<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1997
REGISTRATION NO. 333-35457
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
RANDALL'S FOOD MARKETS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
TEXAS 5411 74-213-4840
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
3663 Briarpark
Houston, Texas 77042
(713)268-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
R. Randall Onstead
President and Chief Executive Officer
3663 Briarpark
Houston, Texas 77042
(713)268-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
ARTHUR D. ROBINSON, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PRELIMINARY PROSPECTUS
RANDALL'S FOOD MARKETS, INC.
[LOGO]
OFFER TO EXCHANGE UP TO $150,000,000 OF ITS
[LOGO]
9 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING
9 3/8% SENIOR SUBORDINATED NOTES DUE 2007
------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED.
------------------------------
Randall's Food Markets, Inc. (the "Company" or "Randall's"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange an aggregate of up to $150,000,000 principal amount of
9 3/8% Series B Senior Subordinated Notes due 2007 (the "Exchange Notes") of the
Company for an identical face amount of the issued and outstanding 9 3/8% Senior
Subordinated Notes due 2007 (the "Old Notes", and together with the Exchange
Notes, the "Notes") of the Company from the Holders (as defined) thereof. As of
the date of this Prospectus, there is $150,000,000 aggregate principal amount of
the Old Notes outstanding. The terms of the Exchange Notes are identical in all
material respects to the Old Notes, except that the Exchange Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and therefore will not bear legends restricting their transfer and will not
contain certain provisions providing for an increase in the interest rate on the
Old Notes under certain circumstances described in the Registration Rights
Agreement (as defined), which provisions will terminate as to all of the Notes
upon the consummation of the Exchange Offer.
Interest on the Exchange Notes will be payable semi-annually on January 1
and July 1 of each year, commencing on January 1, 1998. The Exchange Notes will
mature on July 1, 2007.
Except as described below, the Company may not redeem the Exchange Notes
prior to July 1, 2002. On or after such date, the Company may redeem the
Exchange Notes, in whole or in part, at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to July 1, 2000, the Company may, subject to
certain requirements, redeem up to 40% of the original aggregate principal
amount of the Exchange Notes with the net proceeds of one or more Equity
Offerings (as defined), at a price equal to 109.375% of the aggregate principal
amount to be redeemed, together with accrued and unpaid interest, if any, to the
date of redemption; provided that at least 60% of the original aggregate
principal amount of the Exchange Notes remains outstanding immediately after
each such redemption. The Exchange Notes will not be subject to any sinking fund
requirements. Upon the occurrence of a Change of Control (as defined) or certain
transfer events, the Company will have the option, at any time prior to July 1,
2002, to redeem the Exchange Notes, in whole but not in part, at a redemption
price equal to 100% of the principal amount thereof plus the Applicable Premium
(as defined), together with accrued and unpaid interest, if any, to the date of
redemption. Upon the occurrence of a Change of Control, if the Company does not
so redeem such Exchange Notes at a price of 100% of the principal amount thereof
plus the Applicable Premium in accordance with the immediately preceding
sentence or if a Change of Control occurs after July 1, 2002, the Company will
be required to make an offer to purchase the Exchange Notes at a price equal to
101% of the original aggregate principal amount thereof, together with accrued
and unpaid interest, if any, to the date of purchase. See "Description of the
Exchange Notes."
The Exchange Notes will be unsecured, will be subordinated in right of
payment to all existing and future Senior Indebtedness (as defined) of the
Company and will be effectively subordinated to all obligations of the
subsidiaries of the Company. The Exchange Notes will rank PARI PASSU with any
future senior subordinated indebtedness of the Company and will rank senior to
all other Subordinated Indebtedness (as defined) of the Company. The Indenture
(as defined) permits the Company to incur additional indebtedness, including up
to $450.0 million of Senior Indebtedness under the Credit Facilities (as
defined), subject to certain limitations. See "Description of the Exchange
Notes." As of June 28, 1997, the aggregate amount of the Company's outstanding
Senior Indebtedness was approximately $128.0 million (excluding unused
commitments) and the Company would have had no senior subordinated indebtedness
outstanding other than the Old Notes. As of June 28, 1997, the Company's
subsidiaries had total liabilities of $366.2 million, excluding guarantees of
$128.0 million of indebtedness under the Credit Facilities. See "Selected
Historical Consolidated Condensed Financial and Other Data" and "Risk
Factors--Adverse Consequences of Holding Company Structure" and "--
Subordination."
The Old Notes were issued and sold on June 27, 1997 in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act. The
Exchange Notes are being offered hereby in order to satisfy certain obligations
of the Company contained in the Registration Rights Agreement. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, PROVIDED that such Exchange Notes are acquired
in the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes and
neither such holder nor any such other person is engaging in or intends to
engage in a distribution of such Exchange Notes. However, the Company has not
sought, and does not intend to seek, its own no-action letter, and there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for such Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). A
broker-dealer may not participate in the Exchange Offer with respect to Old
Notes acquired in connection with the initial placement of the Old Notes. The
Company has agreed that, for a period of 90 days after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the Exchange Notes. The Company currently does
not intend to list the Exchange Notes on any securities exchange or to seek
approval for quotation of the Exchange Notes through any automated quotation
system. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the fourth business day
following the Expiration Date (as defined). Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. The
Company will not receive any proceeds from the Exchange Offer. The Company will
pay all of the expenses incident to the Exchange Offer. The Exchange Offer will
expire 5:00 p.m., New York City Time, on , 1997 (the "Expiration Date").
The Company does not currently intend to extend the Expiration Date.
------------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 13, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE EXCHANGE NOTES.
--------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. The Company is not currently subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon completion of the Exchange Offer, the Company will be subject to the
information requirements of the Exchange Act and, in accordance therewith, will
file periodic reports and other information with the Commission. The
Registration Statement, such reports and other information can be inspected and
copied at the Public Reference Section of the Commission located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at regional
public reference facilities maintained by the Commission located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material, including copies of all or any portion of the Registration Statement,
can be obtained from the Public Reference Section of the Commission at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet (http://www.sec.gov). In addition,
pursuant to the Indenture covering Old Notes and the Exchange Notes, the Company
has agreed to file with the Commission and provide to the Holders the annual
reports and the information, documents and other reports otherwise required
pursuant to Section 13 of the Exchange Act. Such requirements may be satisfied
through the filing and provision of such documents and reports which would
otherwise be required pursuant to Section 13 in respect of the Company.
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
press release and in oral statements made by authorized officers of the Company.
When used in this Prospectus, the words "estimate," "project," "anticipate,"
"expect," "intend," "believe" and similar expressions are intended to identify
forward-looking statements. All of these forward-looking statements are based on
estimates and assumptions made by management of the Company, which, although
believed to be reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed upon such estimates and statements. No assurance can be
given that any of such statements or estimates will be realized and actual
results will differ from those contemplated by such forward-looking statements.
The Prospectus includes certain economic and demographic data relating to
the historic and projected performance of the United States and Texas economies
based on information from the U.S. Census Bureau and an independent economic
forecasting firm.
RANDALLS, TOM THUMB, REMARKABLE, THE NEW GENERATION STORE and RANDALLS
FLAGSHIP are registered trademarks of the Company.
i
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE
"COMPANY" SHALL MEAN RANDALL'S FOOD MARKETS, INC. AND ITS CONSOLIDATED
SUBSIDIARIES. ALL REFERENCES TO FISCAL YEAR IN THIS PROSPECTUS REFER TO THE
FISCAL YEAR ENDING ON THE LAST SATURDAY OF JUNE. ALL REFERENCES TO MARKET SHARE
AND DEMOGRAPHIC DATA IN THIS PROSPECTUS ARE BASED ON INDUSTRY AND GOVERNMENT
PUBLICATIONS AND COMPANY DATA, AND UNLESS OTHERWISE INDICATED, REFERENCES TO
YEARS DENOTE CALENDAR, RATHER THAN FISCAL, YEARS. THE COMPANY'S MOST RECENT
FISCAL YEAR ENDED ON JUNE 28, 1997 AND ALL FINANCIAL AND STATISTICAL DATA
PRESENTED HEREIN RELATING TO THE COMPANY'S OPERATIONS, UNLESS OTHERWISE
INDICATED, IS CALCULATED AS OF JUNE 28, 1997. MARKET SHARE DATA PRESENTED HEREIN
IS BASED ON SALES REPORTED IN JULY 1997 WITH RESPECT TO HOUSTON, DALLAS AND FORT
WORTH AND JUNE 1997 WITH RESPECT TO AUSTIN. AN INDEX OF DEFINED TERMS IS
INCLUDED ON PAGE I-1 OF THIS PROSPECTUS.
THE COMPANY
GENERAL
The Company is the second largest supermarket operator in its principal
markets, with 121 stores located in Houston (53 stores), Dallas/Fort Worth (52
stores), and Austin (16 stores). With over 30 years of operations in Houston and
49 years of operations in Dallas/Fort Worth, the Company has developed a loyal
customer base and a portfolio of large, attractive stores in prime locations.
The Company offers customers an expanded selection of high quality products,
exceptional customer service and a variety of specialty departments. These
strengths, together with the Company's position as a Texas-based supermarket
operator, have enabled it to maintain a number two market share in Houston,
Dallas and Austin, the Company's principal markets. For the fiscal year ended
June 28, 1997 ("fiscal year 1997"), the Houston, Dallas, Fort Worth and Austin
markets represented approximately 47%, 35%, 7% and 11% of the Company's net
sales, respectively. For fiscal year 1997, the Company generated net sales of
approximately $2.34 billion and EBITDA (as defined) of $29.8 million.
The Company operates combination food and drug stores which emphasize high
quality products, exceptional customer service and expanded selections of
quality meat, seafood, produce and other perishables. This format appeals to a
broad customer base by offering shoppers an extensive variety of products and
services, including large produce and perishables departments, in-store
bakeries, delicatessens, full-service meat and seafood departments, banks,
pharmacies, full-service floral departments, expanded cosmetic departments,
video rental departments and film processing counters. The Company operates 84
traditional combination food and drug stores under the RANDALLS banner in
Houston and Austin and the TOM THUMB banner in Dallas/Fort Worth averaging
approximately 49,800 square feet. For fiscal year 1997, these stores generated
sales of approximately $1.59 billion, or 68% of net sales, and average weekly
sales per store of approximately $356,000.
The Company's NEW GENERATION and FLAGSHIP STORES are each variations of the
Company's traditional combination food and drug stores, offering an even wider
selection of premium products and services:
NEW GENERATION STORES emphasize expanded perishable food departments and
open product preparation in order to create a farmer's market atmosphere and
highlight product freshness to customers. The Company's 20 New Generation
Stores operate under the RANDALLS banner in Houston and Austin and the TOM
THUMB banner in Dallas, and average approximately 68,900 square feet. For
fiscal year 1997, New Generation Stores generated sales of approximately
$450.0 million, or 19% of net sales, and average weekly sales per store of
approximately $493,000.
FLAGSHIP STORES target customers seeking an expanded array of premium
services and a wider variety of top quality gourmet and specialty
selections. Flagship Stores feature additional "one-stop" shopping
conveniences and many higher margin specialty products and services,
including in-store gourmet
1
<PAGE>
coffee bars and eating areas, expanded bakery departments staffed with
French pastry chefs, a wide range of freshly prepared foods (including
made-to-order pizza, pastas and barbecued meats), home delivery and
catering. The Company operates seven Flagship Stores under the RANDALLS
FLAGSHIP banner in Houston averaging approximately 57,500 square feet and
one store of approximately 34,000 square feet under the SIMON DAVID banner
in Dallas. For fiscal year 1997, Flagship Stores generated sales of
approximately $220.0 million, or 10% of net sales, and average weekly sales
per store of approximately $578,000.
The Company also operates 9 conventional stores which offer a similar variety of
food products and specialty departments as its traditional combination food and
drug stores, but do not include pharmacies. Conventional stores average
approximately 20,600 square feet. For fiscal year 1997, conventional stores
generated sales of approximately $80.0 million, or 3% of net sales, and average
weekly sales per store of approximately $171,000.
COMPANY STRENGTHS
STRONG FRANCHISE AND DISTINCTIVE IMAGE. Over its history, the Company has
established a reputation for providing high quality products and exceptional
service to customers. The Company's stores are known for their broad selection
of high quality meat, seafood, produce and other perishables, which are
complemented by a variety of specialty departments to create a differentiated,
"one-stop" shopping experience. In a series of independent surveys of shoppers
in Houston and Dallas, the Company has consistently received the highest ratings
for specialty categories, such as fresh meat, produce, bakery and floral, and
service categories, such as customer assistance, quick checkout, cleanliness,
product variety and selection. In addition, the Company's long-standing practice
of reinvesting in the community by partnering with customers in charitable
giving programs, such as the "Good Neighbor" program, further enhances customer
loyalty and provides the Company with an additional competitive advantage.
ATTRACTIVE STORES IN PRIME LOCATIONS. The Company has developed a portfolio
of large, attractive stores in prime locations which provides flexibility in
store layout and merchandising. Since 1992, the Company has increased average
store size from approximately 46,000 square feet to approximately 51,000 square
feet by pursuing a strategy of store expansion in selected markets. The Company
attempts to optimize operating results by selecting the variation of its
combination food and drug store that is best suited to each store site's
demographics, local preferences and competition.
LEADING MARKET SHARES. The Company believes that its strong franchise and
distinctive image have enabled it to establish a number two market share in
Houston, Dallas and Austin, its principal markets. The Company's market shares
in Houston, Dallas and Austin are approximately 22%, 19% and 19%, respectively.
The Company's history as a local supermarket operator and the recent
introduction of its frequent shopper program have helped the Company to maintain
its strong market position despite aggressive store opening and remodeling
programs by competitors in recent years. Management believes that the Company's
competitive position will be strengthened by store remodels and new store
construction. In addition, management believes that its frequent shopper program
will continue to enhance its competitive position.
GROWING MARKETS. Over the past several years, Texas has been one of the
fastest growing states in terms of population, income and employment, and
economists project growth in excess of the national average to continue in the
near future. Since 1990, the Houston, Dallas, Fort Worth and Austin markets have
experienced compound annual employment growth of 1.9%, 2.6%, 2.2% and 5.5%,
respectively, all exceeding the national average of 1.5%. In 1996, grocery sales
in Texas increased 5.2% versus 3.3% for the country as a whole. The Houston,
Dallas/Fort Worth and Austin markets accounted for total grocery sales of
approximately $14.8 billion, or 48.9% of total grocery sales in Texas.
2
<PAGE>
EXPERIENCED MANAGEMENT TEAM. The Company's executive officers have spent
the majority of their careers in the supermarket business and have an average of
15 years of experience in the food retailing industry. In addition, the Company
believes opportunities exist to enhance the existing management team with
additional experienced industry executives. Management's expertise and in-depth
knowledge of the Company's markets are further complemented by the financial
expertise of Kohlberg Kravis Roberts & Co., L.P. ("KKR").
CUSTOMER SERVICE-ORIENTED WORKFORCE. The Company emphasizes friendly,
efficient and knowledgeable customer service. All employees are trained to
actively address the needs of customers. These employees reinforce the Company's
distinctive service-oriented image and differentiate it from its competitors.
The Company is dedicated to promoting from within its organization and believes
that it possesses considerable management depth among its workforce, with store
directors having an average of over 15 years of experience with the Company.
BUSINESS STRATEGY
ACCELERATE NEW STORE DEVELOPMENT AND REMODELING PROGRAM. The Company
believes that it will be able to capitalize on the continued growth in its
markets by accelerating its new store development and remodeling program. In
recent years, the Company has not had the financial resources to aggressively
remodel its existing store base or construct new stores. Since the beginning of
fiscal year 1995, the Company has only opened 15 stores and remodeled 10 stores
(while closing 17 stores), compared to management's estimate that its
competitors have opened approximately 110 stores and remodeled approximately 100
stores in the Company's markets over the same period. The Recapitalization and
the Financings (each as defined) will provide the Company with increased
financial flexibility, enabling it to undertake significant remodeling in the
Houston area, new store construction and remodeling in Dallas/ Fort Worth and
selected store expansion in the Austin market. For the fiscal year ended June
27, 1998 ("fiscal year 1998"), the Company expects to make approximately $70.0
million of capital expenditures to open five new stores, commence construction
on seven new stores and purchase land for three new stores, and make
approximately $60.0 million of capital expenditures to renovate or remodel 42
stores.
REDUCE OPERATING COSTS. The Company has identified a number of initiatives
designed to improve operating results by lowering operating costs. Specific
initiatives include: (i) applying the Company's successful labor scheduling
guidelines throughout all operational areas; (ii) implementing performance
measurement standards to further improve operating efficiency; (iii) enhancing
category management to improve store-level merchandising efforts and to increase
promotional buying opportunities; (iv) improving shelf pricing procedures to
decrease the frequency of price changes and inaccurate labeling; and (v)
introducing production planning in the perishables departments. The breadth of
these initiatives reflects the significant opportunities available to the
Company.
DIFFERENTIATE BASED ON HIGH QUALITY PRODUCTS AND SERVICES AT A COMPETITIVE
PRICE. Throughout its history, the Company has developed a reputation for
operating large, attractive stores with an extensive variety of specialty
departments staffed by well-trained, service-oriented employees. The Company
offers an expanded selection of high quality products at competitive prices to
create a differentiated "one-stop" shopping experience. In addition, the Company
is committed to being the "first to market" in providing solutions to its
customers' changing lifestyle needs, as is evidenced by the recent launches of
its frequent shopper program and the PEAPOD on-line grocery ordering and home
delivery program.
LEVERAGE FREQUENT SHOPPER PROGRAM. The Company believes that significant
opportunities exist to increase revenue and focus its marketing efforts by
leveraging its frequent shopper program. Data collected from customers
participating in the frequent shopper program enables the Company to track sales
trends, demographic patterns and customer preferences, and utilize that data to
allocate shelf space, target marketing activities and increase customer loyalty.
3
<PAGE>
INCREASE PRIVATE LABEL SALES. Relative to national brands, private label
products provide comparable quality at lower prices to shoppers and higher gross
margins to the Company. The Company currently offers a three-tiered private
label program, including PRESIDENT'S CHOICE premium private label products, its
own REMARKABLE private label products and VALUE TIME private label products
catering to value-conscious consumers. In recent years, the Company's private
label sales have been lower than the national average. The Company is currently
expanding its private label offerings across all tiers, with particular emphasis
on increasing REMARKABLE label offerings.
THE RECAPITALIZATION AND THE FINANCINGS
RFM Acquisition LLC ("RFM Acquisition"), a Delaware limited liability
company organized at the direction of KKR, the Company and Robert R. Onstead
entered into a Subscription Agreement dated as of April 1, 1997 pursuant to
which RFM Acquisition acquired control of approximately 63% of the Company's
common stock, par value $.25 per share (the "Common Stock"). The consummation of
the transactions contemplated by the Subscription Agreement are collectively
referred to as the "Recapitalization." Pursuant to the Subscription Agreement,
RFM Acquisition paid an aggregate of $225.0 million to the Company (the "Equity
Investment") as consideration for the Company's issuance to RFM Acquisition of
18,579,686 shares of Common Stock and a 25-year option to purchase 3,606,881
shares of Common Stock at $12.11 per share, subject to adjustments (the "RFM
Option"). The Company applied the proceeds from the Equity Investment, together
with approximately $278.0 million of aggregate proceeds from certain financings
described below (collectively, the "Financings"), on June 27, 1997 (the
"Closing") to (i) redeem 5,585,186 shares of Common Stock at $16.00 per share
pursuant to a tender offer (the "Tender Offer") for aggregate consideration of
$89.4 million, (ii) redeem, collectively, 8,250 shares of the Company's Class A
Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock"), and
278,201 shares of the Company's 8% convertible preferred stock (the "Convertible
Preferred Stock") for an aggregate redemption price of $28.7 million, including
accrued dividends of $0.1 million (the "Preferred Stock Redemption"), (iii)
repay or redeem Old Indebtedness (as defined) of approximately $336.0 million,
including accrued interest of $1.0 million (the "Debt Prepayment"), (iv) pay an
estimated make-whole premium (including accrued interest of $0.9 million) of
approximately $14.9 million (the "Make-Whole Premium") as required by the terms
of the optional redemption provisions of the Company's Senior Notes (as defined)
and (v) pay an estimated $33.8 million in expenses and transaction fees. As of
June 28, 1997, RFM Acquisition owned approximately 63% of the issued and
outstanding Common Stock. In the fourth quarter of fiscal year 1997, the Company
recorded a charge of $3.0 million to reflect (i) $0.9 million of severance to
Ron W. Barclay, (ii) $0.9 million of severance to Bob L. Gowens, (iii) $0.9
million of lifetime medical, life insurance, retirement payments and office
facilities for Robert R. Onstead and (iv) $0.3 million primarily to reflect the
transfer of the cash value of split dollar life insurance policies in certain
events to R. Randall Onstead. Such charge is included in the $4.5 million
severance/benefits charge reflected in the Summary Consolidated Condensed
Historical Financial Data.
The Financings included (i) an aggregate of approximately $128.0 million of
bank borrowings by the Company, including $125.0 million of borrowings under a
senior secured term loan facility (the "Term Loan Facility") and $3.0 million of
borrowings under a $225.0 million senior secured revolving credit facility (the
"Revolving Credit Facility", and together with the Term Loan Facility, the
"Credit Facilities"), (ii) $150.0 million aggregate principal amount of Old
Notes (generating gross proceeds of $149.8 million) and (iii) the Equity
Investment. The Revolving Credit Facility will provide for the Company's working
capital requirements and the implementation of the Company's strategy to expand
and enhance its store base.
4
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is offering to exchange pursuant to the
Exchange Offer up to $150,000,000 aggregate principal
amount of its Exchange Notes for a like aggregate
principal amount of its Old Notes. The terms of the
Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity)
to the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except that
the Exchange Notes are freely transferrable by Holders
(as defined) thereof (other than as provided herein),
and are not subject to any covenant regarding
registration under the Securities Act. See "The Exchange
Offer."
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered
for exchange.
Expiration Date; Withdrawal of
Tender.......................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1997, unless the Exchange Offer
is extended, in which case the term "Expiration Date"
means the latest date and time to which the Exchange
Offer is extended. The Company does not currently intend
to extend the Expiration Date. Tenders may be withdrawn
at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange Offer--Withdrawal
Rights."
Exchange Date..................... The date of acceptance for exchange of the Old Notes
will be the fourth business day following the Expiration
Date.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
See "The Exchange Offer--Certain Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any such
condition.
Procedures for Tendering
Old Notes....................... Each Holder wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile,
together with the Old Notes and any other required
documentation to the Exchange Agent (as defined) at the
address set forth therein. See "The Exchange
Offer--Procedures for Tendering Old Notes" and "Plan of
Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Federal Income Tax Consequences... The exchange of Notes pursuant to the Exchange Offer
will not be a taxable event for federal income tax
purposes. See "Certain U.S. Federal Income Tax
Consequences."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes according to
the guaranteed delivery procedures set forth in "The
Exchange Offer--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes...... The Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Acceptance
of Old Notes for Exchange; Delivery of Exchange Notes."
Effect on Holders of Old Notes.... As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Notes pursuant to
the terms of this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration
Rights Agreement (the "Registration Rights Agreement")
dated as of June 27, 1997 among the Company and BT
Securities Corporation, Chase Securities Inc., Goldman,
Sachs & Co., and Paine Webber Incorporated. (the
"Initial Purchasers") and, accordingly, there will be no
increase in the interest rate on the Old Notes pursuant
to the terms of the Registration Rights Agreement, and
the holders of the Old Notes will have no further
registration or other rights under the Registration
Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be entitled to
all the rights and limitations applicable thereto under
the Indenture dated as of June 27, 1997 between the
Company and Marine Midland Bank relating to the Old
Notes and the Exchange Notes (the "Indenture"), except
for any such rights under the Registration Rights
Agreement that by their terms terminate or cease to have
further effectiveness as a result of the making of, and
the acceptance for
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
exchange of all validly tendered Old Notes pursuant to,
the Exchange Offer. All untendered Old Notes will
continue to be subject to the restrictions on transfer
provided for in the Old Notes and in the Indenture. To
the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered
Old Notes could be adversely affected.
Consequence of Failure to
Exchange........................ Holders of Old Notes who do not exchange their Old Notes
for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer
of such Old Notes as set forth in the legend thereon. In
general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Old Notes under the
Securities Act.
Exchange Agent.................... Marine Midland Bank is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
See "The Exchange Offer--Exchange Agent."
</TABLE>
TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
Securities Offered................ $150,000,000 principal amount of 9 3/8% Series B Senior
Subordinated Notes due 2007.
Maturity Date..................... July 1, 2007.
Interest Payment Dates............ Interest on the Exchange Notes will be payable in cash
semi-annually in arrears on each January 1 and July 1,
commencing January 1, 1998.
Optional Redemption............... On or after July 1, 2002, the Exchange Notes will be
redeemable, in whole or in part, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to July 1, 2000, the
Company may redeem up to $60 million of the aggregate
principal amount of the Exchange Notes with the net
proceeds of one or more Equity Offerings, at a
redemption price equal to 109.375% of the aggregate
principal amount to be redeemed, together with accrued
and unpaid interest, if any, to the date of redemption;
PROVIDED that at least $90 million of the aggregate
principal amount of the Exchange Notes remains
outstanding immediately after each such redemption. See
"Description of the Exchange Notes--Optional
Redemption."
Change of Control and Certain
Transfer Events................. Upon the occurrence of a Change of Control or certain
transfer events, the Company will have the option, at
any time prior to July 1, 2002, to redeem the Exchange
Notes, in whole but not in part, at a redemption price
equal to 100% of the aggregate principal amount thereof
plus the Applicable Premium, together with accrued and
unpaid interest, if any, to the date of redemption. Upon
the occurrence of a Change of Control, if the Company
does not so redeem the Exchange Notes at a price of
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
100% of the principal amount thereof plus the Applicable
Premium in accordance with the immediately preceding
sentence or if a Change of Control occurs after July 1,
2002, the Company will be required to make an offer to
purchase the Exchange Notes at a price equal to 101% of
the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase. See
"Description of the Exchange Notes--Repurchase at the
Option of Holders-- Change of Control."
Ranking........................... The Exchange Notes will be unsecured, will be
subordinated in right of payment to all existing and
future Senior Indebtedness of the Company and will be
effectively subordinated to all obligations of the
subsidiaries of the Company. The Exchange Notes will
rank PARI PASSU with any future senior subordinated
indebtedness of the Company and will rank senior to all
other Subordinated Indebtedness of the Company. The
Indenture permits the Company to incur additional
indebtedness, including up to $450.0 million of Senior
Indebtedness under the Credit Facilities, subject to
certain limitations. As of June 28, 1997, the aggregate
amount of the Company's outstanding Senior Indebtedness
was approximately $128.0 million (excluding unused
commitments), the Company had no senior subordinated
indebtedness outstanding other than the Old Notes, and
the Company's subsidiaries had total liabilities of
$366.2 million, excluding guarantees of $128.0 million
of indebtedness under the Credit Facilities. See
"Selected Historical Consolidated Condensed Financial
and Other Data" and "Risk Factors--Adverse Consequences
of Holding Company Structure and "--Subordination."
