee thereunder, including provisions from prior employment agreements which were continued by, or incorporated in, said Agreement dated August 1, 1988. This Agreement may not be modified orally. 2.8 Words in the masculine herein may be interpreted as feminine or neuter, and words in the singular as plural, and vice versa, where the sense requires. IN WITNESS WHEREOF, the parties hereto have hereunto and to a duplicate hereof, set their signatures as of the day, month and year first above written, the Employer by a Director thereunto duly authorized by its Board of Directors. RALPHS GROCERY COMPANY By_________________________________ EMPLOYEE SIGNATURE By_________________________________ FIRST AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement dated May 1, 1990, by and between RALPHS GROCERY COMPANY, a Delaware corporation, and JAN CHARLES GRAY is hereby amended as set forth herein. 1. Articles 1.1 and 1.3 are hereby amended as follows: "The ending date for the period of contract employment is extended three (3) years; the new ending date for 'the period of contract employment' being April 30, 1996." 2. Article 1.3(a) is hereby amended as follows: The date April 30, 1993 is changed to April 30, 1996. 3. All other terms and conditions of the Employment Agreement dated May 1, 1990 by and between RALPHS GROCERY COMPANY, a Delaware corporation, and JAN CHARLES GRAY, and any subsequent amendments or modifications relating thereto, shall remain the same. 4. The effective date of this First Amendment to Employment Agreement is January 20, 1992. ALL OF THE TERMS OF THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ARE HEREBY FULLY AGREED TO BY THE PARTIES. IN WITNESS WHEREOF, the parties hereto have hereunto, and to a duplicate hereof, set their signatures as of the effective date of this First Amendment to Employment Agreement, the Employer by a Director thereunto duly authorized by its Board of Directors. RALPHS GROCERY COMPANY By EMPLOYEE SIGNATURE SECOND AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement dated May 1, 1990, by and between RALPHS GROCERY COMPANY, a Delaware corporation, and JAN CHARLES GRAY is hereby amended as set forth herein. 1. Article 1.1 is hereby amended as follows: "The annual 'total compensation' shall be Two Hundred Ten Thousand Dollars ($210,000)." 2. All other terms and conditions of the Employment Agreement dated May 1, 1990, by and between RALPHS GROCERY COMPANY, a Delaware corporation, and JAN CHARLES GRAY, and any subsequent amendments or modifications relating thereto, shall remain the same. 4. The effective date of this Second Amendment to Employment Agreement is May 1, 1993. ALL OF THE TERMS OF THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT ARE HEREBY FULLY AGREED TO BY THE PARTIES. IN WITNESS WHEREOF, the parties hereto have hereunto, and to a duplicate hereof, set their signatures as of the effective date of this Second Amendment to Employment Agreement, the Employer by a Director thereunto duly authorized by its Board of Directors. RALPHS GROCERY COMPANY By EMPLOYEE SIGNATURE EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement"), made and entered into as of the first day of May, 1990, between RALPHS GROCERY COMPANY, a Delaware corporation, having its executive offices and a principal place of business in the City of Compton, California (hereinafter called the "Employer"), and TERRY PEETS (hereinafter called the "Employee"). It is agreed by and between the parties hereto as follows: ARTICLE I COMPENSATION 1.1 The Employer agrees to and does employ the Employee to perform his duties as Senior Vice President, Merchandising or as determined by the Board of Directors of Employer for the period beginning May 1, 1990, and ending April 30, 1993. During said period the Employer agrees to pay the Employee total compensation in the annual amount of One Hundred Sixty Thousand Dollars ($160,000). The agreement as to said amount shall not preclude or in any way affect the grant by the Employer or the receipt by the Employee of increases in his total compensation, or of bonuses or other forms of additional compensation (including insurance and other employee plan benefits), such increases, bonuses and additional compensation, contingent or otherwise, to be determined solely in the discretion of the Board of Directors of the Employer or persons to whom such authority is delegated by the Board of Directors. 1.2 The total compensation provided in Section 1.1 hereof, shall be payable as current salary, in monthly installments, and at the same monthly rate as adjusted for any fraction of a month unexpired at the termination of the period of contract employment hereunder. 1.3 The term "period of contract employment", as used herein, means the period beginning May 1, 1990 and ending April 30, 1993, or on the last day of any renewal period, as hereinafter provided, or at the time of the previous death or termination of contract employment of the Employee. The term "termination of contract employment", as used herein, means either: (a) The failure of the parties before the close of business on May 1, 1993, to enter into a contract for the Employer's employment of the Employee and the cessation of the Employee's contract employment by the Employer as a result thereof; or (b) The failure of the Employee, during the period of contract employment, to render services to the Employer for a continuous period of twelve (12) months, because of the Employee's physical or mental disability during said period, and action by the Board of Directors of the Employer or persons to whom such authority is delegated by the Board of Directors to end the Employee's contract employment by reason thereof. If there should be any dispute between the parties as to the Employee's physical or mental disability at any time, such question shall be settled by the opinion of an impartial reputable physician agreed upon for thepurpose by the parties or their representatives, or failing agreement within ten (10) days of a written request therefore by either party to the other, then one designated by the then president of the Los Angeles Medical Society. The certificate of such physician as to the matter in dispute shall