Limitations on Repurchase......... Under the Credit Facilities, unless the consent of the
lenders thereunder is obtained, the Company is
prohibited from repurchasing Exchange Notes in a Change
of Control Offer or Asset Sale Offer (each as defined),
except with the proceeds of one or more equity offerings
of subordinated indebtedness, a portion of excess cash
flow and other amounts not applied to repay borrowings
under the Term Loan Facility less certain investments in
acquisition subsidiaries and minority investments. The
Credit Facilities also provide that events that would
constitute a change of control under the Credit
Facilities (which is defined under the Credit Facilities
to include all events that result in a Change of Control
under the Indenture) would constitute a default
thereunder. Any default under the Credit Facilities
would result in an Event of Default under the Indenture
if the lenders under the Credit Facilities accelerated
their loans. In the event a Change of Control Offer or
Asset Sale Offer is required at a time when the Company
is prohibited from purchasing the Exchange Notes, the
Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to
refinance the borrowings that contain such prohibition
(which, at the Closing, consisted solely of the Credit
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Facilities). If the Company does not obtain such a
consent or repay such borrowings, the Company will
remain prohibited from repurchasing the Exchange Notes.
In such case, the Company's failure to purchase tendered
Exchange Notes would constitute an Event of Default
under the Indenture, which would result in an event of
default under the Credit Facilities. If as a result
thereof, a default occurs with respect to any Senior
Indebtedness (including under the Credit Facilities),
the subordination provisions in the Indenture would
likely restrict payments to the holders of the Exchange
Notes. There can be no assurance that the Company will
have the financial resources to repurchase the Notes in
a Change of Control Offer or Asset Sale Offer or retire
its obligations under the Credit Facilities in the event
of a Change of Control. The provisions in the Indenture
relating to a Change of Control may be modified by
Holders of at least a majority in principal amount of
the Notes and such possible amendments include the
deletion of the Holders' right to require the Company to
repurchase Notes upon a Change of Control. See
"Description of the Exchange Notes--Events of Defaults
and Remedies."
Certain Covenants................. The Indenture contains covenants that will, subject to
certain exceptions, limit, among other things, the
ability of the Company and/or its Restricted
Subsidiaries to (i) pay dividends or make certain other
restricted payments or investments; (ii) incur
additional indebtedness and issue disqualified stock and
preferred stock; (iii) create liens on assets; (iv)
merge, consolidate, or sell all or substantially all of
their assets; (v) enter into certain transactions with
affiliates; (vi) create restrictions on dividends or
other payments by Restricted Subsidiaries to the
Company; (vii) create guarantees of indebtedness by
Restricted Subsidiaries; and (viii) incur other senior
subordinated indebtedness. One of the exceptions to the
Indenture's limitation on making investments is the
right to make Investments in Unrestricted Subsidiaries
with the proceeds of capital contributions and the sale
of Capital Stock so designated by senior management of
the Company, so long as such funds are not included in
the calculation of funds generally available for
restricted payments. As a consequence of this provision,
the Company can raise monies from the sale of equity
and, regardless of results of operations, invest such
monies in Persons that are, for purposes of the
Indenture, excluded from the ratios and computations
that determine the ability of the Company to incur
indebtedness or make restricted payments. In addition,
the covenant relating to transactions with affiliates
excludes transactions by the Company with customers,
clients, suppliers or purchasers or sellers of goods or
services which are entered into in the ordinary course
of business and are deemed fair by senior management.
The effect of this exception is to exclude transactions
on reasonable terms entered into in the ordinary course
of business with affiliates of the Company, which may
include other entities owned or controlled by KKR. See
"Description of the Exchange Notes."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Supplemental Indentures Without
Consent of Holders.............. The Company, Restricted Subsidiaries and the Trustee,
without the consent of any Holder, may enter into a
supplemental indenture for the purpose of (i) effecting
the assumption by a Person formed by or surviving a
merger with the Company of the obligations of the
Company under the Indenture and (ii) confirming the
Guarantee (as defined) by a Restricted Subsidiary, if
any such Guarantee is in existence, in the event of a
merger described in clause (i).
Absence of Market................. The Exchange Notes are new securities for which there is
currently no established market. Accordingly, there can
be no assurance as to the development or liquidity of
any market for the Exchange Notes. The Company does not
intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation of the
Exchange Notes on any automated quotation system.
No Personal Liability of
Directors, Officers, Employees
and
Stockholders.................... No director, officer, employee, incorporator or
stockholder of the Company or any Guarantor (as defined)
shall have any liability for any obligations of the
Company or the Guarantors under the Exchange Notes, the
Guarantees (as defined) or the Indenture or any claim
based on, in respect of, or by reason of such
obligation, or their creation. Such waiver may not be
effective to waive liabilities under the federal
securities laws and it is the view of the Commission
that such a waiver is against public policy.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
10
<PAGE>
SUMMARY CONSOLIDATED CONDENSED HISTORICAL FINANCIAL DATA
The following table sets forth certain summary consolidated condensed
historical financial data of the Company. The historical consolidated financial
data of the Company for the fiscal years ended June 24, 1995 ("fiscal year
1995"), June 29, 1996 ("fiscal year 1996") and fiscal year 1997 have been
derived from, and should be read in conjunction with, the audited consolidated
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus. See "Pro Forma Consolidated Condensed Financial
Statement," "Selected Historical Consolidated Condensed Financial and Other
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the historical consolidated financial statements and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
JUNE 28, JUNE 29, JUNE 24,
(DOLLARS IN THOUSANDS) 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(52 WEEKS) (53 WEEKS) (52 WEEKS)
OPERATING DATA:
Net sales.......................................................... $ 2,344,983 $ 2,368,645 $ 2,328,247
Gross profit....................................................... 634,638 630,658 599,549
Store operating, selling and administrative expenses............... 558,065 507,894 501,634
Interest expense, net (1).......................................... 36,828 38,981 43,411
Litigation charge (2).............................................. 9,500 1,000 --
Severance/benefits charge (3)...................................... 4,512 -- --
Estimated store closing costs...................................... 32,790(4) 1,215 --
Loss on extinguishment of debt (5)................................. (9,798)
Net income (loss).................................................. (50,515) 19,438 37
Ratio of earnings to fixed
charges (6)...................................................... -- 1.67x 1.13x
OTHER DATA:
EBITDA (7)(8)...................................................... $ 29,771 $ 120,549 $ 97,915
Depreciation and amortization...................................... 48,875 45,814 47,447
Capital expenditures (9)........................................... 73,864 66,131 59,850
Stores open at end of period (10).................................. 121 120 120
BALANCE SHEET DATA (END OF PERIOD):
Working capital.................................................... $ 11,429 $ 29,895 $ 30,186
Total assets....................................................... 862,374 823,265 816,790
Total debt and capital lease obligations........................... 362,148 437,982 463,944
Redeemable Common Stock............................................ 5,002 31,045 18,749
Stockholders' equity............................................... 213,361 136,650 134,753
CASH FLOW DATA:
Cash flows from operating activities............................... $ 18,392 $ 63,846 $ 53,508
Cash flows from investing activities............................... (48,468) (33,782) (108)
Cash flows from financing activities............................... 21,505 (31,229) (54,331)
</TABLE>
See Notes to Summary Consolidated Condensed Historical Financial Data
11
<PAGE>
NOTES TO SUMMARY CONSOLIDATED CONDENSED HISTORICAL FINANCIAL DATA
(1) Represents interest expense net of interest income.
(2) Represents a charge recorded in connection with the settlement of litigation
relating to the ESOP (as defined). See "Business--Litigation."
(3) Represents a charge recorded in connection with the recent or anticipated
departure of certain executives and other employees of the Company, as well
as certain charges relating to benefits granted under certain employment
agreements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(4) Represents a charge recorded in connection with the Company's decision to
close, replace or sell approximately 20 stores, two of which had been closed
at the end of fiscal year 1997.
(5) Reflects an extraordinary loss of $9.8 million resulting from the early
extinguishment of debt, net of tax, refinanced in the Recapitalization.
(6) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges (net of
capitalized interest). Fixed charges consist of net interest expense on all
indebtedness and capitalized interest, amortization of deferred financing
costs, and one-third of rental expense on operating leases representing that
portion of rental expense deemed by the Company to be attributable to
interest. For fiscal year 1997, the deficiency in earnings to cover fixed
charges was $55.9 million.
(7) "EBITDA" represents earnings before net interest expense, income taxes and
depreciation and amortization. EBITDA is not intended to represent cash
flows from operations as defined by generally accepted accounting principles
("GAAP") and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA is included in this Prospectus as it is a basis
upon which the Company assesses its financial performance and certain
covenants in the Company's borrowing arrangements are tied to similar
measures.
(8) Included in EBITDA for the 52 weeks ended June 28, 1997 are $63.4 million of
charges to record an inventory charge, year-end closed store accrual (see
footnote 4), the settlement of the ESOP litigation (see footnote 2), costs
associated with implementation of the Company's frequent shopper program, a
severance accrual (see footnote 3), compensation expense related to the
issuance of shares of restricted Common Stock to certain employees and
accruals for transaction costs related to the Recapitalization and the
Financings, sales taxes, payroll taxes, legal expenses, rent and other
payables. See "Management's Discussion and Analysis of Operations and
Financial Condition."
(9) Capital expenditures include purchases of real estate, buildings and
equipment. Certain items included in capital expenditures are subsequently
financed through sale leaseback transactions. In fiscal years 1997, 1996 and
1995, proceeds from asset sales (a substantial portion of which were sale
leasebacks of certain real estate properties) were $55.4 million, $30.3
million and $59.3 million, respectively.
(10) The following table sets forth additional information concerning changes in
the Company's store base:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
JUNE 28, JUNE 29, JUNE 24,
1997 1996 1995
----------- ----------- -----------
Beginning of period......................................................... 120 120 121
Newly constructed......................................................... 8 4 3
Acquired.................................................................. 2 -- --
Closed.................................................................... (9) (4) (4)
--- --- ---
End of period............................................................... 121(a) 120 120
--- --- ---
--- --- ---
</TABLE>
- ------------------------
(a) Includes 18 stores that, as of June 28, 1997, the Company has decided to
close, replace or sell.
12
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE DECIDING
TO TENDER OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE
GENERALLY APPLICABLE TO THE OLD NOTES AS WELL AS THE EXCHANGE NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
Old Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Company does not currently intend to register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Old Notes were acquired in the
ordinary course of such Holders' business and such Holders have no arrangement
with any person to participate in the distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes will be adversely affected.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company continued to be significantly leveraged after the
Recapitalization and the Financings. See "The Recapitalization" and
"Capitalization." As of June 28, 1997, the Company had $362.1 million of
consolidated indebtedness, $213.4 million of consolidated common stockholders'
equity and $220.2 million available to be borrowed under the Revolving Credit
Facility (reduced by $1.8 million to reflect outstanding letters of credit).
Also after giving pro forma effect to the Recapitalization and the Financings as
if they had occurred at the beginning of fiscal year 1997, the Company's pro
forma earnings would have been insufficient to cover fixed charges by $53.8
million for fiscal year 1997. Pro forma income (loss) before extraordinary item
for fiscal year 1997 would have been $(39.4) million as compared to $(40.7)
million for the same period on a historical basis, and pro forma interest
expense for fiscal year 1997 would have been $34.7 million as compared to $36.8
million for the same period on a historical basis. See "Capitalization" and "Pro
Forma Consolidated Condensed Financial Statement." The Company and its
subsidiaries may incur additional indebtedness in the future, subject to certain
limitations contained in the instruments governing its indebtedness.
Accordingly, the Company will have significant debt service obligations.
The Company's debt service obligations will have important consequences to
Holders, including the following: (i) a substantial portion of the Company's
cash flow from operations will be dedicated to the payment of principal and
interest on its indebtedness, thereby reducing the funds available to the
Company for operations, future business opportunities and other purposes and
increasing the Company's vulnerability to adverse general economic and industry
conditions; (ii) the Company's ability to obtain additional financing in the
future may be limited; (iii) certain of the Company's borrowings (including, but
not limited to, the amounts borrowed under the Credit Facilities) will be at
variable rates of interest, which would make the Company vulnerable to increases
in interest rates; and (iv) all of the indebtedness incurred in connection with
the Credit Facilities will become due prior to the time the principal payment on
the Exchange Notes will become due.
13
<PAGE>
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Exchange Notes)
and to make scheduled payments under its operating leases depends on its future
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. Based upon the current level
of operations and anticipated growth, management believes that future cash flow
from operations, together with available borrowings under the Revolving Credit
Facility, will be adequate to meet the Company's anticipated requirements for
working capital, capital expenditures, interest payments and scheduled principal
payments for the foreseeable future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." There can be no assurance, however, that the Company's business will
continue to generate sufficient cash flow from operations in the future to
service its debt and make necessary capital expenditures. If unable to do so,
the Company may be required to refinance all or a portion of its existing debt,
including the Exchange Notes, to sell assets or to obtain additional financing.
There can be no assurance that any such refinancing or that any such sale of
assets or additional financing would be possible on terms reasonably favorable
to the Company.
RESTRICTIVE LOAN COVENANTS
The Credit Facilities and the Indenture contain numerous financial and
operating covenants that will limit the discretion of the Company's management
with respect to certain business matters. These covenants will place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments, and to sell or otherwise dispose of assets and merge
or consolidate with other entities. See "Description of Credit Facilities" and
"Description of the Exchange Notes--Certain Covenants." In addition, the Credit
Facilities provide that the Company must meet or exceed a ratio of a measure
similar to EBITDA to interest expense and must not exceed a ratio of total debt
to a measure similar to EBITDA. The Credit Facilities also impose limits on
lease expense and capital expenditures. A failure to comply with the obligations
contained in the Credit Facilities or the Indenture could result in an event of
default under either the Credit Facilities or the Indenture which could result
in acceleration of the related debt and the acceleration of debt under other
instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If, as a result thereof, a default occurs with respect
to Senior Indebtedness, the subordination provisions in the Indenture would
likely restrict payments to the Holders.
ADVERSE CONSEQUENCES OF HOLDING COMPANY STRUCTURE
The Company is a holding company which conducts substantially all of its
operations through its subsidiaries. Consequently, the Exchange Notes are
effectively subordinated to the obligations of the Company's subsidiaries,
including the guarantee by its subsidiaries of obligations under the Credit
Facilities. In the event of an insolvency, liquidation or other reorganization
of any of the subsidiaries of the Company, the creditors of the Company
(including the Holders), as well as stockholders of the Company, will have no
right to proceed against the assets of such subsidiaries or to cause the
liquidation or bankruptcy of such subsidiaries under Federal bankruptcy laws.
Creditors of such subsidiaries, including lenders under the Credit Facilities,
would be entitled to payment in full from such assets before the Company would
be entitled to receive any distribution therefrom. Except to the extent that the
Company may itself be a creditor with recognized claims against such
subsidiaries, claims of creditors of such subsidiaries will have priority with
respect to the assets and earnings of such subsidiaries over the claims of
creditors of the Company, including claims under the Exchange Notes. In
addition, as a result of the Company being a holding company, the Company's
operating cash flow and its ability to service its indebtedness, including the
Exchange Notes, is dependent upon the operating cash flow of its subsidiaries
and the payment of funds by such subsidiaries to the Company in the form of
loans, dividends or otherwise. As of June 28, 1997, the subsidiaries of the
Company had total liabilities of $366.2 million, excluding guarantees of $128.0
million of indebtedness under the Credit Facilities.
14
<PAGE>
SUBORDINATION
The Company's obligations under the Exchange Notes will be subordinate and
junior in right of payment to all existing and future Senior Indebtedness of the
Company. As of June 28, 1997, the aggregate amount of the Company's outstanding
Senior Indebtedness was approximately $128.0 million (excluding unused
commitments). Additional Senior Indebtedness may be incurred by the Company from
time to time, subject to certain restrictions. By reason of such subordination,
in the event of an insolvency, liquidation, or other reorganization of the
Company, the lenders under the Credit Facilities and other creditors who are
holders of Senior Indebtedness must be paid in full before the Holders may be
paid; accordingly, there may be insufficient assets remaining after payment of
prior claims to pay amounts due on the Exchange Notes. In addition, under
certain circumstances, no payments may be made with respect to the Exchange
Notes if a default exists with respect to Senior Indebtedness.
ENCUMBRANCES ON ASSETS TO SECURE CREDIT FACILITIES
In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the Exchange Notes will not be secured by any of
the Company's assets. The Company's obligations under the Credit Facilities will
be secured by a first priority pledge of and security interest in (i) certain
common stock of existing and subsequently acquired direct domestic subsidiaries
of the Company (which at Closing consisted of Randall's Food & Drugs, Inc. and
Randall's Properties Inc.), (ii) 65% of the common stock of each subsequently
acquired direct foreign subsidiary and (iii) evidence of indebtedness in excess
of $5.0 million received by the Company in connection with certain dispositions
of assets. If the Company becomes insolvent or is liquidated, or if payment
under any of the Credit Facilities is accelerated, the lenders under the Credit
Facilities will be entitled to exercise the remedies available to a secured
lender under applicable law. See "Description of Credit Facilities" and
"Description of the Exchange Notes."
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control, the
Company will (unless the Company elects to redeem the Exchange Notes in the
event of a Change of Control prior to July 1, 2002 at a price of 100% of the
principal amount thereof plus the Applicable Premium) make an offer to purchase
all or any part of the Exchange Notes at a price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
the date of purchase. The Credit Facilities will prohibit the Company from
repurchasing any Exchange Notes, except with certain proceeds of one or more
Equity Offerings and offerings of Subordinated Indebtedness, a portion of excess
cash flow and other amounts not applied to repay borrowings under the Term Loan
Facility less certain investments in acquisition subsidiaries and minority
investments. The Credit Facilities will also provide that certain change of
control events with respect to the Company, which is defined under the Credit
Facilities to include all events that result in a Change of Control under the
Indenture, would constitute a default thereunder. Any default under the Credit
Facilities would result in an Event of Default under the Indenture if the
lenders under the Credit Facilities accelerated their loans. In the event of a
default under the Credit Facilities, the subordination provisions under the
Indenture would likely restrict payments to the Holders. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing the Exchange Notes, or if the Company is required to make an Asset
Sale Offer (as defined) pursuant to the terms of the Exchange Notes, the Company
could seek the consent of its lenders to purchase the Exchange Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or refinance such borrowings, the Company
would remain prohibited from purchasing the Exchange Notes. In such case, the
Company's failure to purchase tendered Exchange Notes would constitute an Event
of Default (as defined) under the Indenture, which would result in an event of
default under the Credit Facilities. If, as a result thereof, a default occurs
with respect to any Senior Indebtedness
15
<PAGE>
(including obligations under the Credit Facilities), the subordination
provisions in the Indenture would likely restrict payments to the Holders. The
provisions relating to a Change of Control included in the Indenture may
increase the difficulty of a potential acquiror obtaining control of the
Company. There can be no assurance that the Company will have the financial
resources to repurchase the Notes in the event of a Change of Control Offer or
retire its obligations under the Credit Facilities in the event of a Change of
Control. See "Description of the Exchange Notes--Repurchase at the Option of
Holders--Change of Control."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse club
stores, deep discount drug stores and supercenters. Supermarket chains generally
compete on the basis of location, quality of products, service, price, product
variety and store condition. The Company regularly monitors its competitors'
prices and adjusts its prices and marketing strategy as management deems
appropriate in light of existing conditions. The Company faces increased
competitive pressure in all of its markets from existing competitors which have
opened, and which the Company expects to continue to open, a significant number
of new stores in the Company's markets. Since the beginning of fiscal year 1995,
the Company estimates that its competitors have opened approximately 110 stores
and remodeled approximately 100 stores in its markets. Some of the Company's
competitors have greater financial resources than the Company and could use
these resources to take measures which could adversely affect the Company's
competitive position. The Company's ability to remain competitive in its markets
will depend in part on its ability to remodel and update stores in response to
remodelings and new store openings by its competitors. See
"Business--Competition."
DIFFICULTY IN ACHIEVING POST-RECAPITALIZATION STRATEGY
The post-Recapitalization business strategy that has been developed by the
Company is based on the Company's review of its operations and its competitive
position. See "Prospectus Summary--Business Strategy" and "Business--Business
Strategy." The Company may decide to alter or discontinue certain aspects of the
business strategy described herein and may adopt alternative or additional
strategies. In addition, there can be no assurance that any such strategies, if
implemented, will be successful or will improve operating results. Moreover,
there can be no assurance that the successful implementation of such a strategy
will result in improved operating results. Further, other conditions may exist,
such as increased competition, or an economic downturn in the Company's markets,
which may offset any improved operating results that are attributable to such a
strategy.
Generally, new stores opened by the Company operate at a loss for varying
periods of time, depending on such factors as prevailing competition and the
Company's market position in the surrounding community. Pursuing a strategy of
growth and expansion in light of the current highly competitive industry
conditions could lead to a near-term decline in earnings as a result of opening
and operating a substantial number of new stores, particularly with respect to
stores in markets where the Company does not have an established presence.
MSP LITIGATION
Following the Cullum Acquisition (as defined), the Company terminated
Cullum's Management Security Plan for Cullum Companies, Inc. (the "MSP") and in
respect of such terminations paid participants the greater of (i) the amount of
such participant's deferral and (ii) the net present value of an accrued
benefit, based upon the participant's current salary, age and years of service.
Thirty-five of the former MSP participants have instituted a claim against the
Company on behalf of all persons who were participants in the MSP on its date of
termination (which is alleged by plaintiffs to be approximately 250
16
<PAGE>
persons). The plaintiffs have asked the court to recognize their action as a
class action, to recover additional amounts under the MSP, for a declaration of
rights under an employee pension benefit plan and for breach of fiduciary duty.
The plaintiffs assert that the yearly plan agreement executed by each
participant in the MSP was a contract for a specified retirement and death
benefit set forth in such plan agreements and that such benefits were vested and
nonforfeitable. Summary judgment motions have been filed by both parties with
respect to various matters, and judicial rulings on such motions are currently
pending. Although there can be no assurance that the Company will prevail in
respect of this claim, the Company intends to vigorously contest the MSP claim.
The trial is expected to commence in calendar year 1998. A judgment against the
Company on the MSP litigation could have a material adverse effect on the
Company's financial position, results of operations and cash flow.
GEOGRAPHIC CONCENTRATION
Substantially all of the Company's stores are located in the Houston,
Dallas/Fort Worth and Austin metropolitan areas in Texas which have experienced
economic and demographic growth over the past several years. Although the Texas
economy has diversified in recent years, it remains dependent to some extent on
energy-related industries and a significant economic downturn in any or all of
these areas, or in the energy-related industry generally, could have a material
adverse effect on the Company.
DEPENDENCE ON KEY MANAGEMENT
The Company's success depends largely upon the abilities and experience of
certain key management personnel. The loss of the services of one or more of
such key personnel, and in particular R. Randall Onstead, the Company's
President and Chief Executive Officer, could have a material adverse effect on
the Company. The Company does not maintain key-man life insurance policies on
any of its executives. See "Management" and "Principal Shareholders."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of hazardous materials. The Company believes
that it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable environmental laws and
regulations. From time to time, operations of the Company have resulted or may
result in noncompliance with or liability for cleanup pursuant to environmental
laws and regulations. The Company has determined, based on site evaluations,
that underground storage tanks at truck fueling sites in Texas and Nebraska may
have leaked fuel or other materials and resulted in soil contamination. At the
Abilene, Texas site, based on soil and groundwater remediation efforts to date,
the Company estimates a range of future expenditures between $300,000 and
$700,000, substantially all of which has been reserved. With respect to a second
site, located in Dallas, Texas, the Company has paid remediation costs of
approximately $300,000, and state regulatory authorities have advised the
Company that no further corrective action is necessary. The Company expects to
submit its final closure report to the state shortly, which will be the last
submission associated with that location. One other site, located in Garland,
Texas, was sold to a party who accepted responsibility for corrective action
pertaining to leaking underground storage tank site remediation. Under
applicable environmental laws, the Company may remain liable for remediation at
the Garland site, which the Company estimates may cost up to approximately
$100,000. Remediation of the Nebraska site had been initiated by the Nebraska
Department of Environmental Quality ("NDEQ") using funds from a state fund (the
"Nebraska Fund") dedicated to remediation of leaking underground storage tanks.
Due to shortfalls in the Nebraska Fund, the NDEQ, which has not classified the
Company's site as a high priority, suspended the remediation efforts. The
Company anticipates that future remediation efforts at such site, if
17
<PAGE>
any, would be paid for by the Nebraska Fund. The Company believes that the
remediation efforts described above, which represent the Company's material
environmental matters, will not have a material adverse effect on its results of
operations, financial condition and cash flow. See "Business--Environmental
Matters."
The Company has not incurred material capital expenditures for environmental
controls during the previous three years, nor does the Company anticipate
incurring any such material expenditures to comply with environmental
regulations during the current fiscal or the succeeding fiscal year.
CONTROL BY KKR AFFILIATES
RFM Acquisition holds approximately 63% of the issued and outstanding shares
of Common Stock. RFM Acquisition is a Delaware limited liability company whose
sole member is KKR 1996 Fund L.P. KKR 1996 Fund L.P. is a Delaware limited
partnership whose sole general partner is KKR Associates 1996 L.P. KKR
Associates 1996 L.P. is a Delaware limited partnership whose sole general
partner is KKR 1996 GP L.L.C. KKR 1996 GP L.L.C. is a Delaware limited liability
company whose members are also the members of the limited liability company
which is the general partner of KKR. Accordingly, affiliates of KKR control the
Company and have the power to elect all of its directors, appoint new management
and approve any action requiring the approval of the Company's shareholders,
including adopting amendments to the Company's Articles of Incorporation and
approving mergers or sales of substantially all of the Company's assets. There
can be no assurance that the interests of KKR and its affiliates will not
conflict with the interests of the Holders. See "Management," "Principal
Shareholders" and "Certain Relationships and Related Transactions."
LACK OF PRIOR MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in June 1997 to a small number of institutional
investors and are eligible for trading in the PORTAL Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the Exchange
Notes and there can be no assurance as to the liquidity of markets that may
develop for the Exchange Notes, the ability of the holders of the Exchange Notes
to sell their Exchange Notes or the price at which such holders would be able to
sell their Exchange Notes. If such markets were to exist, the Exchange Notes
could trade at prices that may be lower than the initial market values thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities. Although there is currently no market for the Exchange
Notes, the Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes. However, the Initial Purchasers
are not obligated to do so, and any market making with respect to the Exchange
Notes may be discontinued at any time without notice.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
18
<PAGE>
THE RECAPITALIZATION
THE SUBSCRIPTION AGREEMENT
RFM Acquisition, the Company and Robert R. Onstead entered into the Subscription
Agreement as of April 1, 1997 pursuant to which RFM Acquisition acquired control
of the Company. Pursuant to the Subscription Agreement, RFM Acquisition paid the
$225.0 million Equity Investment to the Company as consideration for the
Company's issuance to RFM Acquisition of 18,579,686 shares of Common Stock and
the RFM Option.
At a special meeting of the Company's shareholders held on June 9, 1997 (the
"Special Meeting"), the shareholders approved a single proposal (the
"Shareholder Proposal") to (i) amend the Company's existing Articles of
Incorporation to increase the number of authorized shares of Common Stock from
25,000,000 shares to 75,000,000 (the "Charter Amendment"), (ii) approve the
Subscription Agreement and (iii) approve the Shareholders Agreement (as defined)
pursuant to which certain shareholders of the Company agreed to vote
approximately 75% of the Common Stock in favor of the Shareholder Proposal.
Pursuant to the Subscription Agreement, Robert R. Onstead and the Company
have agreed to indemnify RFM Acquisition for damages relating to breaches of the
representations, warranties, covenants and agreements contained in the
Subscription Agreement. The Company will be required to indemnify RFM
Acquisition for damages from breaches in an amount up to $10.0 million through
the issuance of additional shares of Common Stock to RFM Acquisition, subject to
a deductible of $2.5 million (except that such deductible will not apply to
breaches of representations and warranties relating to the Company's Employee
Stock Ownership Plan (the "ESOP") or to liabilities for taxes or breaches of
agreements or covenants of the Company). Robert R. Onstead is obligated to
indemnify RFM Acquisition for the next $3.0 million in indemnification
obligations through the payment of cash (i) to RFM Acquisition in the case of a
breach of the representation or warranty relating to the capital structure of
the Company and (ii) otherwise to the Company. The number of additional shares
that may be issued pursuant to the indemnification obligations of the Company is
based on the fair market value of a share of Common Stock as of the date of
issuance of such shares. Pursuant to separate agreements, the Company has agreed
to indemnify RFM Acquisition in the event the Company incurs any liability from
a claim filed against the Company by participants in the MSP. See "Risk
Factors--MSP Litigation" and "Business--Litigation-- MSP Litigation."
In connection with the consummation of the Recapitalization, the Company
paid to KKR a fee of $8.0 million for negotiating the Recapitalization and
arranging the financing therefor. The Company is also required to reimburse KKR
for all of its expenses contemplated by the Subscription Agreement.
THE TENDER OFFER
Pursuant to the Subscription Agreement, the Company purchased 5,585,186
shares of Common Stock at $16.00 per share in connection with the Tender Offer.
These shares were allocated among three tender offer pools: (i) 1,104,336 shares
held by the ESOP (the "ESOP Shares"), (ii) 200,435 shares of the 613,457 shares
which are subject to repurchase obligations of the Company pursuant to
pre-existing contractual arrangements with certain shareholders (such 613,457
shares being referred to as the "Putable Shares") and (iii) 4,280,415 shares
(other than Putable Shares) held by holders of Common Stock other than the ESOP
("Non-ESOP Shares"). The number of shares subject to each tender offer pool
represented approximately 33% of the ESOP Shares and the Non-ESOP Shares, and
35% of the Putable Shares, calculated as of April 1, 1997.
THE SHAREHOLDERS AGREEMENT
RFM Acquisition and certain of the Company's shareholders, including RKO
Management Ltd., Robert R. Onstead, Onstead Foundation, Onstead Charitable
Remainder Unitrust, Onstead Family Trust
19
<PAGE>
for R. Randall Onstead, Jr., Onstead Family Trust for Ann Onstead Hill, Onstead
Family Trust for Mary Onstead, Onstead Family Trust for Charlie Onstead, R.
Randall Onstead, Jr., Mary Onstead, Charles Martin Onstead, R.C. Barclay Family
Trust, Randall C. Barclay Estate, Bobby L. Gowens, Tom Arledge, Lee Straus,
Terry Poyner, Mark Prestidge and Joe Rollins, entered into a voting, repurchase
and shareholders agreement dated as of April 1, 1997 (the "Shareholders
Agreement").
The shareholders party to the Shareholders Agreement will have the right to
participate pro rata in certain sales of Common Stock by RFM Acquisition or its
affiliates (the "RFM Tag Along") and RFM Acquisition or its affiliates will have
the right to require such shareholders to participate pro rata in certain sales
by RFM Acquisition or its affiliates (the "RFM Drag Along").
20
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer. The Company used the proceeds from the Equity Investment,
together with approximately $278.0 million of aggregate proceeds from the
issuance of the Old Notes and borrowings under the Credit Facilities to (i)
consummate the Tender Offer for $89.4 million, (ii) apply $28.7 million to the
Preferred Stock Redemption, (iii) apply $336.0 million to the Debt Prepayment,
(iv) pay the Make-Whole Premium (including accrued interest) of approximately
$14.9 million and (v) pay an estimated $33.8 million in expenses and transaction
fees. The Company, concurrently with the Closing, made an $11.3 payment in
connection with the settlement of litigation relating to its ESOP. See
"Business--Litigation".
The indebtedness of the Company repaid in connection with the
Recapitalization and the Financings (the "Old Indebtedness") consisted of (i)
$144.5 million aggregate principal amount of loans under a term loan facility
provided pursuant to the credit agreement dated as of November 1, 1993, as
amended, among the Company, certain of its subsidiaries, the banks party thereto
and Texas Commerce Bank National Association ("Texas Commerce"), as agent (the
"TCB Credit Facility"), (ii) $55.0 million aggregate principal amount of loans
under a $65.0 million revolving credit facility provided pursuant to the TCB
Credit Facility, (iii) $39.5 million aggregate principal amount of 8.70% Series
A Senior Notes due December 1, 2003 (the "Series A Senior Notes") issued
pursuant to the note purchase agreement dated as of November 1, 1993, as
amended, among the Company, certain of its subsidiaries and the insurance
companies party thereto (the "Note Purchase Agreement"), (iv) $71.0 million
aggregate principal amount of 9.16% Series B-1 Senior Notes due December 1, 2005
(the "Series B-1 Senior Notes") issued pursuant to the Note Purchase Agreement
and (v) $25.0 million aggregate principal amount of 9.16% Series B-2 Senior
Notes due December 1, 2003 (the "Series B-2 Senior Notes", together with the
Series A Senior Notes and the Series B-1 Senior Notes, the "Senior Notes")
issued pursuant to the Note Purchase Agreement.
The sources and uses of the funds for the Recapitalization, the Financings
and the related transactions, were as follows (dollars in thousands):
SOURCES OF FUNDS
<TABLE>
<S> <C>
Revolving Credit Facility......................................................... $ 3,000
Term Loan Facility................................................................ 125,000
Old Notes......................................................................... 149,800
Equity Investment................................................................. 225,000
---------
Total sources................................................................. $ 502,800
---------
---------
</TABLE>
USES OF FUNDS
<TABLE>
<S> <C>
Tender Offer...................................................................... $ 89,400
Preferred Stock Redemption........................................................ 28,700
Debt Prepayment................................................................... 336,000
Make-Whole Premium (including accrued interest of $0.9 million)................... 14,900
Expenses and transaction fees(1).................................................. 33,800
---------
Total uses.................................................................... $ 502,800
---------
---------
</TABLE>
(1) Includes a portion of the $11.3 million payment made by the Company in
connection with the settlement of the ESOP litigation.
21
<PAGE>
CAPITALIZATION
The following table sets forth as of June 28, 1997 the audited consolidated
historical cash and cash equivalents and capitalization of the Company. This
table should be read in conjunction with the notes thereto and the historical
consolidated financial statements of the Company and its subsidiaries and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE
28, 1997
-----------
<S> <C>
(DOLLARS IN THOUSANDS)
Cash and equivalents............................................................................... $ 23,115
-----------
-----------
Debt:
Capital lease obligations........................................................................ 81,645
Other indebtedness............................................................................... 2,748
Credit Facilities (1)............................................................................ 128,000
Old Notes........................................................................................ 149,755
-----------
Total debt..................................................................................... 362,148
Redeemable Common Stock............................................................................ 5,002
Stockholders' equity............................................................................... 213,361
-----------
Total capitalization........................................................................... $ 580,511
-----------
-----------
</TABLE>
- ------------------------
(1) As of June 28, 1997, the Company had availability of $220.2 million under
the Revolving Credit Facility (reduced to reflect $1.8 million of
outstanding letters of credit). See "Description of Credit Facilities."
22
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENT
The following unaudited pro forma consolidated condensed financial statement
(the "Pro Forma Financial Statement") has been derived by the application of pro
forma adjustments to the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma consolidated condensed
statements of operations for the period presented give effect to the
Recapitalization, the Financings and the related transactions (including the
offering of the Old Notes) as if such transactions were consummated as of June
30, 1996 (the first day of fiscal year 1997). The adjustments are described in
the accompanying notes. The Pro Forma Financial Statement should not be
considered indicative of actual results that would have been achieved had the
Recapitalization, the Financings and the related transactions (including the
offering of the Old Notes) been consummated for the period indicated and does
not purport to indicate results of operations for any future period. The Pro
Forma Financial Statement should be read in conjunction with the Company's
historical consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
23
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
52 WEEKS ENDED JUNE 28, 1997
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
--------- --------------- -----------
<S> <C> <C> <C>
Net sales.................................................................... $2,344,983 $ -- $2,344,983
Cost of sales................................................................ 1,710,345 -- 1,710,345
--------- ------- -----------
Gross profit............................................................... 634,638 -- 634,638
Store operating, selling and administrative expenses......................... 558,065 -- 558,065
Depreciation and amortization................................................ 48,875 -- 48,875
Interest expense, net........................................................ 36,828 (2,175)(a) 34,653
Litigation and severance/benefits............................................ 14,012 -- 14,012
Estimated store closing costs................................................ 32,790 -- 32,790
--------- ------- -----------
Income (loss) before income taxes and extraordinary item................... (55,932) 2,175 (53,757)
(Benefit) provision for income taxes......................................... (15,215) 827(b) (14,388)
--------- ------- -----------
Income (loss) before extraordinary item.................................... $ (40,717) $ 1,348 $ (39,369)
--------- ------- -----------
--------- ------- -----------
Pro forma ratio of earnings to fixed charges (c)............................. (c)
-----------
-----------
</TABLE>
- --------------------------
(a) The pro forma adjustments to net interest expense reflect the following:
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
-------------
<S> <C>
JUNE 28, 1997
-------------
Interest on historical debt repaid(1):
Revolving credit facility........................................................ $ (3,720)
Term loan facility............................................................... (11,750)
Senior Notes..................................................................... (12,336)
Interest expense on new debt (2):
Revolving Credit Facility........................................................ 249
Term Loan Facility............................................................... 8,913
Notes............................................................................ 14,063
Amortization of deferred financing costs (eight years)............................. 2,406
-------------
Total adjustment................................................................. $ (2,175)
-------------
-------------
</TABLE>
-------------------------
1) The details of the amounts and interest rates relating to the
historical debt repaid are listed under "Use of Proceeds."
2) Reflects assumed weighted average interest rates of 7.16% on $3.0
million under the Revolving Credit Facility, an effective yield of
9.40% on $150.0 million aggregate principal amount of the Notes, and
an interest rate of 7.13% on $125.0 million of borrowings under the
Term Loan Facility.
A 0.25% increase or decrease in the assumed average interest on
borrowings under the Credit Facilities would change the pro forma
interest expense by $0.3 million for the period ended June 28, 1997 and
the pro forma net earnings (loss) would change by approximately $0.2
million. For fiscal year 1997, each $1.0 million increase or decrease in
the Revolving Credit Facility would change pro forma net interest expense
by approximately $0.1 million. The pro forma net earnings (loss) would
change by approximately $0.1 million.
(b) The adjustment reflects the tax effect of the pro forma adjustments at a 38%
effective tax rate.
(c) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges (net of
capitalized interest). Fixed charges consist of interest expense on all
indebtedness and capitalized interest, amortization of deferred financing
costs, and one-third of rental expense on operating leases representing that
portion of rental expense deemed by the Company to be attributable to
interest. The Company's pro forma earnings, which include certain
non-recurring charges, would have been insufficient to cover fixed charges
by $53.8 million for fiscal year 1997.
24
<PAGE>
SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
The following table sets forth selected historical consolidated condensed
financial and other data for the Company. The historical consolidated financial
statements of the Company for fiscal year 1997 have been audited by Deloitte &
Touche LLP and the historical consolidated financial statements for fiscal years
1996, 1995, the fiscal year ended June 25, 1994 ("fiscal year 1994") and the
fiscal year ended June 26, 1993 ("fiscal year 1993") have been audited by Arthur
Andersen LLP. The historical consolidated financial data as of June 28, 1997 and
June 29, 1996 and for the fiscal years 1997, 1996 and 1995 have been derived
from, and should be read in conjunction with, the audited consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. See "Pro Forma Consolidated Condensed Financial Statement,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------
JUNE 28, JUNE 29, JUNE 24, JUNE 25, JUNE 26,
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- -------------------------------------------- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
OPERATING DATA:
Net sales................................... $ 2,344,983 $ 2,368,645 $ 2,328,247 $ 2,304,524 $ 2,038,360
Cost of sales............................... 1,710,345 1,737,987 1,728,698 1,718,761 1,520,094
--------------- ------------ ------------ ------------ ------------
Gross profit.............................. 634,638 630,658 599,549 585,763 518,266
Store operating, selling and administrative
expenses.................................. 558,065 507,894 501,634 495,280 405,434
Depreciation and amortization............... 48,875 45,814 47,447 45,065 46,189
Interest expense, net(1).................... 36,828 38,981 43,411 50,442 58,553
(Gain) on sale of warehouse................. -- -- -- (5,187) --
Litigation charge(2)........................ 9,500 1,000 -- -- --
Severance/benefits charge(3)................ 4,512 -- -- -- --
Estimated store closing costs............... 32,790(4) 1,215 -- -- --
Income (loss) before income taxes and
extraordinary item...................... (55,932) 35,754 7,057 163 8,090
Benefit (provision) for income taxes........ 15,215 (16,316) (7,020) (3,667) (6,772)
--------------- ------------ ------------ ------------ ------------
Income (loss) before extraordinary item... (40,717) 19,438 37 (3,504) 1,318
Loss on extinguishment of debt(5)........... (9,798) -- -- -- 13,633
--------------- ------------ ------------ ------------ ------------
Net income (loss)......................... $ (50,515) $ 19,438 $ 37 $ (3,504) $ (12,315)
--------------- ------------ ------------ ------------ ------------
--------------- ------------ ------------ ------------ ------------
Ratio of earnings to fixed charges(6)....... -- 1.67x 1.13x 1.00x 1.12x
OTHER DATA:
EBITDA(7)(8)................................ $ 29,771 $ 120,549 $ 97,915 $ 90,483 $ 112,832
Capital expenditures(9)..................... 73,864 66,131 59,850 79,279 51,543
Stores open at end of period(10)............ 121 120 120 121 109
BALANCE SHEET DATA (END OF PERIOD):
Working capital............................. $ 11,429 $ 29,895 $ 30,186 $ 44,211 $ 78,862
Total assets................................ 862,374 823,265 816,790 876,820 934,416
Total debt and capital lease obligations.... 362,148 437,982 463,944 533,273 598,020
Redeemable Common Stock..................... 5,002 31,045 18,749 16,097 36,460
Stockholders' equity........................ 213,361 136,650 134,753 128,165 112,396
CASH FLOW DATA:
Cash flows from operating activities........ $ 18,392 $ 63,846 $ 53,508 $ 62,239 $ 101,453
Cash flows from investing activities........ (48,468) (33,782) (108) 7,651 (81,010)
Cash flows from financing activities........ 21,505 (31,229) (54,331) (107,037) (9,233)
</TABLE>
See Notes to Selected Historical Consolidated Financial and Other Data
25
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
(1) Represents interest expense net of interest income.
(2) Represents a charge recorded in connection with the settlement of litigation
relating to the ESOP. See "Business--Litigation."
(3) Represents a charge recorded in connection with the recent or anticipated
departure of certain executives and other employees of the Company, as well
as certain charges relating to benefits granted under certain employment
agreements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(4) Represents a charge recorded in connection with the Company's decision to
close, replace or sell approximately 20 stores, two of which had been closed
at the end of fiscal year 1997.
(5) The net loss for the fiscal year 1993 reflects an extraordinary loss of
$13.6 million resulting from the retirement of a total of $224.7 million
aggregate principal amount of 16% subordinated discount debentures and $78.6
million aggregate principal amount of 14% senior subordinated debentures.
The net loss for fiscal year 1997 reflects an extraordinary loss of $9.8
million resulting from the early extinguishment of debt, net of tax.
(6) For purposes of determining the ratio of earnings to fixed charges,
refinanced in the Recapitalization, earnings are defined as earnings before
income taxes, plus fixed charges (net of capitalized interest). Fixed
charges consist of interest expense on all indebtedness and capitalized
interest, amortization of deferred financing costs, and one-third of rental
expense on operating leases representing that portion of rental expense
deemed by the Company to be attributable to interest. For fiscal year 1997,
the deficiency in earnings to cover fixed charges was $55.9 million.
(7) "EBITDA" represents earnings before net interest expense, income taxes and
depreciation and amortization. EBITDA is not intended to represent cash
flows from operations as defined by GAAP and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. EBITDA is included
in this Prospectus as it is a basis upon which the Company assesses its
financial performance and certain covenants in the Company's borrowing
arrangements are tied to similar measures.
(8) Included in EBITDA for fiscal year 1997 are $63.4 million of charges to
record an inventory charge, a year-end closed store accrual (see footnote
4), the settlement of the ESOP litigation (see footnote 2), costs associated
with implementation of the Company's frequent shopper program, severance
accrual (see footnote 3), compensation expense related to the issuance of
shares of restricted Common Stock to certain employees and accruals for
transaction costs related to the Recapitalization and the Financings, sales
taxes, payroll taxes, legal expenses, rent and other payables. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
(9) Capital expenditures include purchases of real estate, buildings and
equipment. Certain items included in capital expenditures are subsequently
financed through sale leaseback transactions. In fiscal years 1994, 1995,
1996 and 1997, proceeds from asset sales (a substantial portion of which
were sale leasebacks of certain real estate properties) were $78.3 million,
$59.3 million, $30.3 million and $55.4 million, respectively. For fiscal
year 1994, capital expenditures include $22.3 million relating to the
acquisition of 15 stores in Austin and Houston from Appletree Markets, Inc.
(10) The following sets forth additional information concerning changes in the
Company's store base:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 28, JUNE 29, JUNE 24, JUNE 25, JUNE 26,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
TOTAL STORES:
Beginning of period.............................. 120 120 121 109 45
Newly constructed.............................. 8 4 3 5 4
Acquired....................................... 2 0 0 15(b) 63(c)
Closed......................................... (9) (4) (4) (8)(b) (3)
--- --- --- --- ---
End of period.................................... 121(a) 120 120 121 109
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
- ------------------------------
(a) Includes 18 stores that, as of June 28, 1997, the Company has decided to
close, replace or sell.
(b) Reflects the acquisition of 15 stores in Austin and Houston from AppleTree
Markets, Inc. and the immediate closure of three of such stores in Austin.
(c) Includes the acquisition by the Company in August 1992 of 100% of the stock
of Cullum (representing 62 TOM THUMB stores).
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations of the
Company covers periods before completion of the Recapitalization, the Financings
and the related transactions. Accordingly, the discussion and analysis of such
periods does not reflect the significant impact that the Recapitalization, the
Financings and the related transactions will have on the Company. However, since
the Recapitalization occurred prior to the close of fiscal year 1997, the
balance sheet of the Company as of June 28, 1997, and hence the discussion of
liquidity and capital resources, reflects the impact of the Recapitalization and
the Financings. See "Risk Factors," "Pro Forma Consolidated Condensed Financial
Statement" and the discussion below under "-- Liquidity and Capital Resources"
for further discussion relating to the impact that the Recapitalization, the
Financings and the related transactions had and may in the future have on the
Company.
GENERAL
The Company operates a chain of 121 supermarkets primarily under the
RANDALLS and TOM THUMB banners in the Houston, Dallas/Fort Worth and Austin
metropolitan areas. The Company operates on a 52 or 53 week fiscal year ending
on the last Saturday of June. The consolidated statements of operations for
fiscal years 1995 and 1997 include 52 weeks of operations while fiscal year 1996
includes 53 weeks of operations. Same store sales is defined as net sales for
stores in operation in each of the entire current fiscal period and the
comparable period of the prior fiscal year. Replacement stores are included in
the same store sales calculation. A replacement store is defined as a store that
is opened to replace a store that is closed nearby. At the close of fiscal year
1997, the Company selected 20 stores to be closed, replaced or sold. See
"Business--Store Development."
COMPARISON OF FISCAL YEARS 1997 AND 1996
A table showing the percentage of net sales represented by certain items in
the Company's consolidated condensed statements of operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
(DOLLARS IN THOUSANDS) JUNE 28, 1997 JUNE 29, 1996
----------------------- -----------------------
<S> <C> <C> <C> <C>
(52 WEEKS) (53 WEEKS)
Net sales............................... $ 2,344,903 100.0% $ 2,368,645 100.0%
Cost of sales........................... 1,710,345 72.9 1,737,987 73.4
------------ --------- ------------ ---------
Gross profit.......................... 634,638 27.1 630,658 26.6
Store operating, selling and
administrative expenses............... 558,065 23.8 507,894 21.5
Depreciation and amortization........... 48,875 2.1 45,814 1.9
Interest expense, net................... 36,828 1.6 38,981 1.6
Litigation charge....................... 9,500 0.4 1,000 --
Severance/benefits charge............... 4,512 0.2 -- --
Estimated store closing costs........... 32,790 1.4 1,215 --
Income (loss) before income taxes and
extraordinary item.................... (55,932) (2.4) 35,754 1.5
Benefit (provision) for income taxes.... 15,215 0.6 (16,316) (0.7)
Loss on extinguishment of debt.......... 9,798 0.4 -- --
------------ --------- ------------ ---------
Net income (loss)....................... $ (50,515) (2.2)% $ 19,438 0.8%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
EBITDA.................................. $ 29,771 1.3% $ 120,549 5.1%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
</TABLE>
27
<PAGE>
NET SALES
Net sales decreased by $23.7 million, or 1.0%, during fiscal year 1997 as
compared to fiscal year 1996. The decrease in net sales is attributable to the
additional week of operations in fiscal year 1996. Based on a comparable 52 week
year, net sales increased by $18.8 million, or 0.8% of net sales. The increase
is primarily attributable to additional sales of $93.5 million generated from
the opening of six new stores during fiscal year 1997 and the operation for
fiscal year 1997 of three stores opened during fiscal year 1996. This increase
was offset by a decline in same store sales of 1.45% from fiscal year 1996 due
to continued competitor store openings and remodels, and a decrease in sales of
$41.7 million from fiscal year 1996 due to the closure of five stores during
fiscal year 1997, two more than were closed during fiscal year 1996.
The Company's trend in same store sales has improved during fiscal year 1997
from a decrease of 3.6% in the first quarter, to a decrease of 1.3% in the
second quarter, to an increase of 0.1% in the third quarter, to an increase of
0.3% in the fourth quarter. This improvement has resulted from the introduction
of the frequent shopper program and other marketing initiatives and the
contribution of three replacement stores. The Company cannot predict whether the
improvement in the trend in same store sales that occurred in fiscal year 1997
will continue in future periods.
GROSS PROFIT
Gross profit increased by $4.0 million and, as a percentage of net sales,
increased to 27.1% for fiscal year 1997 from 26.6% for fiscal year 1996. This
increase is attributable to higher margins from new and replacement stores, an
increase in vendor rebates, as well as the impact for fiscal year 1997 of price
increases implemented by the Company late in the second quarter of fiscal year
1996. The higher gross margins of new and replacement stores are due to their
larger formats, more expansive specialty departments and broader range of
products and services.
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Store operating, selling and administrative expenses increased by $50.2
million and, as a percentage of net sales, increased to 23.8% for fiscal year
1997 from 21.5% for fiscal year 1996. The increase is the result of increased
advertising expenditures to introduce and promote the Company's frequent shopper
program, expenses related to the introduction and start-up of the Company's
PEAPOD on-line ordering and home delivery program, store occupancy costs of new
and replacement stores in excess of the occupancy costs of closed stores, and an
increase in labor and benefit costs associated in part with the new and
replacement stores. Also included in store operating, selling and administrative
expenses for fiscal year 1997 are $19.3 million of charges, including
recognition of compensation expense in connection with the issuance of
restricted Common Stock to certain of its employees, charges to record accruals
for sales taxes, payroll taxes, legal expenses, rent and other payables, an
inventory charge, costs associated with implementation of the frequent shopper
program and transaction costs related to the Recapitalization and the
Financings. The Company is focused on reducing store operating, selling and
administrative expenses and does not expect these expenses to increase as a
percentage of net sales in fiscal year 1998 as compared to fiscal year 1997.
EBITDA
EBITDA declined by $90.8 million from fiscal year 1996 and, as a percentage
of net sales, declined to 1.3% for fiscal year 1997 from 5.1% for fiscal year
1996. Operating income (loss) declined by $93.9 million from fiscal year 1996
and, as a percentage of net sales, declined to 0.1% for fiscal year 1997 from
3.2% for fiscal year 1996. This decrease is attributable to the increase in
store operating, selling and administrative expenses described above, partially
offset by the $4.0 million increase in gross profit as described above, and an
additional $44.1 million of other charges. Included in the other charges are a
year-end closed store charge of $30.1 million, settlement of the ESOP litigation
for $9.5 million and a severance charge of $4.5 million.
28
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased by $3.0 million and, as a
percentage of net sales, increased to 2.1% for fiscal year 1997 from 1.9% for
fiscal year 1996. This increase is primarily due to new store openings during
fiscal year 1997.
INTEREST EXPENSE, NET
Net interest expense for fiscal year 1997 declined by $2.1 million compared
to fiscal year 1996 due primarily to a net reduction of debt. The refinancing of
the TCB Credit Facility and the Senior Notes that occurred on June 27, 1997 had
minimal impact on interest expense for fiscal year 1997.
LITIGATION CHARGE
During fiscal year 1995, the Company was named as a defendant in a class
action lawsuit alleging the violation of various federal and state laws in
connection with the operation of the ESOP. The Company and other defendants
elected to settle the suit for $16.5 million, of which the Company was liable
for $11.3 million plus $0.2 million in administrative expenses. Net of insurance
proceeds, the Company paid $10.5 million in the aggregate in connection with the
settlement. During fiscal year 1997 the Company increased its existing
litigation reserves by $9.5 million to fully reserve for such matter. See
"Business--Litigation."
SEVERANCE/BENEFITS CHARGE
For fiscal year 1997, the Company recorded a non-recurring charge of $4.5
million representing a reserve recorded in connection with the recent or
anticipated departures of certain executives and other employees of the Company,
as well as certain charges relating to benefits granted under certain employment
agreements.