be final and binding on the parties; or (c) Exercise by the Employee, at the time and in the manner provided in Section 2.4 hereof, of the option granted to the Employee by such Section 2.4; or (d) The voluntary resignation or retirement of the Employee; or (e) The termination of the Employee's employment by the Employer based upon the Employee's gross misconduct, felony conviction (other than a traffic or moving violation, such as driving while intoxicated), serious breach of Employer policy, as determined by the Board of Directors of the Employer; or (f) The material breach of the Agreement by the Employee. The term "renewal period", as used herein, means a period of renewal occurring at the end of the original term of the agreement as provided for by a written agreement of the parties extending the time for employment. ARTICLE II OTHER PROVISIONS 2.1 The Employee agrees that during the period of contract employment (a) he will faithfully and in conformity with the directions of the Board of Directors of the Employer, or of an officer of the Employer duly authorized by said Board, perform the duties of his employment hereunder, and that he will devote to the performance of said duties all such time and attention as they shall reasonably require, taking, however, from time to time (as the Employer agrees that he may) reasonable vacations; and (b) he will not, without the express consent of the Board of Directors of the Employer or persons to whom such authority is delegated by the Board of Directors, become actively associated with or engaged in any business during the period of contract employment other than that of the Employer, or a division, or subsidiary of the Employer that would detract from the performance of his duties to the Employer, and he will do nothing inconsistent with such duties. In the event that the Employee is in breach of the provisions of Clause (b) of the preceding sentence hereof, Employee shall promptly reimburse Employer for any monies paid by Employer in connection with the relocation of Employee during the period of the Agreement or contemplated by the signing of this Agreement, including, without limitation, any bonus or relocation expenses paid for or incurred by Employer including carrying costs for property purchased from or on behalf of Employee. In the event that the Employee is advised by the Employer in writing that his services will no longer be required during the remainder of the period of contract employment, this shall be treated as a suspension of services and Employee shall continue to be treated as an employee for all purposes, including eligibility for all employee benefits of Employee, and shall continue to be compensated by Employer (subject to the possible offset set forth below) during the remainder of the period of contract employment at the rate of "total compensation" to which Employee was entitled at time of suspension of services. For this purpose, "total compensation" shall include any bonus earned by the Employee in the year of suspension of services of Employee. Employee shall be free to become actively engaged with another business but in such event, fifty percent (50%) of the compensation of any kind received from such other business (except from businesses or investments owned by Employee before the date of termination for which there will be no deduction) and one hundred percent (100%) of the compensation of any kind received from a "competing business" (as defined below), in each case attributable to the period of contract employment, shall be subtracted from any amounts otherwise due Employee from Employer. Employee agrees that he will not disclose to anyone outside of the Employer, or use in other than the Employer's business, confidential information relating to the Employer's business, in any way obtained by him while employed by the Employer, unless authorized by the Employer in writing. It is understood that violation of this provision would cause irreparable harm to the Employer and that Employer may seek to enjoin any such violation or to take any other applicable action. The Employee also agrees that he will not engage in any activity which would violate the Conflict of Interest or Business Ethics Statement signed from time to time by the Employee. 2.2 It is recognized by Employee and Employer that Employee's duties during the period of contract employment will entail the receipt of confidential information concerning not only Employer's current operations and procedures but also its short-range and long-range plans. Employee agrees that, during the period of contract employment, Employee will not have an investment of $100,000 or more in a competing business (as hereinafter defined) and will not render personal services to such competing business in any manner, including, without limitation, as owner, partner, director, trustee, officer, employee, consultant or advisor thereof. If Employee shall breach the agreement contained in this Section 2.2, such breach may render Employee liable to Employer for damages therefor and entitle Employer to enjoin Employee from making such investment or from rendering such personal services. In addition, Employer shall have the right in such event to enjoin Employee from disclosing any confidential information concerning Employer to any such competing business, to enjoin any such competing business from receiving from Employee or using any such confidential information and/or to enjoin any such competing business from retaining or seeking to retain any other employees of Employer. As used in Section 2.1 and 2.2, a "competing business" shall be any business which: (a) at the time of determination, is substantially similar to the whole or a substantial part of the business at the end of the period of active employment, conducted by Employer, or any of its subsidiaries, or subsidiaries of subsidiaries, or divisions, or substantially similar to some substantial part of said business; and (b) at the time of determination, is operating a store or stores which, during its or their fiscal year preceding the determination, in the aggregate had aggregate net sales, including sales in leased and licensed departments, in excess of $10,000,000, which store or stores is or are located in a city or within a radius of twenty-five (25) miles from the outer limits of a city where Employer, or any of its subsidiaries, or subsidiaries of subsidiaries, or divisions is operating a store or stores which, during its or their fiscal year preceding the determination, in the aggregate had aggregate net sales, including sales in leased and licensed departments, in excess of $10,000,000; and (c) had aggregate net sales at all its locations, including sales in leased and licensed departments and sales by its divisions and subsidiaries, during its fiscal year preceding that in which the Employee made such investment herein, or first rendered personal services thereto, following his termination of service, in excess of $25,000,000. 