ESTIMATED STORE CLOSING COSTS
For fiscal year 1997, the Company recorded a charge of $32.8 million which
includes $3.7 million relating to stores that were closed or sold in fiscal year
1997 and $29.1 million related to 20 stores that the Company had decided, as of
June 28, 1997, to close, replace or sell, two of which had been closed as of
June 28, 1997. These costs include estimated inventory losses, lease termination
costs and losses related to the impairment of certain store assets for the
stores to be closed. The Company believes that planned replacement stores will
generate revenues and operating income in excess of the stores to be replaced
after giving effect to increases in store occupancy costs, labor and benefits
associated with such replacement stores. The Company believes that planned
closures and sales of stores will result in reduced revenues of approximately
$100 million per year, but increases in operating income of approximately $5
million per year. Management's plan currently provides for various replacement,
sale and closing dates from June 1997 to June 1999.
BENEFIT (PROVISION) FOR INCOME TAXES
The benefit for income taxes for fiscal year 1997 was $21.2 million due to a
loss before income taxes of $55.9 million and early extinguishment of debt of
$9.8 million. The benefit consists of $15.2 million related to loss before
income taxes and extraordinary item and $6.0 million related to extraordinary
item.
NET INCOME (LOSS)
Net loss for fiscal year 1997 was $50.5 million compared to net earnings of
$19.4 million for fiscal year 1996.
29
<PAGE>
COMPARISON OF FISCAL YEARS 1996 AND 1995
A table showing the percentage of net sales represented by certain items in
the Company's condensed consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
(DOLLARS IN THOUSANDS) JUNE 29, 1996 JUNE 24, 1995
----------------------- -----------------------
<S> <C> <C> <C> <C>
(53 WEEKS) (52 WEEKS)
Net sales............................... $ 2,368,645 100.0% $ 2,328,247 100.0%
Cost of sales........................... 1,737,987 73.4 1,728,698 74.2
------------ --------- ------------ ---------
Gross profit.......................... 630,658 26.6 599,549 25.8
Store operating, selling and
administrative expenses............... 510,109 21.5 501,634 21.5
Depreciation and amortization........... 45,814 1.9 47,447 2.0
Interest expense, net................... 38,981 1.6 43,411 1.9
------------ --------- ------------ ---------
Income before income taxes.............. 35,754 1.5 7,057 0.3
(Provision) for income taxes............ (16,316) 0.7 (7,020) 0.3
------------ --------- ------------ ---------
Net income.............................. $ 19,438 0.8% $ 37 0.0%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
EBITDA.................................. $ 120,549 5.1% $ 97,915 4.2%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
</TABLE>
NET SALES
Net sales increased by $40.4 million, or 1.7%, during fiscal year 1996 as
compared to fiscal year 1995. Included in this increase is approximately $44.7
million of net sales resulting from the additional week of operations in fiscal
year 1996. In addition, this increase is attributable to additional sales of
$86.6 million generated from the opening of three new stores in fiscal year 1996
and the operation for the entire fiscal year 1996 of three new stores opened in
fiscal year 1995, which was offset by a decrease in sales of $32.0 million from
the closure of four stores in fiscal year 1996 and the closure of four stores in
fiscal year 1995 and a decline in same store sales of 2.5% due to continued
competitor store openings and remodels.
GROSS PROFIT
Gross profit increased by $31.1 million and, as a percentage of net sales,
increased to 26.6% for fiscal year 1996 from 25.8% for fiscal year 1995.
Included in this increase is approximately $11.9 million of gross profit
resulting from the additional week of operations in the 53 week fiscal year
1996. The remainder of the increase is due primarily to an increase in the
amount of vendor rebates and the effect of price increases implemented by the
Company late in the second quarter of fiscal year 1996. The increase in vendor
rebates is due to the Company negotiating for additional vendor rebates
resulting in lower net product costs instead of receiving advertising allowances
which are recorded as a credit to store operating, selling and administrative
expenses.
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Store operating, selling and administrative expenses increased by $8.5
million for fiscal year 1996 compared to fiscal year 1995. As a percentage of
net sales, store operating, selling and administrative expenses has remained
constant at 21.5% of net sales for each of fiscal years 1996 and 1995. Included
in store operating, selling and administrative expenses is approximately $9.6
million of expenses resulting from the additional week of operations in the 53
week fiscal year of 1996. The remainder of the increase is also the result of a
number of other factors, including store occupancy costs of new and replacement
stores in excess of the occupancy costs of closed stores, the full year impact
of rent expense associated with seven stores that were sold and leased back in
fiscal year 1995. In addition, the Company negotiated for lower advertising
allowances which are recorded as a credit to store operating, selling and
administrative expenses, in exchange for increased vendor rebates to lower net
product costs (as described above under
30
<PAGE>
"-- Gross Profit"). These increases were offset by a decline in gross
advertising expenses, professional fees and other operating expenses.
EBITDA
EBITDA increased by $22.6 million and, as a percentage of net sales,
increased to 5.1% for fiscal year 1996 from 4.2% for fiscal year 1995. Operating
income increased by $24.2 million and, as a percentage of net sales, increased
to 3.2% for fiscal year 1996 from 2.2% for fiscal year 1995. The increase in
EBITDA and operating income is attributable to the increase in gross profit
partially offset by the increase in store operating, selling and administrative
expenses as described above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $1.6 million and, as a
percentage of net sales, decreased to 1.9% for fiscal year 1996 from 2.0% for
fiscal year 1995. The decrease in expense of $1.6 million is attributed to
reduced capital expenditures for store fixtures and equipment in fiscal year
1996 as compared to fiscal year 1995.
INTEREST EXPENSE, NET
Net interest expense for fiscal year 1996 declined by $4.4 million compared
to fiscal year 1995 due primarily to a net reduction of debt of $26.0 million.
PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal year 1996 increased by $9.3
million compared to fiscal year 1995 due to the increase in earnings before
income taxes to $35.8 million for fiscal year 1996 compared to earnings before
income taxes of $7.1 million for fiscal year 1995.
NET EARNINGS
Net earnings for fiscal year 1996 increased by $19.4 million to $19.4
million from net earnings of $37,000 for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company, and as a result, the Company's operating
cash flow and its ability to service its indebtedness, including the Exchange
Notes, is dependent upon the operating cash flow of its subsidiaries and the
payment of funds by such subsidiaries to the Company in the form of loans,
dividends or otherwise.
The Company's principal sources of liquidity are expected to be cash flow
from operations, borrowings under the Revolving Credit Facility and proceeds
from the sale leaseback of real estate properties. Management anticipates that
the Company's principal uses of liquidity will be to provide working capital,
meet debt service requirements and finance the Company's expansion and
remodeling plans. Management believes that cash flows generated from operations
and borrowings under the Credit Facilities will adequately provide for its
working capital and debt service needs and will be sufficient to fund the
Company's expected capital expenditures.
The Credit Facilities are comprised of the Term Loan Facility and the
Revolving Credit Facility. In the future, the Company will use the proceeds from
the Revolving Credit Facility to provide for working capital requirements and
the implementation of the Company's strategy to expand and enhance its store
base and optimize its distribution facility. At Closing, all amounts outstanding
under the TCB Credit Facility were repaid and the commitments thereunder
terminated and the Senior Notes were similarly retired. The Company has $220.2
million available (reduced by $1.8 million to reflect outstanding letters of
credit) to be borrowed under the Revolving Credit Facility.
Historically, the Company has funded working capital requirements, capital
expenditures and other cash requirements primarily through cash flow from
operations and borrowings under the revolving credit
31
<PAGE>
facility of the TCB Credit Facility and the proceeds of sale leasebacks. In
fiscal years 1997, 1996 and 1995, operating activities generated cash of $18.4
million, $63.8 million and $53.5 million, respectively. Net borrowings
(repayments) of revolving loans under the TCB Credit Facility were $3.0 million,
$17.0 million and $(14.0) million during fiscal years 1997, 1996 and 1995,
respectively.
Cash flows used in (or provided by) investing activities were $48.5 million,
$33.8 million and $0.1 million in fiscal years 1997, 1996 and 1995,
respectively. Capital expenditures include expenditures related to the
construction of new stores, the purchase of real estate, the remodeling of
existing stores, ongoing store expenditures for equipment and maintenance, as
well as expenditures relating to warehousing, distribution, manufacturing
facilities and equipment, data processing and computer equipment. To finance
store development, the Company has traditionally purchased real estate and
constructed stores from operating cash flows and from the proceeds of its
revolving credit facility and then entered into sale leaseback transactions, the
proceeds of which were applied to reduce debt incurred to construct the stores.
Capital expenditures since fiscal year 1994 were primarily financed from
internally generated funds, proceeds from the sale of real estate properties
(including sale leaseback transactions) and borrowings under the TCB Credit
Facility. In fiscal years 1997, 1996 and 1995, capital expenditures were $73.9
million, $66.1 million and $59.9 million, respectively. Proceeds from asset
sales (a substantial portion of which were sale leasebacks of certain real
estate properties) totaled $55.4 million during fiscal year 1997 compared to
$30.3 million during fiscal year 1996. As a result of the disposal of certain
assets, a gain of $0.9 million was recognized during fiscal year 1997. The
Company expects to accelerate its store development program and optimize its
distribution system which will result in a level of capital expenditures
significantly in excess of historical levels. For fiscal year 1998, the Company
expects to make approximately $70.0 million of capital expenditures to open five
new stores, commence construction on seven new stores and purchase land for
three new stores, and make approximately $60.0 million of capital expenditures
to renovate or remodel 42 stores. See "Business -- Store Development." Depending
on store size and format, the cost to build and open a new store ranges from
approximately $8.0 million to $12.0 million. As of June 28, 1997, the Company
had approximately $19.5 million of commitments to make capital expenditures. The
Company anticipates funding its capital expenditures with cash flow from
operations and borrowings under the Revolving Credit Facility and proceeds from
sale leaseback transactions.
The principal uses of cash from financing activities during fiscal year 1997
were net repayments of long-term debt of $400.0 million, the Tender Offer of
$89.4 million, the Preferred Stock Redemption of $28.7 million, the payment of
the Make-Whole Premium of $14.9 million, payment of preferred stock dividends of
$2.3 million, the accelerated amortization of deferred financing costs of $1.8
million and purchase of treasury stock of $0.9 million, offset by a net increase
in capital lease obligations of $5.4 million and net proceeds from the
Recapitalization and the Financings of $55.3 million. In fiscal year 1996, the
primary uses of cash from financing activities were net repayments of long-term
debt and capital lease obligations of $26.0 million and payment of preferred
stock dividends of $5.9 million and issuance of common stock of $0.6 million.
The primary uses of cash from financing activities in fiscal year 1995 were net
repayments of long-term debt and capital lease obligations of $63.7 million and
issuance of common stock of $9.4 million.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
adopted this standard in the first quarter of fiscal year 1997. The adoption of
SFAS No. 121 did not have a significant impact on the Company's financial
condition, results of operations or cash flows.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for Stock-Based Compensation," effective for financial statements
for fiscal years beginning after December 15, 1995. This
32
<PAGE>
statement defines a fair value-based method of accounting for employee stock
options or similar equity instruments. As the statement permits, the Company
will continue to account for these types of instruments using the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The statement, if
adopted, would not have materially affected reported amounts for net income
(loss) and income (loss) per share in fiscal years 1997 and 1996.
EFFECTS OF INFLATION
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has generally
been able to maintain gross profit margins by adjusting retail prices, but
competitive conditions may from time to time render the Company unable to do so
while maintaining its market share.
33
<PAGE>
BUSINESS
GENERAL
The Company is the second largest supermarket operator in its principal
markets, with 121 stores located in Houston (53 stores), Dallas/Fort Worth (52
stores), and Austin (16 stores). With over 30 years of operations in Houston and
49 years of operations in Dallas/Fort Worth, the Company has developed a loyal
customer base and a portfolio of large, attractive stores in prime locations.
The Company offers customers an expanded selection of high quality products,
exceptional customer service and a variety of specialty departments. These
strengths, together with the Company's position as a Texas-based supermarket
operator, have enabled it to maintain a number two market share in Houston,
Dallas and Austin, the Company's principal markets. For fiscal year 1997, the
Houston, Dallas, Fort Worth and Austin markets represented approximately 47%,
35%, 7% and 11% of the Company's net sales, respectively. For fiscal year 1997,
the Company generated net sales of approximately $2.34 billion and EBITDA of
$29.8 million.
The Company operates combination food and drug stores which emphasize high
quality products, exceptional customer service and expanded selections of
quality meat, seafood, produce and other perishables. This format appeals to a
broad customer base by offering shoppers an extensive variety of products and
services, including large produce and perishables departments, in-store
bakeries, delicatessens, full-service meat and seafood departments, salad bars,
banks, pharmacies, full-service floral departments, expanded cosmetic
departments, video rental departments and film processing counters. The Company
operates 84 traditional combination food and drug stores under the RANDALLS
banner in Houston and Austin and the TOM THUMB banner in Dallas/Fort Worth
averaging approximately 49,800 square feet. For fiscal year 1997, these stores
generated sales of approximately $1.59 billion, or 68% of net sales, and average
sales weekly per store of approximately $356,000.
The Company's NEW GENERATION and FLAGSHIP STORES are each variations of the
Company's traditional combination food and drug stores, offering an even wider
selection of premium products and services:
NEW GENERATION STORES emphasize expanded perishable food departments and
open product preparation in order to create a farmer's market atmosphere and
highlight product freshness to customers. The Company's 20 New Generation
Stores operate under the RANDALLS banner in Houston and Austin and the TOM
THUMB banner in Dallas, and average approximately 68,900 square feet. For
fiscal year 1997, New Generation Stores generated sales of approximately
$450.0 million, or 19% of net sales, and average weekly sales per store of
approximately $493,000.
FLAGSHIP STORES target customers seeking an expanded array of premium
services and a wider variety of top quality gourmet and specialty
selections. Flagship Stores feature additional "one-stop" shopping
conveniences and many higher margin specialty products and services,
including in-store gourmet coffee bars and eating areas, expanded bakery
departments staffed with French pastry chefs, a wide range of freshly
prepared foods (including made-to-order pizza, pastas and barbecued meats),
home delivery and catering. The Company operates seven Flagship Stores under
the RANDALLS FLAGSHIP banner in Houston averaging approximately 57,500
square feet and one store of approximately 34,000 square feet under the
SIMON DAVID banner in Dallas. For fiscal year 1997, Flagship Stores
generated sales of approximately $220.0 million, or 10% of net sales, and
average weekly sales per store of approximately $578,000.
The Company also operates 9 conventional stores which offer a similar variety of
food products and specialty departments as its traditional combination food and
drug stores, but do not include pharmacies. Conventional stores average
approximately 20,600 square feet. For fiscal year 1997, Conventional stores
generated sales of approximately $80.0 million, or 3% of net sales, and average
weekly sales per store of approximately $171,000.
34
<PAGE>
COMPANY STRENGTHS
STRONG FRANCHISE AND DISTINCTIVE IMAGE. Over its history, the Company has
established a reputation for providing high quality products and exceptional
service to customers. The Company's stores are known for their broad selection
of high quality meats, seafood, produce and other perishables, which are
complemented by a variety of specialty departments to create a differentiated,
"one-stop" shopping experience. In a series of independent surveys of shoppers
in Houston and Dallas, the Company has consistently received the highest ratings
for specialty categories, such as fresh meat, produce, bakery and floral, and
service categories, such as customer assistance, quick checkout, cleanliness,
product variety and selection. In addition, the Company's long-standing practice
of reinvesting in the community by partnering with customers in charitable
giving programs, such as the "Good Neighbor" program, further enhances customer
loyalty and provides the Company with an additional competitive advantage.
ATTRACTIVE STORES IN PRIME LOCATIONS. The Company has developed a portfolio
of large, attractive stores in prime locations which provide flexibility in
store layout and merchandising. Since 1992, the Company has increased average
store size from approximately 46,000 square feet to approximately 51,000 square
feet by pursuing a strategy of store expansion in selected markets. The Company
attempts to optimize operating results by selecting the variation of its
combination food and drug store that is best suited to each store site's
demographics, local preferences and competition.
LEADING MARKET SHARES. The Company believes that its strong franchise and
distinctive image have enabled it to establish a number two market share in
Houston, Dallas and Austin, its principal markets. The Company's market shares
in Houston, Dallas, Austin, and Fort Worth are approximately 22%, 19%, 19% and
9%, respectively. The Company's history as a local supermarket operator and the
recent introduction of its frequent shopper program have helped the Company to
maintain its strong market position despite aggressive store opening and
remodeling programs by competitors in recent years. Management believes that
following the Recapitalization and the Financings, the Company's competitive
position will be strengthened by store remodels and new construction. In
addition, management believes that its frequent shopper program will continue to
enhance its competitive position.
GROWING MARKETS. Over the past several years, Texas has been one of the
fastest growing states in terms of population, income and employment, and
economists project growth in excess of the national average to continue in the
near future. Since 1990, the Houston, Dallas, Fort Worth and Austin markets have
experienced compound annual employment growth of 1.9%, 2.6%, 2.2% and 5.5%,
respectively, all exceeding the national average of 1.5%. In 1996, grocery sales
in Texas increased 5.2% versus 3.3% for the country as a whole, and the Houston,
Dallas/Fort Worth and Austin markets accounted for total grocery sales of
approximately $14.8 billion, or 48.9% of total grocery sales in Texas.
EXPERIENCED MANAGEMENT TEAM. The Company's executive officers have spent
the majority of their careers in the supermarket business and have an average of
15 years of experience in the food retailing industry. In addition, the Company
believes opportunities exist to enhance the existing management team with
additional experienced industry executives. Management's expertise and in-depth
knowledge of the Company's markets are further complemented by the financial
expertise of KKR.
CUSTOMER SERVICE-ORIENTED WORKFORCE. The Company emphasizes friendly,
efficient and knowledgeable customer service. All employees are trained to
actively address the needs of customers. These employees reinforce the Company's
distinctive service-oriented image and differentiate it from its competitors.
The Company is dedicated to promoting from within its organization and believes
that it possesses considerable management depth among its workforce, with store
directors having an average of over 15 years of experience with the Company.
35
<PAGE>
BUSINESS STRATEGY
ACCELERATE NEW STORE DEVELOPMENT AND REMODELING PROGRAM. The Company
believes that it will be able to capitalize on the continued growth in its
markets by accelerating its new store development and remodeling program. In
recent years, the Company has not had the financial resources to aggressively
remodel its existing store base or construct new stores. Since the beginning of
fiscal year 1995, the Company has only opened 15 stores and remodeled 10 stores
(while closing 17 stores), compared to management's estimate that its
competitors have opened approximately 110 stores and remodeled approximately 100
stores in the Company's markets over the same period. The Recapitalization and
the Financings will provide the Company with increased financial flexibility,
enabling it to undertake significant remodeling in the Houston area, new store
construction and remodeling in Dallas/Fort Worth and selected store expansion in
the Austin market. For fiscal year 1998, the Company expects to make
approximately $70.0 million of capital expenditures to open five new stores,
commence construction on seven new stores and purchase land for three new
stores, and make approximately $60.0 million of capital expenditures to renovate
or remodel 42 stores.
REDUCE OPERATING COSTS. The Company has identified a number of initiatives
designed to improve operating results by lowering operating costs. Specific
initiatives include: (i) applying the Company's successful labor scheduling
guidelines throughout all operational areas; (ii) implementing performance
measurement standards to further improve operating efficiency; (iii) enhancing
category management to improve store-level merchandising efforts and to increase
promotional buying opportunities; (iv) improving shelf pricing procedures to
decrease the frequency of price changes and inaccurate labeling; and (v)
introducing production planning in the perishables departments. The breadth of
these initiatives reflects the significant opportunities available to the
Company.
DIFFERENTIATE BASED ON HIGH QUALITY PRODUCTS AND SERVICES AT A COMPETITIVE
PRICE. Throughout its history, the Company has developed a reputation for
operating large, attractive stores with an extensive variety of specialty
departments staffed by well-trained, service-oriented employees. The Company
offers an expanded selection of high quality products at competitive prices to
create a differentiated "one-stop" shopping experience. In addition, the Company
is committed to being the "first to market" in providing solutions to its
customers' changing lifestyle needs, as is evidenced by the recent launches of
its frequent shopper program and the PEAPOD on-line grocery ordering and home
delivery program.
LEVERAGE FREQUENT SHOPPER PROGRAM. The Company believes that significant
opportunities exist to increase revenue and focus its marketing efforts by
leveraging its frequent shopper program. Data collected from customers
participating in the frequent shopper program enables the Company to track sales
trends, demographic patterns and customer preferences, and utilize that data to
allocate shelf space, target marketing activities and increase customer loyalty.
INCREASE PRIVATE LABEL SALES. Relative to national brands, private label
products provide comparable quality at lower prices to shoppers and higher gross
margins to the Company. The Company currently offers a three-tiered private
label program, including PRESIDENT'S CHOICE premium private label products, its
own REMARKABLE private label products and VALUE TIME private label products
catering to value-conscious consumers. In recent years the Company's private
label sales have been lower than the national average. The Company is currently
expanding its private label offerings across all tiers, with particular emphasis
on increasing REMARKABLE label offerings.
OPERATING INITIATIVES
LABOR SCHEDULING AND WORK METHODS. The Company is currently in the process
of introducing a labor scheduling system based upon engineered labor standards,
corporate productivity guidelines and customer service standards. Subsequent to
the implementation of such system to the front-end of its stores, the system
will be expanded storewide. As part of this program, the Company intends to
redesign certain work standards to improve labor productivity.
36
<PAGE>
COMPANY-WIDE PERFORMANCE MEASURES. The Company is currently evaluating its
existing set of financial reporting and performance measurement systems to
ensure that these systems support its business strategy and identify those
factors which lead to enhanced operating profitability. The reporting systems
will monitor each department's performance relative to identified financial
goals and report exceptions to management.
CATEGORY MANAGEMENT. The Company is in the process of implementing
store-wide category management programs as part of a coordinated merchandising
effort. The next phase of this initiative includes the integration of category
management plans with operating budgets and with company-wide promotional
efforts and the identification of enhanced performance measures. The program
will enable the Company to execute more consistent promotional programs at the
store level and increased promotional buying opportunities. The Company plans to
work more closely with vendors to coordinate joint advertising and promotional
programs and increase vendor support. As a part of this initiative, the Company
will begin to track inventory in each store with a goal of reducing the
frequency of inadequate store inventory levels.
COMPANY HISTORY
Co-founders Robert R. Onstead, R.C. Barclay, and Norman N. Frewin began
operations in Houston on July 4, 1966 with the purchase of two existing grocery
stores. The Company's stores emphasized service and personal attention with an
overriding goal to treat each customer as a member of the family. As the first
two stores prospered, the Company was able to open a third store in 1968 and a
fourth in 1970. In early 1979, the Company acquired four grocery stores, each
approximately 40,000 square feet in size and substantially larger than any of
its existing stores, to increase its store total to 14. The Company continued to
expand in the Houston area in the 1980s, operating 39 stores by 1989, many of
which were in excess of 40,000 square feet.
In August 1992, having accumulated a portfolio of 45 stores in the Houston
market, the Company acquired 100% of the stock of Cullum Companies, Inc.
("Cullum"), a food and drug retailer which operated 62 stores in Dallas and
Austin under the TOM THUMB banner (the "Cullum Acquisition"). Cullum had
operated in Dallas since 1948 and in Austin since 1972. In January 1994, the
Company acquired 12 stores in Austin (three of which were closed immediately
after the acquisition) and three stores in Houston from AppleTree Markets, Inc.
STORE DEVELOPMENT
The Company's long history of developing stores in densely populated areas
has resulted in a portfolio of large, attractive stores in prime locations which
offers the Company significant competitive advantages. The Company attempts to
optimize operating results by selecting the variation of its combination food
and drug store that is best suited to each store site's demographics, local
preferences and competition. The Company carefully monitors changes in
neighborhood demographics to determine whether a change in format is warranted
and selectively converts stores when opportunities arise.
The Company believes that the appearance of its stores is an integral
component of the customer's shopping experience. The Company's goal is to
maintain clean, well-lit stores with attractive architectural features that
enhance the image of its stores as upscale markets catering to the changing
lifestyle needs of quality conscious customers. As a result of acquisitions, new
store construction and remodelings, total square footage in the Company's stores
has increased 26% since 1992 from approximately 4,915,000 square feet to
approximately 6,185,000 square feet and average store size has increased from
approximately 46,400 square feet to approximately 51,100 square feet over the
same period. While most of its newer stores are larger and while the Company
expects the average size of its stores to grow as stores are remodeled and new
stores are opened, the Company intends to remain flexible as to the size of new,
acquired and remodeled stores.
37
<PAGE>
The following table sets forth certain information with respect to store
size.
<TABLE>
<CAPTION>
NUMBER OF STORES
AS OF JUNE 28, 1997
-----------------------
<S> <C>
STORE SIZE:
Less than 20,000 square feet................................................................. 6
Between 20,000 and 30,000 square feet........................................................ 3
Between 30,000 and 40,000 square feet........................................................ 16
Between 40,000 and 50,000 square feet........................................................ 14
Between 50,000 and 60,000 square feet........................................................ 58
Over 60,000 square feet...................................................................... 24
</TABLE>
The following table sets forth additional information concerning the
Company's stores for the indicated period:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 28, JUNE 29, JUNE 24, JUNE 25, JUNE 26,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
TOTAL STORES:
Beginning of period........................................ 120 120 121 109 45
Newly constructed........................................ 8 4 3 5 4
Acquired................................................. 2 0 0 15(2) 63(3)
Closed................................................... (9) (4) (4) (8)(2) (3)
--- --- --- --- ---
End of period.............................................. 121(1) 120 120 121 109
--- --- --- --- ---
--- --- --- --- ---
MAJOR REMODELS(4)............................................ 0 5 5 5 1
</TABLE>
- ------------------------
(1) Includes 18 stores that, as of June 28, 1997, the Company has decided to
close, replace or sell.
(2) Reflects the acquisition of 15 stores in Austin and Houston from AppleTree
Markets, Inc. and the immediate closure of three of such stores in Austin.
(3) Includes the acquisition by the Company in August 1992 of 100% of the stock
of Cullum (representing 62 TOM THUMB stores).
(4) Includes major remodels involving expenditures of at least $1.0 million per
store.
In fiscal year 1997, the Company opened three stores in Houston, six stores
in Dallas and one store in Austin, while closing nine stores. In addition, the
Company has decided to close or replace up to 14 stores and sell 4 stores as
part of a strategic review of its operations. Over the next three years, the
Company presently plans to open an average of eight to 10 new stores per year
and engage in an average of 25 major and other remodels per year, with a focus
on new store openings in Dallas and remodels in Houston. The Company's plans to
remodel existing stores and construct new stores are reviewed continually and
are subject to change. The Company has been highly selective in acquiring store
locations and attempts to take advantage of market research and its extensive
knowledge of Texas markets in evaluating opportunities. In conducting market
research for store locations the Company typically evaluates population shifts,
demographic conditions, socio-economic characteristics, zoning changes, traffic
patterns, new construction, anticipated cannibalization of the Company's
existing stores and the proximity of competitors' stores, in an effort to
determine a future store's sales potential. The Company's ability to expand and
remodel existing stores and to open new stores is subject to many factors,
including successful negotiation of new leases or amendments to existing leases,
successful site acquisition and the availability of financing on acceptable
terms, and may be limited by zoning, environmental and other governmental
regulations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
38
<PAGE>
INDUSTRY OVERVIEW
The $426.0 billion food retailing industry in the United States includes
national and regional supermarket chains, independent and specialty grocers,
traditional convenience food stores and newer "alternative format" food stores,
including warehouse club stores, deep discount food operators and supercenters.
Management believes that the food retailing industry is identified by four
trends: consolidation, shift in store formats, increased private label
penetration and increased sales of home meal replacement products.
A large portion of the U.S. supermarket industry is highly fragmented.
According to industry reports, the top 10 supermarket operators (excluding
convenience and grocery stores with annual sales of less than $2.0 million and
also excluding warehouse stores, club stores, deep food discounters and
supercenters) accounted for approximately 37% of the approximately $323.0
billion of 1996 domestic supermarket sales, while no supermarket operator
outside of the top five accounted for more than 3.5% of such sales. In addition,
approximately 150 supermarket operators had sales of $250 million or more in
1995. Recently, the food retailing industry has been experiencing consolidation
as larger supermarket chains acquire smaller independent competitors within
their markets as well as supermarket chains in different geographic markets.
According to the PROGRESSIVE GROCER ANNUAL REPORT published in April 1997,
high-volume supermarket chains accounted for 78% of 1996 supermarket sales, as
compared to only 61% in 1976.
In an effort to increase sales and margins, supermarkets are introducing new
formats and remodeling older stores more frequently. Operators have shifted
resources to building larger stores or reformatting conventional stores into
superstores or combination stores to accommodate higher margin specialty
departments, such as bakery, seafood, delicatessen, health and beauty aids,
pharmacies and video rentals. As a result of this trend, the average size of a
chain store has increased to 37,000 square feet.
The percentage of gross supermarket sales derived from private label
products has increased significantly in recent years to a range of 15% to 20%.
Private label goods enable grocery chains to provide a product with quality
comparable to a branded product at a lower cost. In addition to providing
enhanced gross margins and a value-oriented product to customers, certain food
retailers also are able to use private label products as negotiating leverage
with branded suppliers to enhance margins on branded products as well. Over a
longer term, private label products build customer loyalty by offering a product
label that the customer can only purchase at the retailer's stores.
Management believes that, in recent years, the trend toward increased
convenience has led to an increase in eating away from home and the purchase of
prepared meals for home consumption. According to the U.S. Department of
Commerce, retail sales for "eating and drinking" establishments increased by
6.2% per annum from 1986 to 1995, significantly higher than the 3.7% annual
growth experienced by "food stores" during the same period. In response to this
trend, supermarkets have expanded their frozen food selections, full-service
specialty departments such as delicatessens, and home meal replacement products,
each of which provide convenience-oriented consumers with an alternative to
restaurants and fast food establishments.
MARKET OVERVIEW
Over the past several years, Texas has been one of the fastest growing
states in terms of population, income and employment, and economists project
growth in excess of the national average to continue in the near future. Since
1990, the Houston, Dallas, Fort Worth and Austin markets have experienced
compound annual employment growth of 1.9%, 2.6%, 2.2% and 5.5%, respectively,
all exceeding the national average of 1.5%. In 1996, grocery sales in Texas
increased 5.2% versus 3.3% for the country as a whole, and the Houston,
Dallas/Fort Worth and Austin markets accounted for total grocery sales of
approximately $14.8 billion, or approximately 48.9% of total grocery sales in
Texas. Texas has experienced a structural shift away from energy-based
industries such as oil and gas, towards growth industries such as healthcare and
technology. As a result of this increased diversification, the Texas economy has
become less susceptible to energy-related economic cycles.
39
<PAGE>
HOUSTON
With a population of approximately 4.2 million, the Houston metropolitan
area is expanding at a rate slightly above national levels. In addition to the
energy industry, Houston is also home to global technology, biomedical,
aerospace and engineering firms. Annual population and job growth in the Houston
area are projected at 1.8% and 2.2%, respectively, through 2000, compared to
0.9% and 1.1% nationally through 2000, respectively. In addition, the Houston
market experienced 4.5% cumulative annual growth in retail sales during 1995 and
1996, compared to 5.1% nationally.
DALLAS/FORT WORTH
The Dallas/Fort Worth metropolitan area has a population of approximately
4.4 million and has benefited in recent years from strong oil and natural gas
markets, continued strong growth in the high technology sector and renewed
strength in the airline industry. Annual population and job growth in the
Dallas/Fort Worth area are projected at 1.8% and 2.3%, respectively, through
2000, compared to 0.9% and 1.1% nationally through 2000, respectively. In
addition, the Dallas/Fort Worth market experienced 6.9% cumulative annual growth
in retail sales during 1995 and 1996 compared to 5.1% nationally.
AUSTIN
With a population of approximately 1.0 million, the Austin metropolitan area
has experienced population growth during the past five years that is three times
the national average. This significant population growth has been driven by the
area's opportunities in the semiconductor industry and other technology-related
industries. Annual population and job growth in the Austin area are projected at
2.1% and 2.6%, respectively, through 2000, compared to 0.9% and 1.1% nationally
through 2000, respectively. In addition, the Austin market experienced 14.7%
cumulative annual growth in retail sales during 1995 and 1996 compared to 5.1%
nationally.
MERCHANDISING
The Company's merchandising strategy is designed to create a differentiated
"one-stop" shopping experience that blends concerns for value and quick service
with variety, quality and convenience. Management believes that its
merchandising strengths have fostered a loyal customer base by establishing a
distinctive reputation for providing high quality products and a variety of
specialty departments.
EXPANDED SELECTIONS OF QUALITY MEAT, SEAFOOD, PRODUCE AND OTHER
PERISHABLES. The Company's stores are well-known for their broad selection of
quality meats, seafood, produce and other perishables. The Company believes that
its reputation for carrying select cuts of beef, natural poultry and pork, fresh
seafood and local produce differentiates its stores from those of its
competitors. The Company's full-service meat departments generally incorporate
an open design which fosters interaction among butchers and customers. All meat
offerings are skillfully trimmed and appealingly displayed. A wide range of home
replacement meals, such as shish kebabs, chicken kiev and stuffed game hens, are
featured in each store's meat department and many stores' meat departments
include full-service smokehouses. Fresh fish and seafood from nearby Gulf waters
are delivered daily to each store. The Company's produce departments are
designed to portray an open market feel with carefully selected and hand stacked
produce and offerings of fresh herbs and organically grown fruits and
vegetables. An extensive variety of produce from local growers is given special
emphasis in store merchandising.
HIGH QUALITY CONVENIENCE-ORIENTED SPECIALTY DEPARTMENTS AND SERVICES. Based
on market and demographic data, management believes that supermarkets offering a
broad array of products and time-saving services are perceived by customers as
part of a solution to today's lifestyle demands. Accordingly, a principal
component of the Company's merchandising strategy is to design stores which
offer a "one-stop" shopping experience. In-store services such as bank branches,
ATMs, drycleaning services and video rental departments are strategically placed
near the front of the stores. Gourmet coffee bars, in-store bakeries and
prepared foods sections are conveniently located near seating areas. Most stores
are open 24 hours, with well-lit parking lots and on-site security personnel.
40
<PAGE>
INCREASED EMPHASIS ON PREPARED FOODS AND HOME MEAL REPLACEMENT ITEMS. Many
stores offer daily selections of pastas and dinner entrees, as well as
made-to-order pizzas, rotisserie chickens, quiches, hot and cold sandwiches and
salads. In Flagship and New Generation Stores, food is prepared in open areas to
increase shoppers' confidence in product freshness. In Flagship Stores,
selections extend to panini sandwiches made of focaccia bread baked on the
premises and a sushi bar staffed by trained sushi chefs. In many stores, baked
goods are made daily from scratch, including bagels, hot rolls, scones, brioche
and specialty breads; and each Flagship Store is staffed with a French pastry
chef. Each store contains a full-service florist shop offering flowers and
plants delivered daily by vendors, and most stores are staffed by master
florists or designers. Most stores offer an extensive selection of wines and
champagnes, including wines from well-known California and French vineyards as
well as local vineyards.
The Company's video rental departments feature over 5,000 movie titles,
rental VCRs and snack centers all contained in an appealing alcove decorated
with glossy posters and monitors playing current videos. Most stores include a
bank branch and/or ATM machines, one-hour photo processing, as well as a
full-service pharmacy. Customer service centers in each store provide a wide
array of services, including the purchase of lottery and movie tickets, check
cashing, payment of utility bills, car licenses, and hunting
and fishing licenses.
PRIVATE LABEL PROGRAM
The Company supplements its branded grocery offerings with a selection of
private label goods, including grocery, general merchandise, floral, health and
beauty products, dairy, produce and delicatessen products. In comparison to
national brands, private label goods provide comparable quality at lower prices
to customers and higher gross margins to the Company. The Company currently
offers a three-tiered private label program including PRESIDENT'S CHOICE premium
private label products, its own REMARKABLE brand private label products and
VALUE TIME private label products catering to value-conscious consumers. The
Company procures REMARKABLE and VALUE TIME products through Topco Associates,
Inc., a national food buying cooperative owned by over 45 retail, wholesale and
food service operators and offering over 6,000 private label branded goods. In
addition, Daymon Associates, a leading sales and marketing company for private
label brands, manages the Company's private label program. In recent years the
Company's private label sales have been significantly lower than the national
average; however, the Company is currently expanding its private label offerings
across all tiers, with particular emphasis on increasing REMARKABLE label
offerings.
ADVERTISING AND MARKETING
The Company advertises through television, radio, newspapers and newspaper
inserts, with an emphasis placed on its reputation for providing high quality
products and exceptional service. The Company distributes a large number of its
circulars to target markets each week. The Company regularly promotes new
products and services through in-store demonstrations and samplings, and "point
of sale" coupons. In addition, in order to enhance its name recognition and
quality-oriented image, the Company sponsors a number of local and nationally
recognized charitable organizations and professional sports franchises. The
Company also provides coupons which are printed on the reverse side of the
shopper's receipt.
The Company's frequent shopper program has become the cornerstone of its
marketing efforts since its inception in the fall of 1996. Currently, frequent
shopper card holders account for a majority of the Company's total sales and a
significant percentage of the Company's total transactions. Data generated from
frequent shopper card purchases enables the Company to track changing sales and
demographic patterns and customer preferences. The Company uses such data to
allocate advertising resources and shelf space accordingly and focus on targeted
marketing activities (i.e., direct mailings) that are tailored to the needs of
identifiable consumer segments.
41
<PAGE>
Frequent shopper card holders currently receive check-cashing privileges,
debit card capability, electronic discounts and direct mailings from the
Company. In addition, in conjunction with the Company's "Good Neighbor" program,
frequent shopper card holders can select from one of over 5,000 participating
not-for-profit organizations, and the Company will donate a fixed percentage of
the holder's frequent shopper card purchases to that organization.
PURCHASING AND DISTRIBUTION
The Company is currently undertaking an evaluation of its existing
distribution channels. The Company has traditionally purchased a portion of its
merchandise from third party suppliers. Approximately 30% of the Company's
purchases are supplied directly to the Company's stores by Fleming, one of the
nation's largest food distribution companies, pursuant to a 1993 supply
agreement which expires in June 2001. The Company has initiated a legal action
against Fleming, one of its long-time suppliers. In the action, the Company
alleges, among other things, that Fleming violated the terms of a supply
agreement signed in 1993. Under the terms of the supply agreement, the Company
was to purchase groceries and other items at Fleming's cost, plus a small
markup. Among the violations alleged by the Company are claims that Fleming
wrongfully manipulated its costing procedures, which resulted in overcharges,
and then unilaterally changed the overall pricing formula. Additionally, the
Company alleged that Fleming failed to provide supporting documentation for
purchases as required under the contract. Since 1993 when the supply agreement
was signed, the Company has purchased approximately $2.0 billion in products
from Fleming. Based on the supporting documents provided to the Company by
Fleming to date, the Company will be seeking a substantial amount of damages
from Fleming and termination of the supply agreement. Fleming has filed an
answer denying each allegation and a counterclaim alleging that the Company
failed to purchase the quantities required by the supply agreement.
An additional 30% of the Company's purchases, including beverages, tobacco
products, milk, bread and snack foods, are supplied directly to the Company's
stores by vendors, with the remaining 40% of products being self-distributed.
The Company believes it can improve its cost structure and manage working
capital more efficiently by enhancing its distribution capabilities.
The Company currently operates two distribution facilities in Houston and
one in Dallas, totaling over 600,000 square feet. The Telge Road facility in
Houston consists of 109,640 square feet of refrigerated space to store
perishable goods, 33,020 square feet of dry grocery space and 7,000 square feet
of office space, and is located on approximately 70 acres of Company-owned land,
10 of which have been developed. The Rogerdale facility in Houston consists of
155,728 square feet of dry grocery space and 13,916 square feet of office space,
and is located on approximately 29 acres of Company-owned land, approximately 20
of which have been developed. The Inwood facility located in Dallas consists of
78,854 square feet of refrigerated space, 194,020 square feet of dry grocery
space, and 21,900 square feet of office space, and is located on approximately
25 acres of Company-owned land, substantially all of which has been developed.
Each store submits orders to the distribution facilities through a
centralized processing system, and merchandise is normally received by the
stores on the next day. Merchandise is delivered from the distribution
facilities through a leased fleet of 34 tractors, 66 refrigerated trailers and
18 dry trailers. The majority of the Company's stores in Houston and Dallas are
located within a 70 mile radius of a distribution facility.
The Rogerdale facility currently is for sale. The Company intends to expand
the Telge Road facility in connection with the anticipated consummation of such
sale.
INFORMATION TECHNOLOGY SYSTEMS
The Company's information systems include IBM personal computer-based
point-of-sale hardware and software in every checkout lane of each store,
thereby facilitating the implementation of the frequent shopper program. The
Company has an electronic payment system which includes check verification,
credit
42
<PAGE>
and debit card processing, ACH payment option, video rental application, and a
check collection system. These systems are fully integrated into the IBM
point-of-sale system.
The Company has a direct store delivery system, which integrates the receipt
of goods at each store with accounting and merchandising at the Company's
corporate headquarters. This integrated system provides the Company timely
information and greater efficiency and control over product receipts,
merchandising and accounts payable functions. In addition, the Company has
electronic time and attendance and labor scheduling systems that enable store
management to better control labor costs and increase the automation level of
the payroll process.
The Company is in the final stage of converting from a mainframe data center
operation to client-server based "open systems" architecture that will be the
foundation for its future technology development. Management expects that the
expanded functionality of its information capabilities will permit the
refinement of tools it can apply to better analyze data from the frequent
shopper program.
The Company is in the process of converting from a mainframe based
accounting software system to a client server based accounting system that
enhances the accounting process and provides for greater and more timely access
to Company accounting information. The Company also uses Electronic Data
Interchange to transmit and receive documents from suppliers. The Company is
using a warehousing and merchandising system developed internally running on a
UNIX machine using Informix as its database engine.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse club
stores, deep discount drug stores and supercenters. Supermarket chains generally
compete on the basis of location, quality of products, service, price, variety
and store condition. The Company regularly monitors its competitors' prices and
adjusts its prices and marketing strategy as management deems appropriate in
light of existing conditions. The Company faces increased competitive pressure
in all of its markets from existing competitors which have opened, and appear to
have plans to continue to open, a significant number of new stores in the
Company's markets. Some of the Company's competitors have greater financial
resources than the Company and could use these resources to take measures which
could adversely affect the Company's competitive position.
The Company's principal competitors in Houston are The Kroger Co.
("Kroger"), Fiesta Mart Inc. and H.E. Butt Grocery Company ("H.E.B."), with
market shares of approximately 26%, 11% and 8%, respectively. The Company's
principal competitors in Dallas are Albertsons Inc. ("Albertsons"), Minyard Food
Stores ("Minyard") and Kroger, with market shares of approximately 21%, 15% and
15%, respectively. The Company's principal competitors in Fort Worth are
Albertsons, Kroger, Winn-Dixie Stores and Minyard, with market shares of
approximately 22%, 19%, 17% and 10%, respectively. The Company's principal
competitors in the Austin metropolitan area are H.E.B. and Albertsons, with
market shares of approximately 48% and 17%, respectively.
EMPLOYEES AND LABOR RELATIONS
The Company is one of the leading private employers in Texas. As of June 28,
1997, the Company employed 17,067 persons, of whom approximately 43% were
full-time and approximately 57% were part-time employees. Of this number, 15,952
were employed in supermarkets, 471 were employed in the
43
<PAGE>
warehouse operations and 644 were employed in the Company's business offices.
The Company currently employs an average of 130 employees in each store.
<TABLE>
<S> <C>
EMPLOYEE TYPE: TOTAL
---------
Salaried............................................................................ 2,059
Hourly:
Full-time......................................................................... 5,229
Part-time......................................................................... 9,779
---------
Total............................................................................... 17,067
---------
---------
</TABLE>
The Company has an incentive compensation plan covering its key management
staff. Incentive compensation for store operations managers is based upon the
profitability of the operations within the scope of their management
responsibility.
The Company's employees are not members of unions or parties to collective
bargaining agreements.
PROPERTIES
The Company operates a total of 121 supermarkets, with 53 located in the
Houston metropolitan area, 52 in the Dallas/Fort Worth metropolitan area and 16
in the Austin metropolitan area. Four of the Company's stores are owned and 117
are leased (four of which are held through interests in joint ventures).
The Company's real estate holdings consist of 139 leasehold (the "Leased
Properties") and 29 owned (the "Fee Properties") properties. The Company also
owns interests in seven properties through joint ventures (the "Joint Venture
Properties"). The Company's ownership interests in the Joint Venture Properties
range from 50% to 83.3%. The book value of the Company's investments in the
seven Joint Venture Properties is $0.8 million. As of June 28, 1997, the Joint
Venture Properties had $23.4 million of indebtedness, all of which is
nonrecourse to the Company. The Company shares in the profits and losses on the
Joint Venture Properties on a pro rata basis with the other joint venture
owners. See Footnote 4 to the Consolidated Financial Statements.
LEASED PROPERTIES
The Company leases 139 properties under standard commercial leases which
generally obligate the Company to pay its proportionate share of real estate
taxes, common area maintenance charges and insurance costs. In addition, such
leases generally provide for percentage of sales rent when sales from the store
exceed a certain dollar amount. Generally these leases have 20-year terms, with
four five-year renewal options. The Company owns a majority of the fixtures and
equipment in each leased location and has made various leasehold improvements to
the store sites. Company stores are located on 117 of the 139 Leased Properties
and, of the remaining 22 leases, 16 have been assigned or subleased to
unaffiliated third parties, generally in connection with store closings.
FEE PROPERTIES
The Company owns the 29 Fee Properties through Randall's Properties, Inc., a
wholly-owned subsidiary. The Fee Properties consist of the Company's
headquarters in Houston (comprised of two sites), the three Warehouses, two
shopping centers which are not occupied by Company stores, one shopping center
anchored by a Company store, one store leased to an unaffiliated party, three
free-standing supermarkets, 16 undeveloped properties and one property currently
under construction. The Company intends to enter into a sale leaseback
arrangement with third parties in connection with this property upon completion
of construction.
44
<PAGE>
JOINT VENTURE PROPERTIES
The seven Joint Venture Properties are comprised of four shopping centers
which contain Company stores and three parcels of undeveloped land. The joint
ventures relating to the Joint Venture Properties were originally formed in
order to acquire land, develop shopping centers and lease the land. The Company
does not intend to enter into any additional joint venture or similar
arrangements in the future.
TRADENAMES AND TRADEMARKS
The Company uses a variety of tradenames and trademarks. Except for
RANDALLS, TOM THUMB and REMARKABLE, the Company does not believe any of such
tradenames or trademarks are material to its business. The Company has granted
the right to certain retail shopping centers to use the RANDALLS, TOM THUMB and
SIMON DAVID tradenames as part of the tradenames of such shopping centers, so
long as the Company's stores are operating in such shopping centers.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of hazardous materials. Under various
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property and may be held liable
to a governmental entity or to third parties for damages and for investigation
and clean-up costs incurred by such parties in connection with the
contamination. The Company believes that it currently conducts its operations,
and in the past has operated its business, in substantial compliance with
applicable environmental laws and regulations. There can be no assurance that
(i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. From
time to time, operations of the Company have resulted or may result in
noncompliance with or liability for cleanup pursuant to environmental laws and
regulations. The Company has determined that underground storage tanks at truck
fueling sites in Texas and Nebraska may have leaked fuel and other materials and
resulted in soil contamination. At the Abilene, Texas site, based on soil and
groundwater remediation efforts to date, the Company estimates a range of future
expenditures between $300,000 and $700,000, substantially all of which has been
reserved. With respect to a second site, located in Dallas, Texas, the Company
has paid remediation costs of approximately $300,000, and state regulatory
authorities have advised the Company that no further corrective action is
necessary. The Company expects to submit its final closure report to the state
shortly, which will be the last submittal associated with that location. One
other site, located in Garland, Texas, was sold to a party who accepted
responsibility for corrective action pertaining to leaking underground storage
tank site remediation. Under applicable environmental laws, the Company may
remain liable for remediation of the Garland site, which the Company estimates
may cost up to approximately $100,000. Remediation of the Nebraska site had been
initiated by the NDEQ using funds from the Nebraska Fund dedicated to
remediation of leaking underground storage tanks. Due to shortfalls in the
Nebraska Fund, the NDEQ, which has not classified the Company's site as a high
priority, suspended the remediation efforts. The Company anticipates that future
remediation efforts at such site, if any, would be paid for by the Nebraska
Fund. The Company believes that the remediation efforts described above, which
represent the Company's material environmental matters, will not have a material
adverse effect on its financial condition, results of operations and cash flow.
The Company has not incurred material capital expenditures for environmental
controls during the previous three years, nor does the Company anticipate
incurring any such material expenditures to comply with environmental
regulations during the current fiscal or the succeeding fiscal year.
45
<PAGE>
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental agencies,
including, but not limited to, the U.S. Food and Drug Administration, the U.S.
Department of Agriculture, and other federal, state and local agencies. The
Company's stores are also subject to local laws regarding the sale of alcoholic
beverages.
LITIGATION
MSP LITIGATION
Following the Cullum Acquisition, the Company terminated the MSP and in
respect of such terminations paid participants the greater of (i) the amount of
such participant's deferral and (ii) the net present value of an accrued
benefit, based upon the participant's salary, age and years of service. Thirty-
five of the former MSP participants have instituted a claim against the Company
on behalf of all persons who were participants in the MSP on its date of
termination (which is alleged by plaintiffs to be approximately 250 persons).
The plaintiffs have asked the court to recognize their action as a class action,
to recover additional amounts under the MSP, for a declaration of rights under
an employee pension benefit plan and for breach of fiduciary duty. The
plaintiffs assert that the yearly plan agreement executed by each participant in
the MSP was a contract for a specified retirement and death benefit set forth in
such plan agreements and that such benefits were vested and nonforfeitable.
Summary judgment motions have been filed by both parties with respect to various
matters, and judicial rulings on such motions are currently pending. The trial
is expected to commence in calendar year 1998. Although there can be no
assurance that the Company will prevail in respect of this claim, the Company
intends to vigorously contest the MSP claim. A judgment against the Company on
the MSP litigation could have a material adverse effect on the Company's
financial position, results of operations and cash flow.
ESOP LITIGATION
On November 28, 1995, two individuals filed a lawsuit on behalf of the ESOP
and certain participants and former participants in and beneficiaries of the
ESOP. The lawsuit alleged that the Company, certain employees thereof and
certain entities which engaged in a variety of services relating to the ESOP had
violated various federal and state laws in connection with the operation of the
ESOP, including transactions by the ESOP involving the Common Stock. The Company
and the other defendants denied all of the allegations. The plaintiffs'
representatives and the Company and the other defendants subsequently agreed to
settle the litigation. Although the defendants continue to deny all charges of
wrongdoing or liability against them, they have concluded that it was desirable
to settle the litigation in order to avoid further expense, inconvenience and
distraction, noting the uncertainty and risks inherent in litigation.
The Company and the other defendants elected to settle the suit pursuant to
a settlement agreement (the "Settlement Agreement") for $16.5 million, of which
the Company was liable for $11.3 million plus $0.2 million in expenses. Net of
insurance proceeds, the Company has paid $10.5 million in the aggregate in
connection with the settlement. The Company increased its existing litigation
reserves by $9.5 million during fiscal year 1997 to fully reserve for such
matters and concurrently with the Closing, the Company paid $11.3 million into a
trust fund pursuant to the Settlement Agreement.
In addition, the settlement provides for certain changes in the operation of
the ESOP, including the addition of a 401(k) feature offering a variety of
professionally managed mutual fund investments and the cessation of additional
investments by the ESOP in the Common Stock. Under the Settlement Agreement, the
Company and the other defendants were released from further liability relating
to the litigation by all the members of the plaintiffs' class.
EEOC LITIGATION
On June 5, 1997, the U.S. District Court for the Southern District of Texas
granted a joint motion by the Company and the Equal Employment Opportunity
Commission (the "EEOC") for entry of a consent decree (the "Consent Decree")
settling a charge by the EEOC Commissioner filed in 1989 that the
46
<PAGE>
Company violated Title VII of the Civil Rights Act of 1964, as amended. The
Consent Decree provides that between January 1, 1988 and December 31, 1992 the
Company violated Title VII by (i) failing to hire African American, Hispanic and
female applicants for entry-level jobs, (ii) segregating female and Hispanic
employees, (iii) failing to select African Americans and women for the Grocery
Management Training Program and (iv) failing to maintain required records. Under
the terms of the Consent Decree, the Company is required to pay $2.3 million,
representing back pay and interest, into a fund to be divided among entry-level
claimants, and $0.2 million into a fund to be divided among grocery department
management trainee claimants. The Company will bear the costs of administering
the settlement, which the Company estimates to be approximately $0.8 million. As
of June 28, 1997, the Company has reserved $3.3 million for expected
expenditures in connection with the EEOC settlement. Qualified promotion
claimants will be placed on a preferential promotion list from which future
promotions will be made by the Company. The Consent Decree includes certain
requirements to properly notify potential claimants and certain enhanced
reporting requirements. The Consent Decree will be effective for a two-year
period, except that the obligations to distribute back pay, offer employment,
retain information and make reports will extend beyond the two-year term.
During the course of the EEOC investigation evidence was uncovered that the
Company may not have hired certain persons for age and other reasons. The
Company has agreed to settle these charges for an immaterial amount of money.