2.3 The Employer agrees that during the period of active employment the Employee shall be allowed reasonable traveling expenses and shall be furnished office space, assistance and accommodations suitable to the character of his position with the Employer and adequate for the performance of his duties hereunder. 2.4 This Agreement shall not be assignable by the Employer without the written consent of the Employee, except that, if the Employer shall merge or consolidate with or into, or transfersubstantially all of its assets, including goodwill, to another corporation or other form of business organization, this Agreement shall bind and run to the benefit of the successor of the Employer resulting from such merger, consolidation, or transfer; provided, however, that if any such merger, consolidation, or transfer shall be with, into, or to any corporation or other form of business organization other than a subsidiary of the Employer or a corporation having substantially the same common stockholders as the Employer, the Employee at any time thereafter shall have the right, at his option, on not less than thirty (30) days' written notice to the Employer or its successors, to terminate the period of contract employment. The Employee may not assign, pledge, or encumber his interest in this Agreement, or any part thereof, without the written consent of the Employer. 2.5 The Employer agrees that in the event of war or a national emergency, the Employee will, at his request, be granted a leave of absence for military or governmental service, and during said period of leave of absence shall be paid such compensation as may be fixed by, or with the authority of, the Board of Directors of the Employer. During any such leave of absence, the Employee shall, except in respect to his rights to the compensation herein provided and his obligation to perform active duties of the Employer be deemed, for the purposes of this Agreement, to be in the active employment of the Employer. 2.6 This Agreement and all questions arising in connection therewith shall be governed by the laws of the State of California. 2.7 This Agreement comprises the entire agreement between the parties hereto and as of May 1, 1990, supersedes, cancels and annuls the Agreement dated August 1, 1988, between Employer and Employee and any rights of employee thereunder, including provisions from prior employment agreements which were continued by, or incorporated in, said Agreement dated August 1, 1988. This Agreement may not be modified orally. 2.8 Words in the masculine herein may be interpreted as feminine or neuter, and words in the singular as plural, and vice versa, where the sense requires. IN WITNESS WHEREOF, the parties hereto have hereunto and to a duplicate hereof, set their signatures as of the day, month and year first above written, the Employer by a Director thereunto duly authorized by its Board of Directors. RALPHS GROCERY COMPANY By_________________________________ EMPLOYEE SIGNATURE By_________________________________ FIRST AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement dated May 1, 1990, by and between RALPHS GROCERY COMPANY, a Delaware corporation, and TERRY PEETS is hereby amended as set forth herein. 1. Articles 1.1 and 1.3 are hereby amended as follows: "The ending date for the period of contract employment is extended three (3) years; the new ending date for 'the period of contract employment' being April 30, 1996." 2. Article 1.3(a) is hereby amended as follows: The date April 30, 1993 is changed to April 30, 1996. 3. All other terms and conditions of the Employment Agreement dated May 1, 1990 by and between RALPHS GROCERY COMPANY, a Delaware corporation, and TERRY PEETS, and any subsequent amendments or modifications relating thereto, shall remain the same. 4. The effective date of this First Amendment to Employment Agreement is January 20, 1992. ALL OF THE TERMS OF THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ARE HEREBY FULLY AGREED TO BY THE PARTIES. IN WITNESS WHEREOF, the parties hereto have hereunto, and to a duplicate hereof, set their signatures as of the effective date of this First Amendment to Employment Agreement, the Employer by a Director thereunto duly authorized by its Board of Directors. RALPHS GROCERY COMPANY By EMPLOYEE SIGNATURE SECOND AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement dated May 1, 1990, by and between RALPHS GROCERY COMPANY, a Delaware corporation, and TERRY PEETS is hereby amended as set forth herein. 1. Article 1.1 is hereby amended as follows: "The annual 'total compensation' shall be One Hundred Ninety-Five Thousand Dollars ($195,000)." 2. All other terms and conditions of the Employment Agreement dated May 1, 1990, by and between RALPHS GROCERY COMPANY, a Delaware corporation, and TERRY PEETS, and any subsequent amendments or modifications relating thereto, shall remain the same. 4. The effective date of this Second Amendment to Employment Agreement is May 1, 1993. ALL OF THE TERMS OF THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT ARE HEREBY FULLY AGREED TO BY THE PARTIES. IN WITNESS WHEREOF, the parties hereto have hereunto, and to a duplicate hereof, set their signatures as of the effective date of this Second Amendment to Employment Agreement, the Employer by a Director thereunto duly authorized by its Board of Directors. RALPHS GROCERY COMPANY By EMPLOYEE SIGNATURE -----END PRIVACY-ENHANCED MESSAGE-----