FLEMING DISPUTE
On July 30, 1997, the Company initiated an arbitration proceeding before the
American Arbitration Association against Fleming Companies, Inc. ("Fleming"),
one of its long-time suppliers. In the action, the Company alleges that Fleming
violated the terms of a supply agreement signed in 1993, commited fraud by
reason of certain statements and representations that Fleming should have known
were untrue and violated the Racketeering Influence and Corrupt Organizations
Act, as amended. Under the terms of the supply agreement, the Company was to
purchase groceries and other items at Fleming's cost, plus a small markup. Among
the violations alleged by the Company are claims that Fleming wrongfully
manipulated its costing procedures, which resulted in overcharges, and then
unilaterally changed the overall pricing formula. Additionally, the Company
alleged that Fleming failed to provide supporting documentation for purchases as
required under the contract. Since 1993 when the supply agreement was signed,
the Company has purchased approximately $2.0 billion in products from Fleming.
Based on the supporting documents provided to the Company by Fleming to date,
the Company will be seeking a substantial amount of damages from Fleming and
termination of the supply agreement. The Company is currently in the process of
analyzing its transactions with Fleming to quantify its request for damages, but
a quantification is not expected until later in fiscal year 1998. Fleming has
filed an answer denying each allegation and a counterclaim alleging that the
Company failed to purchase the quantities required by the supply agreement.
Fleming has asserted a further counterclaim that the Company has engaged in the
self-supply of certain products in violation of the supply agreement. Fleming
asserts that such alleged breaches resulted in excess of $0.7 million in damages
to Fleming. In the event the Company were to prevail, an award of damages could
be material and, if the supply agreement were terminated, the Company believes
it would be able to decrease its costs of supply below historical levels. In the
event the Company were to not succeed in the arbitration and Fleming were to
prevail on its counterclaim, the Company does not believe that such result would
have a material adverse effect on the Company.
Other than the foregoing matters, the Company believes it is not a party to
any pending legal proceedings, including ordinary litigation incidental to the
conduct of its business and the ownership of its property, the adverse
determination of which would have a material adverse effect on the Company, its
operations or its financial condition.
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions with the Company of
directors and executive officers of the Company, together with certain other key
personnel. The Board of Directors will be subject to change from time to time.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert R. Onstead.................................... 66 Chairman of the Board
R. Randall Onstead................................... 41 President, Chief Executive Officer and Director
Douglas G. Beckstett................................. 45 Senior Vice President, Human Resources
Michael M. Calbert................................... 35 Senior Vice President, Corporate Planning and
Development
Curtis D. McClellan.................................. 30 Vice President, Corporate Controller
Terry P. Poyner...................................... 45 Senior Vice President, Merchandising/Logistics
D. Mark Prestidge.................................... 38 President, Dallas Division
J. Russell Robinson.................................. 55 Senior Vice President, Chief Information Officer
Joe R. Rollins....................................... 41 Senior Vice President, Real Estate and Assistant
Secretary
Lee E. Straus........................................ 48 Senior Vice President, Finance, Secretary and
Treasurer
John V. Sullivan..................................... 40 Senior Vice President, Houston Operations, Randall's
Food & Drugs, Inc.
Henry R. Kravis...................................... 53 Director
George R. Roberts.................................... 53 Director
Paul E. Raether...................................... 50 Director
James H. Greene, Jr.................................. 47 Director
Nils P. Brous........................................ 32 Director
</TABLE>
ROBERT R. ONSTEAD is a co-founder of the Company and has been its Chairman
for all 31 years of its existence. Mr. Onstead attended the University of North
Texas.
R. RANDALL ONSTEAD has been President and Chief Executive Officer of the
Company since April 1996, a Director of the Company for 11 years and has been
with the Company for 19 years. From 1986 to April 1996, Mr. Onstead served as
President and Chief Operating Officer. Prior to 1986, Mr. Onstead was Assistant
Grocery Buyer for five years after serving in various management positions since
1978. He has a B.S. degree in Marketing from Texas Tech University and has
attended Harvard Business School's Management Development Program.
DOUGLAS G. BECKSTETT joined the Company as Senior Vice President of Human
Resources in June 1997. He had 20 years of Human Resources experience prior to
joining the Company, most recently serving as vice president of Human Resources
for APS Inc. He received his bachelor's degree in management science with a
concentration in organizational theory in 1974 from Duke University and his
M.B.A., with honors, in organizational behavior in 1977 from Boston University.
MICHAEL M. CALBERT joined the Company in September 1994 as Senior Vice
President, Corporate Controller and was promoted to Senior Vice President,
Corporate Planning and Development in 1996. From 1984 to 1994, he served as a
Manager in the audit and consulting groups of Arthur Andersen LLP. Mr. Calbert
is responsible for the coordination and implementation of the Company's overall
strategic plan. Mr. Calbert is a certified public accountant and received a
B.B.A. degree from Stephen F. Austin State University.
48
<PAGE>
CURTIS D. MCCLELLAN was named Vice President and Corporate Controller of the
Company on August 12, 1997. Mr. McClellan most recently served as Controller in
the Dallas Division. Other positions he has held include director of operational
accounting, chief accounting manager, and accounting manager. He joined the
Company in 1991 after working for Price Waterhouse L.L.P. in the Audit
Department for two years. He received his bachelor's degree in business
administration with an emphasis in accounting from Abilene Christian University.
He is a certified public accountant.
TERRY P. POYNER joined the Company as a Store Director in 1981 and currently
is Senior Vice President, Merchandising/Logistics. Mr. Poyner directs the
Company's merchandising, marketing, distribution and category management
strategies and programs. Mr. Poyner has a B.B.A. degree in Finance and a M.B.A.
from the University of Houston.
D. MARK PRESTIDGE was appointed President, Tom Thumb Stores Division in
March 1996. From April 1994 to 1996, Mr. Prestidge served as Division Vice
President, Tom Thumb Stores Division after serving for two years as a Vice
President/District Manager of the Division. From 1980 to 1992, he served in
various store management positions at the Company. Mr. Prestidge joined the
Company in 1979 and oversees the management of the Tom Thumb stores division's
retail stores, merchandising, procurement, and distribution operations.
J. RUSSELL ROBINSON joined the Company as Senior Vice President, Chief
Information Officer in June 1997. Prior to joining the Company, he served as
Vice President, Information Services for Ralph's Grocery Company where he worked
for 12 years. Mr. Robinson has a B.A. degree in Business Administration from
California State University at Long Beach and an M.B.A. degree from the
University of Southern California.
JOE R. ROLLINS was promoted to Senior Vice President, Real Estate in August
1996, after serving 12 years as Vice President, Real Estate. From 1978 to 1984,
he served as Real Estate Manager for Kroger in Houston. Mr. Rollins is
responsible for new store site evaluation and acquisition and leasing
arrangements for stores, warehouses and other facilities. In addition, he
negotiates the purchase and sale of real property. Mr. Rollins has a B.B.A.
degree from Texas Tech University.
LEE E. STRAUS joined the Company in August 1994 as Senior Vice
President-Finance, Secretary and Treasurer after more than 21 years in various
positions at Texas Commerce Bancshares. From 1989 to 1994, Mr. Straus served as
President of Texas Commerce Mortgage Company, and prior to that was Executive
Vice President, Chief Administrative Officer, of Texas Commerce Bancshares. He
has a M.B.A. from Stanford University.
JOHN W. SULLIVAN was named Senior Vice President, Houston Operations for
Randall's Food & Drugs, Inc. in August 1997. With seven years of prior
supermarket experience, he joined the Company in 1982 as a Manager Trainee and
worked his way up from Grocery Director to District Manager in Austin. From
August 1993 to August 1997, he served as Division Vice President in Austin and
in Houston. Mr. Sullivan attended St. Edward's University in Austin, Texas.
HENRY R. KRAVIS is a Founding Partner of KKR and a managing member of the
Executive Committee of KKR & Co. LLC, the limited liability company which serves
as the general partner of KKR. He is also a director of Amphenol Corporation,
AutoZone, Inc., Borden, Inc., Bruno's, Inc., Evenflo & Spalding Holdings
Corporation, Flagstar Companies Inc., Flagstar Corporation, The Gillette
Company, IDEX Corporation, K-III Communications Corporation, KinderCare Learning
Centers, Inc., KSL Recreation Group, Inc., Merit Behavioral Care Corporation,
Newsquest Capital plc, Owens-Illinois Group, Inc., Owens-Illinois, Inc., Safeway
Inc., Sotheby's Holdings Inc., Union Texas Petroleum Holdings, Inc., and World
Color Press, Inc.
GEORGE R. ROBERTS is a Founding Partner of KKR and a managing member of the
Executive Committee of KKR & Co. LLC, the limited liability company which serves
as the general partner of KKR. He is also a director of Amphenol Corporation,
AutoZone, Inc., Borden, Inc., Bruno's, Inc., Evenflo & Spalding
49
<PAGE>
Holdings Corporation, Flagstar Companies Inc., Flagstar Corporation, IDEX
Corporation, K-III Communications Corporation, KinderCare Learning Centers,
Inc., KSL Recreation Group, Inc., Merit Behavioral Care Corporation, Newsquest
Capital plc, Owens-Illinois Group, Inc., Owens-Illinois, Inc., Safeway Inc.,
Union Texas Petroleum Holdings, Inc., and World Color Press, Inc.
PAUL E. RAETHER is a member of KKR & Co. LLC, the limited liability company
which serves as the general partner of KKR. Prior thereto, he was an executive
thereof. He is also a director of Bruno's, Inc., Flagstar Companies, Inc.,
Flagstar Corporation, IDEX Corporation and KSL Recreation Group, Inc.
JAMES H. GREENE, JR. is a member of KKR & Co. LLC, the limited liability
company which serves as the general partner of KKR. Prior thereto, he was an
executive thereof. He is also a director of Bruno's, Inc., Owens-Illinois, Inc.,
Owens-Illinois Group, Inc., Safeway Inc. and Union Texas Petroleum Holdings,
Inc.
NILS P. BROUS has been an executive of KKR since 1992. Prior thereto, he was
an associate at Goldman, Sachs & Co. Mr. Brous is also a director of Bruno's,
Inc., Canadian General Insurance Group Limited and KinderCare Learning Centers,
Inc.
Messrs. Kravis and Roberts are first cousins. Robert R. Onstead and R.
Randall Onstead are father and son.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses incurred
in attending all Board and committee meetings. It is anticipated that each
director who is not an employee of the Company will receive an aggregate annual
fee of $30,000. Directors who are also employees of the Company will receive no
remuneration for serving as directors.
EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for fiscal year 1997 for (i) the Chief Executive Officer of the
Company during such fiscal year, (ii) the Chairman of the Board of the Company
during such fiscal year and (iii) each of the five other most highly compensated
executive officers of the Company, determined as of June 28, 1997 (collectively,
the "Named Executive Officers").
50
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- -------------
FISCAL OTHER ANNUAL RESTRICTED ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) STOCK AWARDS COMPENSATION
- ------------------------------------------- --------- ---------- --------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $
Robert R. Onstead.......................... 1997 500,096 0 35,385 -- 255,639(2)
Chairman of the Board
R. Randall Onstead......................... 1997 375,192 185,589 9,807 103,480(3) 169,064(2)
President and Chief Executive Officer
Ron W. Barclay............................. 1997 200,192 92,125 16,812 60,465(3) --
Executive Vice President,
Chief Administrative Officer
& Assistant Secretary (4)
Michael M. Calbert......................... 1997 175,000 133,000 11,289 58,382(3) --
Senior Vice President,
Corporate Planning and
Development
Thomas K. Arledge.......................... 1997 175,192 89,000 19,762 58,382(3) --
Senior Vice President,
Retail Operations (5)
Terry P. Poyner............................ 1997 171,415 75,875 8,353 49,627(3) --
Senior Vice President,
Merchandising/Logistics
Lee E. Straus.............................. 1997 153,846 71,731 3,500 46,708(3) --
Senior Vice President,
Finance, Secretary and
Treasurer
</TABLE>
- ------------------------
(1) The amounts shown in this column represent annual payments for club
allowance, car allowance and/ or reimbursement of medical expenses.
(2) Includes income recognized upon the purchase of a whole life insurance
policy for the benefit of the individual.
(3) Includes income recognized upon the vesting of restricted Common Stock as of
the Closing. Pursuant to his Employment Agreement, Mr. Onstead has been
granted options to purchase 371,594 shares of Common Stock at a price of
$12.11 per share, with 50% of such shares to vest 20% per year over five
years and the remaining 50% to vest based on the attainment of certain
earnings targets by the Company.
(4) Mr. Barclay retired from the Company effective as of August 16, 1997.
(5) Mr. Arledge terminated his employment with the Company effective as of
August 14, 1997.
STOCK OPTION AND RESTRICTED STOCK PLAN
The Company Stock Option and Restricted Stock Plan (the "Stock Plan")
provides for participation by key executives who are selected by the Company's
Executive Committee. There are 1.5 million shares available for awards under the
Stock Plan. To date, the following options have been granted: options to
purchase 35,928 shares at $9.65 per share; options to purchase 25,209 shares at
$11.90 per share; options to purchase 20,000 shares at $10.75 per share; options
to purchase 20,001 shares at $15.00 per share; and options to purchase 495,810
shares at $18.15 per share. As of June 28, 1997 approximately 76,295 shares
subject to options were exercisable.
51
<PAGE>
OPTION GRANTS
On December 30, 1994, the Company granted options to purchase $1,300,000 of
Common Stock to each of Messrs. Calbert, Arledge and Straus (the "1994 Option
Grant"). The options granted to Messrs. Calbert and Arledge consisted of five
tranches of formula grants to be made on the last business day of five
consecutive calendar years commencing December 30, 1994. Mr. Arledge's options
were cancelled in connection with his resignation from the Company effective as
of August 14, 1997. With respect to vested options, he received aggregate
consideration of $27,255 (the difference between the respective exercise prices
of such options and $12.11 per share). Mr. Arledge's unvested options were
cancelled without any payment. The options granted to Mr. Straus consisted of
three tranches of formula grants to be made on the last business day of three
consecutive calendar years commencing December 30, 1994.
The number of options in each tranche of formula grants is determined by
dividing $100,000 by the value of a share of Common Stock at successive calendar
year ends. The exercise prices which have been fixed as of the present time are
$9.65, $11.90 and $15.00 for each of Messrs. Calbert and Straus. The exercise
prices of the two remaining tranches for Mr. Calbert will be determined on the
last business day of each of calendar years 1997 and 1998.
The following Option Grants Table sets forth, as to the Named Executive
Officers, certain information relating to stock options granted during fiscal
year 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME SARS GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------------- ----------------- ----------------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Onstead............... 0 0 -- -- -- --
R. Randall Onstead.............. 0 0 -- -- -- --
Ron W. Barclay(1)............... 0 0 -- -- -- --
Michael M. Calbert(2)........... 6,667 33 15.00 12/30/2004 30,935(3) 73,070(3)
Thomas K. Arledge(4)............ -- -- -- -- -- --
Terry P. Poyner................. 0 0 -- -- -- --
Lee E. Straus(2)................ 6,667 33 15.00 12/30/2004 30,935(3) 73,070(3)
</TABLE>
- ------------------------
(1) Mr. Barclay retired from the Company effective as of August 16, 1997.
(2) Represents the number of options granted on December 29, 1995 to each of
Messrs. Calbert, Arledge and Straus pursuant to the 1994 Option Grant.
(3) The value of the Common Stock was $10.50 based upon an appraisal of the
Common Stock as of June 28, 1997. Based upon the exercise prices, the
amounts shown in these columns are the potential realizable value of options
granted at assumed rates of stock price appreciation (5% and 10%, as set by
the executive compensation disclosure provisions of the proxy rules)
compounded annually over the option term and have not been discounted to
reflect the present value of such amounts. The assumed rates of stock price
appreciation are not intended to forecast the future appreciation of the
Common Stock.
(4) Mr. Arledge's options were cancelled in connection with his resignation from
the Company effective as of August 14, 1997. With respect to vested options,
he received aggregate consideration of $27,255 (the difference between the
respective exercise prices of such options and $12.11 per share). Mr.
Arledge's unvested options were cancelled without any payment.
52
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND OPTION VALUES AS OF JUNE
28, 1997
The following table sets forth certain information concerning the number of
stock options held by the Named Executive Officers as of June 28, 1997, and the
value of in-the-money options outstanding as of such date.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE- MONEY
OPTIONS AS OF OPTIONS AS
NUMBER OF SHARES JUNE 28, 1997 OF JUNE 28, 1997
ACQUIRED ON (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE) UNEXERCISABLE)
- ------------------------------------------ --------------------- ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Robert R. Onstead......................... 0 $ 0 0 $ 0
R. Randall Onstead........................ 0 0 0 0
Ron W. Barclay(1)......................... 0 0 0 0
Michael M. Calbert(2)(3).................. 0 0 18,765/8,281 8,808/1,372
Thomas K. Arledge(4)...................... -- -- -- --
Terry P. Poyner........................... 0 0 0 0
Lee E. Straus(2).......................... 0 0 18,765/8,281 8,808/1,372
</TABLE>
- ------------------------
(1) Mr. Barclay retired from the Company effective as of August 16, 1997.
(2) The value of the Common Stock was $10.50 based upon an appraisal of the
Common Stock as of June 28, 1997.
(3) The number of unexercisable options does not include two tranches totaling
$200,000 of Common Stock granted to Mr. Calbert whose exercises price will
be fixed on December 31, 1997 and December 31, 1998, respectively. See
"--Option Grants."
(4) Mr. Arledge's options were cancelled in connection with his resignation from
the Company effective as of August 14, 1997. With respect to vested options,
he received aggregate consideration of $27,255 (the difference between the
respective exercise prices of such options and $12.11 per share). Mr.
Arledge's unvested options were cancelled without any payment.
In fiscal year 1997, the Company issued certain employees 139,382 shares of
restricted Common Stock, of which 5,000 have been forfeited. In addition, these
employees were granted options to purchase 523,355 shares of Common Stock at an
exercise price of $18.15 per share, of which 27,545 have been forfeited. These
options become exercisable on September 30, 2000 and expire on September 30,
2006.
1997 STOCK PURCHASE AND OPTION PLAN
The Company has adopted the 1997 Stock Purchase and Option Plan for Key
Employees of Randall's Food Markets, Inc. and Subsidiaries (the "1997 Plan").
Grants made pursuant to the Stock Plan will become subject to, and be
exercisable only in accordance with, the provisions of the 1997 Plan.
The 1997 Plan provides for the issuance of shares of authorized but unissued
or reacquired shares of Common Stock, subject to adjustment to reflect certain
events such as stock dividends, stock splits, recapitalizations, mergers or
reorganizations of or by the Company. The 1997 Plan is intended to assist the
Company in attracting and retaining employees of outstanding ability and to
promote the identification of their interests with those of the stockholders of
the Company. The 1997 Plan permits the issuance of Common Stock (the "1997 Plan
Purchase Stock") and the grant of Non-Qualified Stock Options and Incentive
Stock Options (the "1997 Plan Options") to purchase shares of Common Stock and
other stock-based awards (the issuance of 1997 Plan Purchase Stock and the grant
of 1997 Plan Options and other stock-based awards pursuant to the 1997 Plan
being a "1997 Plan Grant"). Unless sooner terminated by the Company's Board of
Directors, the 1997 Plan will expire ten years after its approval by the
Company's
53
<PAGE>
stockholders. Such termination will not affect the validity of any 1997 Plan
Grant outstanding on the date of the termination.
The Compensation Committee of the Board of Directors will administer the
1997 Plan, including, without limitation, the determination of the employees to
whom 1997 Plan Grants will be made, the number of shares of Common Stock subject
to each 1997 Plan Grant, and the various terms of 1997 Plan Grants. The
Compensation Committee of the Board of Directors may from time to time amend the
terms of any 1997 Plan Grant, but, except for adjustments made upon a change in
the Common Stock by reason of a stock split, spin-off, stock dividend, stock
combination or reclassification, recapitalization, reorganization,
consolidation, change of control, or similar event, such action shall not
adversely affect the rights of any participant under the 1997 Plan with respect
to the 1997 Plan Purchase Stock and the 1997 Plan Options without such
participant's consent. The Board of Directors will retain the right to amend,
suspend or terminate the 1997 Plan.
BONUS PLANS
Prior to the Recapitalization, the Company maintained a bonus plan covering
different executive populations at and above the district vice president level.
Bonus payments under these plans were part cash and part stock and were keyed to
relevant performance factors within each group. The maximum bonuses ranged from
40% of annual base salary for certain vice presidents to 100% of annual base
salary for the seven most senior executives. Performance criteria are a
combination of corporate performance, individual and district or division goals,
as appropriate. The bonus plans are only summarily described and are not set
forth in any formal documents. The Company has adopted a new bonus plan for
fiscal year 1998 which completely replaces the old bonus plan. Under the new
plan, separate bonus programs have been established for (i) officers,
administrative department directors and key managers, (ii) store directors and
department managers, (iii) pharmacists, (iv) merchandisers; (v) in-store service
personnel and (vi) pricing coordinators. The bonus payments will consist solely
of cash payments and will be keyed to different performance measures for each
eligible employee group.
RETIREMENT PLANS
The Company maintains two qualified retirement plans. One, the Company's
hourly employees' retirement plan, is a defined benefit pension plan. The other
plan is the ESOP, which currently holds 2,275,622 shares of Common Stock. The
ESOP provides for pass through voting with respect to a potential change in
control. The Company also maintains the nonqualified Key Employee Stock Purchase
Plan (the "KeySOP") which provides benefits to key employees and highly
compensated employees whose benefits under the ESOP are limited due to Internal
Revenue Code requirements. As of June 28, 1997, this plan held 42,601 shares of
Common Stock, and the ESOP and KeySOP held an aggregate of 2,318,223 shares of
Common Stock, or approximately 7.7% of the outstanding shares of Common Stock as
of such date.
No additional shares of Common Stock will be purchased by the ESOP. Although
it will no longer acquire shares of Common Stock, the Company has combined the
ESOP with a 401(k) plan option with diversified investment alternatives. The
Company recently settled a class action lawsuit brought on behalf of the ESOP
and made a payment of $11.3 million in connection with such settlement. See
"Business-- Litigation." In addition, no additional shares of Common Stock will
be purchased by the KeySOP.
SAVINGS AND INVESTMENT PLAN
The Board of Directors of the Company adopted the Savings and Investment
Plan (the "Savings Plan") effective January 1, 1990. All full-time employees of
the Company and its subsidiaries are eligible to participate in the Savings Plan
upon completion of one year of service and the attainment of the age of 18.
Participants may contribute, in increments of 1%, up to 10% (6% before July 1,
1994) of their compensation to the Savings Plan. In accordance with the
provisions of the Savings Plan, the Board of Directors has
54
<PAGE>
elected, since April 1, 1991, not to match employee contributions. Pursuant to
the Subscription Agreement, subject to certain exceptions, the Company will
continue to maintain the Savings Plan and other benefit plans of the Company, or
substitute plans that are no less favorable in the aggregate to the employees of
the Company than such existing plans, until December 31, 1997.
EMPLOYEE WELFARE BENEFITS AND RETIREE INSURANCE BENEFITS
The Company provides welfare and other benefits only for its full-time
employees. In addition to health and medical insurance, the Company also
provides other standard benefits such as paid vacation and holidays, life
insurance, sick pay and long-term disability coverage for eligible employees.
The Company is self-insured with respect to health benefits for its employees.
The long-term disability coverage and life insurance for eligible employees is
fully insured. The Company has a stop loss policy in effect with respect to its
self-insured medical plan and is reimbursed by the stop loss carrier for all
claims that exceed the stop loss level, which is $200,000 for calendar 1997.
Reimbursement for stop loss claims is handled by the third party administrator
who pays all medical claims. In the event charges for any eligible employee
exceeds $200,000 in one plan year, the third party administrator pays the claim
for the plan and then submits the claim to the carrier for reimbursement. Total
medical claims paid by the Company in calendar 1996 were $20.7 million. Total
claims reimbursed in calendar year 1996 were $0.4 million.
The Company does not generally provide retiree medical or retiree life
insurance benefits. However, the Company does have individual arrangements which
provide for health benefits for life with respect to four surviving family
members of the founders. These persons are Robert R. Onstead, Kay Onstead, Mabel
Frewin and Deloris Barclay.
EMPLOYMENT CONTRACTS
Effective April 1, 1997 (the "Effective Date"), the Company entered into
employment agreements with Robert R. Onstead, R. Randall Onstead and Ron W.
Barclay (the "Employment Agreements") which became effective upon consummation
of the Equity Investment and are subject to the terms and conditions described
below.
ROBERT R. ONSTEAD. The Employment Agreement with Robert R. Onstead provides
that Mr. Onstead will continue to serve as Chairman of the Board through July 1,
1998 (the "Initial Period"). From July 2, 1998, Mr. Onstead shall become
Chairman Emeritus for life and serve as a consultant until such time as 10% of
the Common Stock (or the common stock of a successor to the Company) is tradable
on a national stock exchange (the "Consulting Period"). In addition, Mr. Onstead
will continue to be nominated as a director (and the Company shall use its best
efforts to secure his election as such) until such time as his stock ownership
in the Company falls below 10% of the outstanding Common Stock.
During the Initial Period the Company will pay Mr. Onstead a monthly salary
of $41,667 and will generally continue to furnish the perquisites and benefits
that were available to Mr. Onstead prior to the Effective Date. During the
Consulting Period, the Company will pay Mr. Onstead a monthly fee of $16,667. In
addition, following the Initial Period, Mr. Onstead will receive monthly
retirement payments in the amount of $8,333 until Mr. Onstead owns less than 3%
of the outstanding Common Stock (or of the outstanding interest in a successor).
The Company will furnish Mr. Onstead (and his spouse) at no cost to them with
lifetime medical, dental and life insurance benefits. The Company will also
provide Mr. Onstead with certain office amenities for life; provided that the
annual cost thereof may not exceed $100,000.
In the event Mr. Onstead's employment or consulting engagement is terminated
(i) by the Company (A) due to his death or disability, (B) as a result of Mr.
Onstead's gross negligence or willful misconduct in the performance of his
duties and services or his material breach of any material provision of his
Employment Agreement which is not corrected within 30 days of notice thereof or
(C) in connection with the insolvency, liquidation or any other event which
results in the discontinuance of the existence of the Company without a
successor thereto, or (ii) by Mr. Onstead other than as a result of the
Company's
55
<PAGE>
material breach of any material provision of his Employment Agreement which is
not corrected within 30 days of notice thereof (a termination under clause (i)
or (ii) being hereinafter referred to as a "Non-Severance Termination"), the
Company will cease to pay Mr. Onstead's salary or consulting fee (as applicable)
upon such termination. In the event of a change of control of the Company, Mr.
Onstead's employment shall terminate 30 days after such event and the Company
(or its successor) will cease to pay Mr. Onstead's salary or consulting fee (as
applicable) upon such termination.
In the event Mr. Onstead incurs a termination other than a Non-Severance
Termination prior to the expiration of the Initial Period, the Company is
required to pay Mr. Onstead an amount equal to the sum of (x) the aggregate
amount of salary that he would have received for the remainder of the Initial
Period and (y) the economic value of the benefits he would have received during
such period.
In the event Mr. Onstead incurs a termination other than a Non-Severance
Termination during his consulting engagement, the Company is required to
continue to pay Mr. Onstead all amounts due in respect of his consulting
engagement on the same basis as if Mr. Onstead had remained a consultant through
the Consulting Period.
R. RANDALL ONSTEAD. The Employment Agreement with R. Randall Onstead
provides that Mr. Onstead will serve as President and Chief Executive Officer,
for which he will receive a minimum monthly base salary of $35,417. Pursuant to
his Employment Agreement, Mr. Onstead also will be granted options to purchase
371,594 shares of Common Stock at a price of $12.11 per share, with 50% of such
shares to vest 20% per year over five years and the remaining 50% to vest based
on the attainment of certain performance goals. In addition to receiving other
benefits and perquisites available to similarly situated executives of the
Company, Mr. Onstead will also be extended a $750,000 line of credit by the
Company which will be secured by his Common Stock and be payable 180 days after
termination of his Employment Agreement to the extent not satisfied out of (i)
any compensation due him and payable upon the termination of his employment and
(ii) the proceeds from the disposition of Common Stock and options by him. This
line of credit will bear interest at the applicable federal rate, which is
published in a revenue ruling each month by the Internal Revenue Service. No
advances have been made to Mr. Onstead under this line of credit.
In the event Randall Onstead incurs a Non-Severance Termination, the Company
will cease to pay Mr. Onstead's salary upon such termination. In the event Mr.
Onstead incurs a termination of employment other than a Non-Severance
Termination (which shall include a termination of employment by Mr. Onstead due
to the assignment to him by the Board of duties materially inconsistent with his
position) within two years of the Effective Date, he shall be entitled to a
severance payment in an amount equal to three times the sum of (i) his base
salary on the date of termination and (ii) the average annual bonus paid or
payable with respect to the immediately preceding three calendar years. He shall
also be entitled to three years continued medical and dental coverage at no cost
to him for himself, his spouse and his dependents. In the event Mr. Onstead
incurs a termination of employment other than a Non-Severance Termination after
two years following the Effective Date, he shall be entitled to a severance
payment in an amount equal to two times the sum of (i) his base salary on the
date of termination and (ii) the average annual bonus paid or payable with
respect to the immediately preceding two calendar years. He shall also be
entitled to two years continued medical and dental coverage at no cost to him
for himself, his spouse and his dependents. Regardless of the timing of any such
termination, if Mr. Onstead's employment is terminated without cause, he shall
be entitled to the Company's investment in certain life insurance policies.
RON W. BARCLAY. Ron. W. Barclay retired from the Company effective as of
August 16, 1997. The Employment Agreement with Mr. Barclay provides that,
following Mr. Barclay's termination, he is entitled to outplacement services for
a period of one year in an amount not to exceed $30,000. Mr. Barclay agrees not
to engage in any business activity in the United States which is in competition
with the business of the Company for a period of two years following his
termination. In consideration of the foregoing obligation,
56
<PAGE>
the Company will pay Mr. Barclay a total of $200,000 in bi-weekly installments
over such two-year period. Furthermore, for a period of three years following
his termination, Mr. Barclay agrees not to solicit any employees of the Company
or solicit any suppliers of the Company in connection with any business that is
in competition with the Company.
Mr. Barclay's Employment Agreement provides for a consulting engagement for
a period of three years following his termination of employment. In respect of
such engagement, Mr. Barclay shall receive $6,000 per year payable in a lump sum
upon his termination of employment and shall receive continued medical and
dental insurance coverage during his consulting engagement.
In addition, Mr. Barclay executed a severance and release agreement to his
Employment Agreement (the "Severance and Release Agreement"), entitling him to
the following severance benefits: (i) continued salary from his date of
termination to the effective date of the Severance and Release Agreement reduced
by the amount of any payments made in respect of the non-competition obligation
described above and (ii) a lump sum payment equal to $647,857 reduced by any
payment made pursuant to clause (i) of this paragraph.
In the event Mr. Barclay dies during his consulting engagement, his estate
shall be entitled to receive a lump sum payment equal to the difference between
(i) $865,857 and (ii) any amounts paid in respect of Mr. Barclay's consulting
engagement and non-competition obligation. In the event of Mr. Barclay's death
during his consulting engagement the Company will provide 36 months continued
medical and dental insurance coverage for his qualified dependents.
TERMINATION AGREEMENT
Effective on or about April 1, 1997, the Company entered into a termination
agreement with Bob L. Gowens (the "Gowens Agreement"). Pursuant to the Gowens
Agreement, Mr. Gowens resigned from all positions with the Company and the
Company accepted such resignation. Mr. Gowens has received a severance payment
of $625,000 reduced by certain amounts. In addition, he is entitled to
outplacement services for a period of one year in an amount not to exceed
$30,000.
Mr. Gowens agrees not to engage in any business activity in the United
States which is in competition with the business of the Company for a period of
two years following his termination. In consideration of the foregoing
obligation, the Company will pay Mr. Gowens a total of $200,000 in bi-weekly
installments over such two-year period. Furthermore, for a period of three years
following his termination, Mr. Gowens agrees not to solicit any employees of the
Company or solicit any suppliers of the Company in connection with any business
that is in competition with the Company.
The Gowens Agreement provides for a consulting engagement for a period of
three years following his termination of employment. In respect of such
engagement, Mr. Gowens shall receive $25,000 per year payable in a lump sum upon
his termination of employment and shall receive continued medical and dental
insurance coverage during his consulting engagement. Under the terms of the
Gowens Agreement, the Company is released from all claims Mr. Gowens may have
against it.
57
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning beneficial
ownership of shares of Common Stock as of June 28, 1997 by: (i) persons known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each person who is a director of the Company; (iii) each person who
is a Named Executive Officer; and (iv) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL PERCENTAGE
OWNERSHIP OF OF CLASS
NAME OF BENEFICIAL OWNER COMMON STOCK OUTSTANDING(A)
- ---------------------------------------------------------------------------- -------------- -----------------
<S> <C> <C>
KKR 1996 GP L.L.C.(b)
c/o Kohlberg Kravis Roberts & Co., L.P.
9 West 57th Street
New York, NY 10019........................................................ 18,579,686 62.5%(c)
Robert R. Onstead(d)(e)..................................................... 6,054,165 20.4
Randall's Food Markets, Inc. Employee Stock Ownership Plan.................. 2,275,622 7.7
R. Randall Onstead(d)(f).................................................... 210,524 *
Ron W. Barclay(d)(g)........................................................ 240,744 *
Michael M. Calbert(d)(f).................................................... 20,656 *
Thomas K. Arledge(d)(h)..................................................... 3,241 *
Terry P. Poyner(d)(f)....................................................... 2,755 *
Lee E. Straus(d)(f)......................................................... 2,593 *
All directors and executive officers as group (15 persons).................. 25,486,492 85.8%
</TABLE>
- ------------------------
* Less than one percent.
(a) The amounts and percentage of Common Stock beneficially owned are reported
on the basis of regulations of the Commission governing the determination of
beneficial ownership of securities. Under the rules of the Commission, a
person is deemed to be a "beneficial owner" of a security if that person has
or shares "voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Under these rules,
more than one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to
which he has no economic interest. The percentage of class outstanding is
based on the 29,714,261 shares of Common Stock outstanding as of June 28,
1997. In connection with the Subscription Agreement, the Company has agreed
to certain indemnities for the benefit of RFM Acquisition which are payable
in additional shares of Common Stock, and the percentages in the table do
not reflect any issuances thereunder. See "The Recapitalization."
(b) Shares of Common Stock shown as beneficially owned by KKR 1996 GP L.L.C. are
held by RFM Acquisition. KKR 1996 GP L.L.C. is the sole general partner of
KKR Associates 1996 L.P., a Delaware limited partnership. KKR Associates
1996 L.P. is the sole general partner of KKR 1996 Fund L.P., a Delaware
limited partnership. KKR 1996 Fund L.P. is the sole member of RFM
Acquisition. KKR 1996 GP L.L.C. is a limited liability company, the managing
members of which are Messrs. Henry R. Kravis and George R. Roberts and the
other members of which are Messrs. Robert I. MacDonnell, Paul E. Raether,
Michael W. Michelson, James H. Greene, Jr., Michael T. Tokarz, Perry Golkin,
Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis,
Roberts, Raether and Greene are directors of the Company. Each of such
individuals may be deemed to share beneficial ownership of the shares shown
as beneficially owned by KKR 1996 GP L.L.C. Each of such individuals
disclaims beneficial ownership of such shares. Mr. Nils P. Brous is a
limited partner of KKR Associates 1996 L.P. and also is a director of the
Company.
58
<PAGE>
(c) KKR 1996 GP L.L.C. will own approximately 62% of the Common Stock on a fully
diluted basis assuming exercise of the RFM Option and the expected issuance
of stock and options to certain members of management under the 1997 Plan.
(d) Does not include shares of Common Stock held by these individuals as part of
their participation in the ESOP and KeySOP.
(e) Includes shares held by Mr. Onstead's family partnership, his spouse and the
Onstead Foundation.
(f) Does not include shares of Common Stock that may be reserved for options and
other stock purchase rights that have been or are to be granted to
management under the 1997 Plan.
(g) Mr. Barclay retired from the Company effective as of August 16, 1997.
(h) Mr. Arledge terminated his employment with the Company effective as of
August 14, 1997.
59
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
KKR 1996 GP L.L.C. beneficially owns approximately 63% of the Company's
outstanding shares of Common Stock. The managing members of KKR 1996 GP L.L.C.
are Messrs. Henry R. Kravis and George R. Roberts and the other members of which
are Messrs. Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson, Michael
T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S. Robbins, Scott M.
Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts, Raether and Greene are
directors of the Company, as is Mr. Nils P. Brous, who is a limited partner of
KKR Associates 1996 L.P. Each of the members of KKR 1996 GP L.L.C. is also a
member of the limited liability company which serves as the general partner of
KKR and Mr. Brous is an executive of KKR. KKR, an affiliate of RFM Acquisition
and KKR 1996 GP L.L.C., received a fee of $8.0 million in cash for negotiating
the Recapitalization and arranging the financing therefor, plus the
reimbursement of its expenses in connection therewith, and, from time to time in
the future, KKR may receive customary investment banking fees for services
rendered to the Company in connection with divestitures, acquisitions and
certain other transactions. In addition, KKR has agreed to render management,
consulting and financial services to the Company for an annual fee of $1.0
million. See "Management--Directors and Executive Officers" and "Principal
Shareholders."
RFM Acquisition has the right, under certain circumstances and subject to
certain conditions, to require the Company to register under the Securities Act
shares of Common Stock held by it pursuant to a registration rights agreement
entered into at the Closing (the "RFM Registration Rights Agreement"). Such
registration rights will generally be available to RFM Acquisition until
registration under the Securities Act is no longer required to enable it to
resell the Common Stock owned by it. The RFM Registration Rights Agreement
provides, among other things, that the Company will pay all expenses in
connection with the first six demand registrations requested by RFM Acquisition
and in connection with any registration commenced by the Company as a primary
offering in which RFM Acquisition participates through piggy-back registration
rights granted under such agreement. RFM Acquisition's exercise of its
registration rights under the RFM Registration Rights Agreement will be subject
to the RFM Tag Along and the RFM Drag Along provided for in the Shareholders
Agreement. See "The Recapitalization-- Shareholders Agreement."
On March 1, 1997, the Company loaned $20,000 to the Onstead Family Trust.
This loan is evidenced by a promissory note, bears interest at a rate of 5% per
annum and is payable on March 1, 1998, or on the Company's earlier demand.
In connection with the Company's grant of $250,000 worth of restricted
Common Stock (25,907 shares) to Michael Calbert on December 30, 1994, the
Company loaned Mr. Calbert $100,000 on January 26, 1995 to pay related income
taxes. So long as Mr. Calbert is in active employment during the 15 days before
and after each payment date, the Company has agreed to forgive the scheduled
repayments. The loan is evidenced by a promissory note, bears interest at 8% per
annum and is payable in annual installments of $20,000 each, plus interest,
beginning December 1, 1995 and ending December 1, 1999. The note is secured by
the 25,907 shares, one-fifth of which are released each year beginning December
1, 1995.
Robert R. Onstead owns a 7% carried interest and the estate of Randall C.
Barclay owns a 3% carried interest in the limited partnership that developed and
owns a shopping center in which one of the Company's stores is the anchor
tenant. The base rent for this store is $392,796 per year, which is considered
market rent.
The Company purchases uniforms and other merchandise from Coastal Athletic
Supply ("Coastal"), which is majority owned by Ann and Preston Hill (Robert R.
Onstead's daughter and son-in-law). Purchases from Coastal during fiscal years
1995, 1996 and 1997 were $1,097,407, $775,609 and $1,152,483, respectively. In
addition, the Company guarantees the obligations of Coastal to Uniforms To You
("UTY") and M.J. Soffe Co. ("Soffe") for merchandise purchased on the Company's
behalf (the "Uniform Guarantees"). As of June 28, 1997, the obligations subject
to the Uniform Guarantees were $68,203 to UTY and $136,428 to Soffe,
respectively; the highest balances due with respect to such obligations were
$57,740 to UTY and $0 to Soffe, respectively, for fiscal year 1995, $69,892 to
UTY and $0 to Soffe, respectively, for fiscal year 1996, and $133,432 to UTY and
$136,428 to Soffe, respectively, for fiscal year 1997. The obligations subject
to the Uniform Guarantees are not interest bearing.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
CAPITAL STRUCTURE
The entire authorized capital stock of the Company consists of (i)
75,000,000 shares of Common Stock, (ii) 8,250 shares of Class A Preferred Stock,
and (iii) 5,000,000 shares of serial preferred stock with a par value of $10.00
per share (the "Serial Preferred Stock"). As of June 28, 1997, there were (i)
29,714,261 shares of Common Stock issued and outstanding; (ii) no shares of
Class A Preferred Stock or Serial Preferred Stock issued or outstanding; (iii)
710,243 shares of Common Stock reserved for issuance upon exercise of authorized
but unissued outstanding employee or director stock options to purchase shares
of Common Stock granted under any stock option or stock purchase plan, program
or arrangement of the Company; and (iv) 596,947 shares of Common Stock issuable
upon exercise of outstanding stock options (with an average exercise price of
$17.02).
REPURCHASE RIGHTS
SHAREHOLDER AGREEMENTS. Pursuant to shareholder agreements dated March 29,
1984 and April 8, 1985 among the Company and John N. Frewin, Norman P. Frewin,
Rosemary Frewin Gambino and certain other shareholders parties thereto (the
"Qualified Shareholders"), when a Qualified Shareholder desires to dispose of
shares of Common Stock, the Company has the right to acquire such shares for the
per share value most recently determined on behalf of the trustee of the ESOP.
In the event the Company does not exercise such election, other Qualified
Shareholders have the right to purchase the shares at such valuation. In the
event neither the Company nor the other Qualified Shareholders have exercised
the repurchase right, the selling Qualified Shareholders may require the Company
to repurchase such shares at the valuation. If a Qualified Shareholder becomes
totally disabled and is unable to continue employment with the Company, or if a
Qualified Shareholder is voluntarily or involuntarily terminated from employment
for any reason other than death, the repurchase procedures described above are
automatically operative as if such shareholder had intended to dispose of his or
her shares. Upon the death of a Qualified Shareholder, all shares of Common
stock owned by such shareholder must be sold to the Company at the valuation
referred to above. As of June 28, 1997, holders beneficially owning 346,941
shares of Common Stock possess such repurchase rights under such agreements. In
1992, an additional holder of Common Stock (6,053 shares as of June 28, 1997)
was granted similar repurchase rights.
CULLUM ACQUISITION. In connection with the Cullum Acquisition, the Company
granted the former Cullum shareholders put rights on the shares of Common Stock
issued in such transaction. Pursuant to the Registration Rights and Repurchase
Agreement dated as of August 24, 1992 (the "Former Cullum Shareholders
Agreement"), among the Company and the Morgan Stanley Leveraged Equity Fund II,
L.P. and the other former Cullum shareholders parties thereto (collectively, the
"Former Cullum Shareholders"), the Former Cullum Shareholders have the right to
require the Company to repurchase 60,028 shares of Common Stock for the per
share value most recently determined on behalf of the trustee of the ESOP. This
put right is exercisable commencing on October 15, 1997 and on each subsequent
October 15 to and including October 15, 2001.
REGISTRATION RIGHTS
RFM ACQUISITION. RFM Acquisition has the right, under certain circumstances
and subject to certain conditions, to require the Company to register under the
Securities Act shares of Common Stock held by it pursuant to the RFM
Registration Rights Agreement. Such registration rights will generally be
available to RFM Acquisition until registration under the Securities Act is no
longer required to enable it to resell the Common Stock owned by it. The RFM
Registration Rights Agreement provides, among other things, that the Company
will pay all expenses in connection with the first six demand registrations
requested by RFM Acquisition and in connection with any registration commenced
by the Company as a primary offering in which RFM Acquisition participates
through piggy-back registration rights granted under such agreement.
61
<PAGE>
RFM Acquisition's exercise of its registration rights under the RFM Registration
Rights Agreement will be subject to the RFM Tag Along and the RFM Drag Along
provided for in the Shareholders Agreement. See "The Recapitalization --
Shareholders Agreement."
FORMER CULLUM SHAREHOLDERS. The Former Cullum Shareholders Agreement
provides the Former Cullum Shareholders with customary "piggy-back" registration
rights. Should the Company register securities in connection with an offering of
common stock, then the Company must offer to register shares of Common Stock
(including shares of Common Stock issuable upon the conversion of shares of
Convertible Preferred Stock) held by the Former Cullum Shareholders. These
registration rights do not pertain to an offering on Form S-4 or S-8 or a
registration statement that is filed with respect to an exchange offer or an
offering that will be made solely to existing shareholders of the Company.
62
<PAGE>
DESCRIPTION OF CREDIT FACILITIES
The Credit Facilities are provided by a syndicate of banks and other
financial institutions (the "Lenders") led by The Chase Manhattan Bank, as
administrative agent (the "Administrative Agent"), Chase Securities Inc., as
arranger, National Westminster Bank Plc, as syndication agent, and Citicorp
Securities, Inc., as documentation agent. The Credit Facilities provide for the
Term Loan Facility of up to $125.0 million and the $225.0 million Revolving
Credit Facility. The Revolving Credit Facility includes borrowing capacity of up
to $25.0 million for letters of credit, and up to $25.0 million for short-term
borrowings. The Term Loan Facility matures on the date that is nine years after
the Closing and provides for nominal annual amortization. The final maturity of
loans under the Revolving Credit Facility will be the date that is seven years
after the Closing.
The interest rate under the Term Loan Facility fluctuates based on leverage
and initially will be adjusted LIBOR plus 1.50%. The interest rate under the
Revolving Credit Facility fluctuates based on leverage and initially will be ABR
plus 0.00%. The Company may elect interest periods of 1, 2, 3 or 6 months (or 9
or 12 months, to the extent available from all the Lenders under the relevant
Facility) for Adjusted LIBOR borrowings. Calculation of interest shall be on the
basis of actual days elapsed in a year of 360 days (or 365 or 366 days, as the
case may be, in the case of ABR loans based on the Prime Rate) and interest
shall be payable at the end of each interest period and, in any event, at least
every 3 months or 90 days, as the case may be. ABR is the Alternate Base Rate,
which is the highest of Chase's Prime Rate, the Federal Funds Effective Rate
plus 0.50% and the Base CD Rate plus 1.00%. Adjusted LIBOR and the Base CD Rate
will at all times include statutory reserves to the extent actually incurred
(and, in the case of the Base CD Rate, FDIC assessment rates).
The Company will pay a commitment fee at a rate which will fluctuate based
on leverage and initially will equal 0.25% per annum on the undrawn portion of
the commitments in respect of the Credit Facilities, commencing to accrue with
respect to each Lender's commitment upon the acceptance by the Company of such
Lender's commitment, paid initially at the Closing and quarterly in arrears
after the Closing. The commitment fees will at all times be calculated based on
the actual number of days elapsed over a 365-day year.
The Company will pay a letter of credit fee equal to a rate per annum equal
to the margin for Adjusted LIBOR loans under the Revolving Credit Facility, less
0.125%, on the aggregate face amount of outstanding letters of credit under the
Revolving Credit Facility, payable in arrears at the end of each quarter and
upon the termination of the Revolving Credit Facility, in each case for the
actual number of days elapsed over a 365-day year. In addition, the Company
shall pay to the Fronting Bank, for its own account, (a) a fronting fee of
0.125% per annum on the aggregate face amount of outstanding letters of credit,
payable in arrears at the end of each quarter and upon the termination of the
Revolving Credit Facility, in each case for the actual number of days elapsed
over a 365-day year, and (b) customary issuance, amendment and administration
fees.
The Credit Facilities contain provisions under which commitment fees and
interest rates will be adjusted in increments based on the ratio (the "Leverage
Ratio") of consolidated total debt to consolidated adjusted EBITDA in effect
from time to time. Subject to certain exceptions, the margin for Adjusted LIBOR
loans for the Term Loan Facility and the Revolving Credit Facility, and the
commitment fee rate thereunder, will be, in the case of a Leverage Ratio (i)
greater than or equal to 6.0:1, 2.75%, 2.25% and .500%, respectively, (ii)
greater than or equal to 5.5:1, 2.50%, 2.00% and .425%, respectively, (iii)
greater than or equal to 5.0:1, 2.25%, 1.75% and .375%, respectively, (iv)
greater than or equal to 4.5:1, 2.00%, 1.50% and .375%, respectively, (v)
greater than or equal to 4.0:1, 1.75%, 1.25% and .250%, respectively, (vi)
greater than or equal to 3.5:1, 1.50%, 1.00% and .250%, respectively, (vii)
greater than or equal to 3.0:1, 1.50%, .875% and .250%, respectively, and (viii)
less than 3.0:1, 1.50%, .750%, and .250%, respectively, with the margin for ABR
loans being .125% less than the corresponding margin for Adjusted LIBOR loans
(but not less than 0%).
63
<PAGE>
The Term Loans are subject to mandatory prepayment with (a) 100% of the net
cash proceeds of certain non-ordinary-course asset sales or other dispositions
of property by the Company and its subsidiaries, except to the extent that such
proceeds are reinvested in the business of the Company and its subsidiaries
(subject to the line of business covenant) within a specified time period and
subject to certain other exceptions, (b) a portion of excess cash flow (as
defined in the Credit Facilities), to the extent not reinvested in the business
of the Company and its subsidiaries within six months after each yearly test
period and (c) 100% of the net proceeds of certain issuances of debt obligations
of the Borrower and its subsidiaries. Voluntary prepayments and Revolving Credit
Facility commitment reductions are permitted in whole or in part at the option
of the Company, in minimum principal amounts, without premium or penalty,
subject to reimbursement of certain of the Lenders' costs under certain
conditions.
The Company's obligations under the Credit Facilities are secured by a
perfected first priority pledge of and security interest in all the common stock
of existing and subsequently acquired direct domestic subsidiaries of the
Company (which at Closing consisted of Randall's Food & Drugs, Inc. and
Randall's Properties, Inc.), evidences of indebtedness in excess of $5.0 million
received by the Company in connection with certain dispositions of assets and
65% of the common stock of subsequently acquired direct foreign subsidiaries. In
addition, indebtedness under the Credit Facilities is guaranteed by each
existing and subsequently acquired domestic subsidiary of the Company (which at
Closing consisted of Randall's Food & Drugs, Inc. and Randall's Properties,
Inc.), subject to certain exceptions. See "Description of the Exchange
Notes--Subordination" and "Risk Factors--Subordination" and "--Encumbrances on
Assets to Secure Credit Facilities."
The Credit Facilities contain customary covenants and restrictions on the
Company's ability to, among other things, incur debt, grant liens, sell assets,
pay dividends, make investments, prepay or redeem the Notes, enter into leases
or incur capital expenditures. In addition, the Credit Facilities provide that
the Company must meet or exceed a ratio of consolidated adjusted EBITDA to
consolidated adjusted interest expense and must not exceed a ratio of
consolidated total debt to consolidated adjusted EBITDA.
Events of default under the Credit Facilities include (i) nonpayment of
principal with no period of grace and nonpayment of interest, fees or other
amounts due under the Credit Facilities within five days after the same become
due; (ii) material breach of any representation or warranty; (iii) failure to
observe any term, covenant or agreement contained in the Credit Facilities
beyond an applicable period of grace; (iv) the failure by the Company or its
subsidiaries (1) to make payments in respect of any Indebtedness when due and
such failure continues after the applicable period of grace or (2) to perform or
observe any condition or covenant or any other event shall occur or condition
shall exist relating to such Indebtedness and the effect of such failure, event
or condition is to cause or to permit the holders of such Indebtedness to cause
such Indebtedness to be due prior to its stated maturity and the aggregate
amount of such Indebtedness, together with the aggregate amount of all other
Indebtedness in default, equals or exceeds $20 million; (v) certain events of
bankruptcy or insolvency with respect to the Company or material subsidiaries;
(vi) the occurrence of certain events under the Employee Retirement Income
Security Act of 1974, as amended; (vii) any material provision of the pledge
agreement shall cease to create a valid security interest or the guaranty of the
Company's obligations shall cease to be effective; (viii) judgments against the
Company or its subsidiaries of $20 million or greater that remain unsatisfied,
unvacated or unstayed pending appeal for a period of 60 days after entry; or
(ix) a change of control (as defined below) occurs.
A "change of control" under the Credit Facilities will occur if (a) KKR, its
Affiliates and management of the Company shall cease to own in the aggregate,
directly or indirectly, beneficially and of record, at least 35% of the
outstanding Voting Stock of the Company (other than as the result of one or more
widely distributed offerings of common stock of the Company); (b) any person,
entity or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange
Act) shall at any time have acquired direct or indirect beneficial ownership of
a percentage of the outstanding Voting Stock of the Company that exceeds the
percentage of such Voting Stock then beneficially owned, in the aggregate, by
KKR, its Affiliates and management of the Company, unless, in the case of (a) or
(b) above, KKR, its Affiliates and management
64
<PAGE>
of the Company have, at such time, the right or the ability by voting power,
contract or otherwise to elect or designate for election a majority of the Board
of Directors of the Company; (c) at any time "continuing directors" shall not
constitute a majority of the Board of Directors of the Company; or (d) a Change
of Control (as defined in the Indenture) shall occur. Continuing directors of
the Company under the Credit Facilities is defined in the Credit Facilities to
include members of the Board of Directors at Closing, individuals who are
members of the board for at least 12 months, individuals nominated by KKR and
individuals nominated by a majority of the then continuing directors. The
capitalized terms included in the definition of "change of control" under the
Credit Facilities have meanings comparable to those included in the Indenture.
65
<PAGE>
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $150 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $150 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on June 27, 1997 in a transaction exempt from the
registration requirements of the Securities Act. Accordingly, the Old Notes may
not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
not later than 100 days after the date of issuance of the Old Notes, and to use
its best efforts to cause the registration statement relating to the Exchange
Offer to become effective under the Securities Act not later than 200 days after
the date of issuance of the Old Notes and the Exchange Offer to be consummated
not later than 30 days after the date of the effectiveness of the Registration
Statement (or use its best efforts to cause to become effective by the 230th
calendar day after the Issuance Date a shelf registration statement with respect
to resales of the Old Notes). A copy of the Registration Rights Agreement has
been filed as an exhibit to the Registration Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company. Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further
66
<PAGE>
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and that such Holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Exchange Notes.
See "--Resale of Exchange Notes." Each broker-dealer that receives Exchange
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no-action letter, there can be no assurance that the Staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. A broker-dealer
may not participate in the Exchange Offer with respect to Old Notes acquired in
connection with the initial placement of the Old Notes. See "Plan of
Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from June 27, 1997.
67
<PAGE>
Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date") . The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a) under the Exchange Act. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Old Notes, by giving oral or written notice to the Exchange
Agent and by timely public announcement no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled Expiration Date.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer unless properly withdrawn. The Company does not anticipate
extending the Expiration Date.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other documents required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO
THE COMPANY.
68
<PAGE>
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Old Notes not exchanged are to be delivered to an address
other than that of the registered holder appearing on the note register for the
Old Notes, the signature in the Letter of Transmittal must be guaranteed by an
Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by
69
<PAGE>
an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver
70
<PAGE>
any additional documents deemed by the Exchange Agent or the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Old Notes or transfer ownership of such Old Notes on the account books
maintained by a book-entry transfer facility. The Transferor further agrees that
acceptance of any tendered Old Notes by the Company and the issuance of Exchange
Notes in exchange therefor shall constitute performance in full by the Company
of certain of its obligations under the Registration Rights Agreement. All
authority conferred by the Transferor will survive the death or incapacity of
the Transferor and every obligation of the Transferor shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 90 days after the Expiration Date,
make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may
71
<PAGE>
be retendered by following one of the procedures described under "Procedures for
Tendering Old Notes" above at any time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely book-entry
confirmation of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Old Notes will be credited to an account
maintained with such book-entry transfer facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Notes or the Exchange
Notes or that may materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any law, rule or regulation or applicable interpretations of the
Staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Exchange Offer; or
72
<PAGE>
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or have
a material adverse effect on the contemplated benefits of the Exchange Offer
to the Company; or
(f) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any govermental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (v) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the United
States, or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
73
<PAGE>
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
Marine Midland Bank Marine Midland Bank
Attn: Corporate Trust Operations Attn: Corporate Trust Operations
140 Broadway, Level A 140 Broadway, Level A
New York, New York 10005-1180 New York, New York 10005-1180
BY FACSIMILE:
(212) 658-2292
Attn.: Paulette Shaw
Telephone: (212) 658-5931
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $500,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction in which the securities laws or blue
sky laws of which require the Exchange Offer to be made by
74
<PAGE>
a licensed broker or dealer, the Exchange Offer is being made on behalf of the
Company by one or more registered brokers or dealers which are licensed under
the laws of such jurisdication.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of Old Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
75
<PAGE>
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
76
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Old Notes were issued and the Exchange Notes offered hereby will be
issued under the Indenture. The terms of the Exchange Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture describes the
material terms of the Indenture but is subject to, and qualified in its entirety
by reference to, the provisions of the Indenture, including the definitions of
certain terms contained therein and those terms made part of the Indenture by
reference to the Trust Indenture Act. For definitions of certain capitalized
terms used in the following summary, see "--Certain Definitions." The Indenture
is an exhibit to the Registration Statement of which this Prospectus is a part.
On June 27, 1997, the Company issued $150 million aggregate principal amount
of Old Notes under the Indenture. The terms of the Exchange Notes are identical
in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Exchange
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to all existing and future Senior
Indebtedness of the Company. As of June 28, 1997, the aggregate amount of the
Company's outstanding Senior Indebtedness was approximately $128.0 million. The
Indenture will permit the incurrence of additional Senior Indebtedness in the
future.
Operations of the Company are conducted primarily through its Subsidiaries
and, therefore, the Company is dependent upon the cash flow of its Subsidiaries
to meet its obligations, including its obligations under the Exchange Notes. The
Exchange Notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's Subsidiaries. Any right of the Company to receive assets of any of
its Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors, except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company still would be subordinate
to any security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company. As of June 28, 1997, the
Company's Subsidiaries had approximately $366.2 million of liabilities
(excluding guarantees of the Indebtedness under the Credit Facilities)
outstanding. See "Risk Factors--Adverse Consequences of Holding Company
Structure" and "--Subordination."
All of the Company's Subsidiaries will be Restricted Subsidiaries. However,
under certain circumstances, the Company will be able to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not be subject to any of the restrictive covenants set forth in the Indenture.
SUBORDINATION
The payment of the Subordinated Note Obligations is subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash
equivalents of all Senior Indebtedness, whether outstanding on the date of the
Indenture or thereafter incurred. Upon any distribution to creditors of the
Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior
Indebtedness will
77
<PAGE>
be entitled to receive payment in full in cash equivalents of such Senior
Indebtedness before the Holders will be entitled to receive any payment with
respect to the Subordinated Note Obligations, and until all Senior Indebtedness
is paid in full in cash equivalents, any distribution to which the Holders would
be entitled shall be made to the holders of Senior Indebtedness (except that
Holders may receive (i) shares of stock and any debt securities that are
subordinated at least to the same extent as the Exchange Notes to (a) Senior
Indebtedness and (b) any securities issued in exchange for Senior Indebtedness
and (ii) payments made from the trusts described under "--Legal Defeasance and
Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in such subordinated securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of, premium, if any, or interest on, or
of unreimbursed amounts under drawn letters of credit or in respect of bankers'
acceptances or fees relating to letters of credit or bankers' acceptances
constituting, Designated Senior Indebtedness occurs and is continuing beyond any
applicable period of grace (a "PAYMENT DEFAULT") or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness that
permits holders of the Designated Senior Indebtedness as to which such default
relates to accelerate its maturity (a "NON-PAYMENT DEFAULT") and the Trustee
receives a notice of such default (a "PAYMENT BLOCKAGE NOTICE") from a
representative of holders of such Designated Senior Indebtedness. Payments on
the Exchange Notes, including any missed payments, may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived or shall have ceased to exist or such Designated Senior Indebtedness
shall have been discharged or paid in full in cash equivalents and (b) in case
of a nonpayment default, the earlier of (x) the date on which such nonpayment
default is cured or waived, (y) 179 days after the date on which the applicable
Payment Blockage Notice is received (each such period, the "PAYMENT BLOCKAGE
PERIOD") or (z) the date such Payment Blockage Period shall be terminated by
written notice to the Trustee from the requisite holders of such Designated
Senior Indebtedness necessary to terminate such period or from their
representative. No new period of payment blockage may be commenced unless and
until 365 days have elapsed since the effectiveness of the immediately preceding
Payment Blockage Notice. However, if any Payment Blockage Notice within such
365-day period is given by or on behalf of any holders of Designated Senior
Indebtedness (other than the agent under the Senior Credit Facilities), the
agent under the Senior Credit Facilities may give another Payment Blockage
Notice within such period. In no event, however, may the total number of days
during which any Payment Blockage Period or Periods is in effect exceed 179 days
in the aggregate during any 365 consecutive day period. No nonpayment default
that existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been cured or waived for a period
of not less than 90 days.
If the Company fails to make any payment on the Exchange Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the Holders to accelerate the
maturity thereof.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Exchange Notes is accelerated because of
an Event of Default.
As a result of the subordination provisions described above, in the event of
insolvency, bankruptcy, administration, reorganization, receivership or similar
proceedings relating to the Company, Holders may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. In addition,
the Exchange Notes will be structurally subordinated to the liabilities of
Subsidiaries of the Company. At June 28, 1997, the Company had approximately
$128.0 million of Senior Indebtedness outstanding and the Company had additional
availability of $220.2 million (reduced by $1.8 million of outstanding letters
of credit) for borrowings under the Credit Facilities, all of which would be
Senior Indebtedness of the Company, and the Company's Subsidiaries had aggregate
outstanding liabilities of approximately $366.2 million, excluding guarantees of
the Indebtedness under the Credit Facilities. Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company and its
Subsidiaries may
78
<PAGE>
incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness. See
"--Certain Covenants--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock."
"DESIGNATED SENIOR INDEBTEDNESS" means (i) Senior Indebtedness under the
Senior Credit Facilities and (ii) any other Senior Indebtedness permitted under
the Indenture the principal amount of which is $25.0 million or more and that
has been designated by the Company as Designated Senior Indebtedness.
"SENIOR INDEBTEDNESS" means (i) the Obligations under the Senior Credit
Facilities and (ii) any other Indebtedness permitted to be incurred by the
Company under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes, including, with respect to
clauses (i) and (ii), interest accruing subsequent to the filing of, or which
would have accrued but for the filing of, a petition for bankruptcy, whether or
not such interest is an allowable claim in such bankruptcy proceeding.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (1) any liability for federal, state, local or other taxes owed
or owing by the Company, (2) any obligation of the Company to any of its
Subsidiaries, (3) any accounts payable or trade liabilities arising in the
ordinary course of business (including instruments evidencing such liabilities)
other than obligations in respect of letters of credit under the Senior Credit
Facilities, (4) any Indebtedness that is incurred in violation of the Indenture,
(5) Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is without recourse to the
Company, (6) any Indebtedness, guarantee or obligation of the Company which is
subordinate or junior to any other Indebtedness, guarantee or obligation of the
Company, (7) Indebtedness evidenced by the Notes and (8) Capital Stock of the
Company.
"SUBORDINATED NOTE OBLIGATIONS" means any principal of, premium, if any, and
interest on the Notes payable pursuant to the terms of the Notes or upon
acceleration, together with and including any amounts received upon the exercise
of rights of rescission or other rights of action (including claims for damages)
or otherwise, to the extent relating to the purchase price of the Notes or
amounts corresponding to such principal, premium, if any, or interest on the
Notes.
The Exchange Notes will rank senior in right of payment to all Subordinated
Indebtedness of the Company. At the Issuance Date the Company had no
Subordinated Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to $150.0
million and will mature on July 1, 2007. Interest on the Exchange Notes will
accrue at the rate of 9 3/8% per annum and will be payable semi-annually in
arrears on January 1 and July 1, commencing on January 1, 1998, to Holders of
record on the immediately preceding December 15 and June 15. Interest on the
Exchange Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the Issuance Date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Exchange Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders at their respective
addresses set forth in the register of Holders; PROVIDED that all payments of
principal, premium, if any, and interest with respect to Exchange Notes
represented by one or more permanent global Exchange Notes registered in the
name of or held by The Depository Trust Company or its nominee will be made by
wire transfer of immediately available funds to the accounts specified by the
Holder or Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Exchange Notes will be issued in denominations
of $1,000 and integral multiples thereof.
79
<PAGE>
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Exchange Notes.
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes will not be redeemable at the
Company's option prior to July 1, 2002. From and after July 1, 2002, the
Exchange Notes will be subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on July 1 of each of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------- -----------
<S> <C>
2002.................. 104.688%
2003.................. 103.125
2004.................. 101.563
2005 and thereafter... 100.000%
</TABLE>
In addition, at any time or from time to time, on or prior to July 1, 2000,
the Company may, at its option, redeem up to 40% of the aggregate principal
amount of Exchange Notes originally issued under the Indenture on the Issuance
Date at a redemption price equal to 109.375% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the redemption
date, with the net proceeds of one or more Equity Offerings; PROVIDED that at
least 60% of the aggregate principal amount of Exchange Notes originally issued
under the Indenture on the Issuance Date remains outstanding immediately after
the occurrence of each such redemption; PROVIDED FURTHER that each such
redemption occurs within 60 days of the date of closing of each such Equity
Offering. The Trustee shall select the Exchange Notes to be purchased in the
manner described under "Repurchase at the Option of Holders--Selection and
Notice."
At any time on or prior to July 1, 2002, the Exchange Notes may also be
redeemed as a whole at the option of the Company upon the occurrence of a Change
of Control or upon the acquisition, in one or a series of related transactions,
of 50% or more of the total Voting Stock of the Company by an Affiliate of KKR
or the sale, lease or transfer, in one or a series of related transactions, of
all or substantially all of the assets of the Company and its Subsidiaries,
taken as a whole, to an Affiliate of KKR, upon not less than 30 nor more than 60
days prior notice (but in no event more than 90 days after the occurrence of
such Change of Control or transfer event) mailed by first-class mail to each
Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued and
unpaid interest, if any, to, the date of redemption (the "Redemption Date")
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
"APPLICABLE PREMIUM" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at July 1, 2002 (such redemption price being described under "--Optional
Redemption") plus (2) all required interest payments due on such Note through
July 1, 2002, computed using a discount rate equal to the Treasury Rate plus 75
basis points, over (B) the principal amount of such Note.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the
period from the Redemption Date to July 1, 2002; PROVIDED,
80
<PAGE>
HOWEVER, that if the period from the Redemption Date to July 1, 2002 is not
equal to the constant maturity of a United States Treasury security for which a
weekly average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to July 1, 2002 is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL. The Indenture provides that, upon the occurrence of a
Change of Control, unless the Company has elected to redeem the Exchange Notes
in connection with such Change of Control at a price of 100% of the principal
amount thereof plus the Applicable Premium as described in "--Optional
Redemption," the Company will make an offer to purchase all or any part (equal
to $1,000 or an integral multiple thereof) of the Exchange Notes pursuant to the
offer described below (the "CHANGE OF CONTROL OFFER") at a price in cash (the
"CHANGE OF CONTROL PAYMENT") equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase. The
Indenture will provide that within 30 days following any Change of Control, the
Company will mail a notice to each Holder, with a copy to the Trustee, with the
following information: (1) a Change of Control Offer is being made pursuant to
the covenant entitled "Change of Control," and that all Exchange Notes properly
tendered pursuant to such Change of Control Offer will be accepted for payment;
(2) the purchase price and the purchase date, which will be no earlier than 30
days nor later than 60 days from the date such notice is mailed, except as may
be otherwise required by applicable law (the "CHANGE OF CONTROL PAYMENT DATE");
(3) any Exchange Note not properly tendered will remain outstanding and continue
to accrue interest; (4) unless the Company defaults in the payment of the Change
of Control Payment, all Exchange Notes accepted for payment pursuant to the
Change of Control Offer will cease to accrue interest on the Change of Control
Payment Date; (5) Holders electing to have any Exchange Notes purchased pursuant
to a Change of Control Offer will be required to surrender the Exchange Notes,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Exchange Notes completed, to the paying agent specified in the notice at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) Holders will be
entitled to withdraw their tendered Exchange Notes and their election to require
the Company to purchase such Exchange Notes, provided that the paying agent
receives, not later than the close of business on the last day of the Offer
Period (as defined in the Indenture), a telegram, telex, facsimile transmission
or letter setting forth the name of the Holder, the principal amount of Exchange
Notes tendered for purchase, and a statement that such Holder is withdrawing his
tendered Exchange Notes and his election to have such Exchange Notes purchased;
and (7) that Holders whose Exchange Notes are being purchased only in part will
be issued new Exchange Notes equal in principal amount to the unpurchased
portion of the Exchange Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple thereof.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding Senior Indebtedness or obtain the
requisite consents, if any, under any outstanding Senior Indebtedness in each
case necessary to permit the repurchase of the Exchange Notes required by this
covenant.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Exchange Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The Indenture provides that on the Change of Control Payment Date, the
Company will, to the extent permitted by law, (1) accept for payment all
Exchange Notes or portions thereof properly tendered
81
<PAGE>
pursuant to the Change of Control Offer, (2) deposit with the paying agent an
amount equal to the aggregate Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (3) deliver, or cause to be
delivered, to the Trustee for cancellation the Exchange Notes so accepted
together with an Officers' Certificate stating that such Exchange Notes or
portions thereof have been tendered to and purchased by the Company. The
Indenture will provide that the paying agent will promptly mail to each Holder
the Change of Control Payment for such Exchange Notes, and the Trustee will
promptly authenticate and mail to each Holder a new Exchange Note equal in
principal amount to any unpurchased portion of the Exchange Notes surrendered,
if any, PROVIDED, that each such new Exchange Note will be in a principal amount
of $1,000 or an integral multiple thereof. The Company will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
The Credit Facilities provide, and future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may, prohibit the Company from purchasing any Exchange Notes as a result of a
Change of Control and/or provide that certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing the Exchange Notes, the Company could seek the consent of its lenders
to the purchase of the Exchange Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing the Exchange Notes. In such case, the Company's failure to purchase
tendered Exchange Notes would constitute an Event of Default under the
Indenture. If, as a result thereof, a default occurs with respect to any Senior
Indebtedness, the subordination provisions in the Indenture would likely
restrict payments to the Holders.
The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
ASSET SALES. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, cause, make or suffer to exist an
Asset Sale, unless (x) the Company, or its Restricted Subsidiaries, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the fair market value (as determined in good faith by the Company) of the assets
sold or otherwise disposed of and (y) at least 75% of the consideration therefor
received by the Company, or such Restricted Subsidiary, as the case may be, is
in the form of cash or Cash Equivalents; PROVIDED that the amount of (a) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto) of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Notes), that are assumed by the transferee of any such assets, (b) any
securities received by the Company or such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received) within 180 days following the closing
of such Asset Sale and (c) any Designated Noncash Consideration received by the
Company or any of its Restricted Subsidiaries in such Asset Sale having an
aggregate fair market value, taken together with all other Designated Noncash
Consideration received pursuant to this clause (c) that is at that time
outstanding, not to exceed the greater of (x) $100 million or (y) 15% of Total
Assets at the time of the receipt of such Designated Noncash Consideration (with
the fair market value of each item of Designated Noncash Consideration being
measured at the time received and without giving effect to subsequent changes in
value), shall be deemed to be cash for purposes of this provision and for no
other purpose.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted
Subsidiary, at its option, may (i) apply the Net Proceeds from such Asset Sale
to permanently reduce (x) Obligations under the Senior Credit Facilities (and to
correspondingly reduce commitments with respect thereto), (y) other Senior
Indebtedness or Pari Passu Indebtedness (PROVIDED that if the Company shall so
reduce Obligations under Pari Passu Indebtedness, it will equally and ratably
reduce Obligations under the Notes if the Notes are then prepayable (the Notes
82
<PAGE>
become prepayable from and after July 1, 2002) or, if the Notes may not be then
prepaid, the Company shall make an offer (in accordance with the procedures set
forth below for an Asset Sale Offer) to all Holders to purchase at 100% of the
principal amount thereof, plus the amount of accrued but unpaid interest, if
any, on, the amount of Notes that would otherwise be prepaid) or (z)
Indebtedness of a Wholly Owned Restricted Subsidiary, (ii) apply the Net
Proceeds from such Asset Sale to an investment in any one or more businesses,
capital expenditures or acquisitions of other assets in each case, used or
useful in a Similar Business (including investments or purchases of non-capital
assets in connection with the construction or expansion of distribution
facilities), (iii) in the case of a sale of a store or stores, deem such Net
Proceeds to have been applied to the extent of any capital expenditures made to
construct or acquire a replacement store in the general vicinity of the store
sold within 365 days preceding the date of the Asset Sale; PROVIDED that Net
Proceeds were not previously excluded from the definition of Excess Proceeds as
a result of the same capital expenditures made to acquire or construct such
replacement store and/or (iv) apply the Net Proceeds from such Asset Sale to an
investment in properties or assets that replace the properties and assets that
are the subject of such Asset Sale. Pending the final application of any such
Net Proceeds, the Company or such Restricted Subsidiary may temporarily reduce
Indebtedness under a revolving credit facility, if any, or otherwise invest such
Net Proceeds in Cash Equivalents or Investment Grade Securities. The Indenture
provides that any Net Proceeds from the Asset Sale that are not invested as
provided and within the time period set forth in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $15.0 million, the Company shall make an offer
to all Holders (an "Asset Sale Offer") to purchase the maximum principal amount
of Notes, that is an integral multiple of $1,000, that may be purchased out of
the Excess Proceeds at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
fixed for the closing of such offer, in accordance with the procedures set forth
in the Indenture. The Company will commence an Asset Sale Offer with respect to
Excess Proceeds within ten Business Days after the date that Excess Proceeds
exceeds $15.0 million by mailing the notice required pursuant to the terms of
the Indenture, with a copy to the Trustee. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased in the manner described under the caption "Selection
and Notice" below. Upon completion of any such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
The Credit Facilities prohibit, and future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may prohibit, the Company from purchasing any Notes pursuant to this Asset Sales
covenant. In the event the Company is prohibited from purchasing the Notes, the
Company could seek the consent of its lenders to the purchase of the Notes or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing the Exchange Notes. In such case, the
Company's failure to purchase tendered Notes would constitute an Event of
Default under the Indenture. If, as a result thereof, a default occurs with
respect to any Senior Indebtedness, the subordination provisions in the
Indenture would likely restrict payments to the Holders.
SELECTION AND NOTICE. If less than all of the Notes are to be redeemed at
any time or if more Notes are tendered pursuant to an Asset Sale Offer than the
Company is required to purchase, selection of such Notes for redemption or
purchase, as the case may be, will be made by the Trustee in compliance with the
83
<PAGE>
requirements of the principal national securities exchange, if any, on which
such Notes are listed, or, if such Notes are not so listed, on a pro rata basis,
by lot or by such other method as the Trustee shall deem fair and appropriate
(and in such manner as complies with applicable legal requirements); provided
that no Exchange Notes of $1,000 or less shall be purchased or redeemed in part.
Notices of purchase or redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the purchase or
redemption date to each Holder to be purchased or redeemed at such Holder's
registered address. If any Note is to be purchased or redeemed in part only, any
notice of purchase or redemption that relates to such Note shall state the
portion of the principal amount thereof that has been or is to be purchased or
redeemed.
A new Note in principal amount equal to the unpurchased or unredeemed
portion of any Note purchased or redeemed in part will be issued in the name of
the Holder thereof upon cancellation of the original Note. On and after the
purchase or redemption date unless the Company defaults in payment of the
purchase or redemption price, interest shall cease to accrue on Notes or
portions thereof purchased or called for redemption.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests,
including any dividend or distribution payable in connection with any merger or
consolidation (other than (A) dividends or distributions by the Company payable
in Equity Interests (other than Disqualified Stock) of the Company or (B)
dividends or distributions by a Restricted Subsidiary so long as, in the case of
any dividend or distribution payable on or in respect of any class or series of
securities issued by a Subsidiary other than a Wholly Owned Subsidiary, the
Company or a Restricted Subsidiary receives at least its pro rata share of such
dividend or distribution in accordance with its Equity Interests in such class
or series of securities); (ii) purchase, redeem, defease or otherwise acquire or
retire for value any Equity Interests of the Company or any direct or indirect
parent of the Company; (iii) make any principal payment on, or redeem,
repurchase, defease or otherwise acquire or retire for value in each case, prior
to any scheduled repayment, or maturity, any Subordinated Indebtedness (other
than Indebtedness permitted under clauses (g) and (h) of the covenant described
under "--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"); or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of the first paragraph of
"--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issuance Date (including Restricted Payments
permitted by clauses (i), (ii) (with respect to the payment of dividends on
Refunding Capital Stock pursuant to clause (b) thereof), (iv) (only to the
extent that amounts paid pursuant to such clause are greater than amounts
that would have been paid pursuant to such clause if $5.0 million and $10.0
million were substituted in such clause for $10.0 million and $20.0 million,
respectively), (v), (viii), (ix) and (xiii) of the next succeeding
paragraph, but excluding all other Restricted Payments permitted by the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from the fiscal quarter that first begins after the Issuance Date to the end
of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
84
<PAGE>
Payment (or, in the case such Consolidated Net Income for such period is a
deficit, minus 100% of such deficit), PLUS (ii) 100% of the aggregate net
cash proceeds and the fair market value, as determined in good faith by the
Board of Directors, of marketable securities received by the Company since
immediately after the closing of the Recapitalization and the Financings
from the issue or sale of Equity Interests of the Company (including Retired
Capital Stock (as defined below), but excluding cash proceeds and marketable
securities received from the sale of (A) Equity Interests to members of
management, directors or consultants of the Company and its Subsidiaries
after the Issuance Date to the extent such amounts have been applied to
Restricted Payments in accordance with clause (iv) of the next succeeding
paragraph, and (B) Designated Preferred Stock) or debt securities of the
Company that have been converted into such Equity Interests of the Company
(other than Refunding Capital Stock (as defined below) or Equity Interests
or convertible debt securities of the Company sold to a Restricted
Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock), PLUS (iii)
100% of the aggregate amount of cash and marketable securities contributed
to the capital of the Company following the Issuance Date, PLUS (iv) 100% of
the aggregate amount received in cash and the fair market value of
marketable securities (other than Restricted Investments) received from (A)
the sale or other disposition (other than to the Company or a Restricted
Subsidiary) of Restricted Investments made by the Company and its Restricted
Subsidiaries and repurchases and redemptions of such Restricted Investments
from the Company and its Restricted Subsidiaries by such Person and
repayments of loans or advances which constitute Restricted Investments to
the Company and its Restricted Subsidiaries or (B) a dividend from, or the
sale (other than to the Company or a Restricted Subsidiary) of the stock of,
an Unrestricted Subsidiary (other than an Unrestricted Subsidiary the
Investment in which was made by the Company or a Restricted Subsidiary
pursuant to clauses (vi), (x) or (xi) below).
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) (a) the redemption, repurchase, retirement or other acquisition of
any Equity Interests (the "RETIRED CAPITAL STOCK") or Subordinated
Indebtedness of the Company in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of,
Equity Interests of the Company (other than any Disqualified Stock) (the
"REFUNDING CAPITAL STOCK"), and (b) the declaration and payment of dividends
on the Refunding Capital Stock in an aggregate amount per year no greater
than the aggregate amount of dividends per annum that was declarable and
payable on such Retired Capital Stock immediately prior to such retirement;
PROVIDED, HOWEVER, that at the time of the declaration of any such
dividends, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(iii) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Company so long as (A) the principal amount of such new Indebtedness does
not exceed the principal amount of the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired for value (PLUS the amount of any
premium required to be paid under the terms of the instrument governing the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired), (B) such Indebtedness is subordinated to the Senior Indebtedness
and the Notes at least to the same extent as such Subordinated Indebtedness
so purchased, exchanged, redeemed, repurchased, acquired or retired for
value, (C) such Indebtedness has a final scheduled maturity date equal to or
later than the final scheduled maturity date of the Subordinated
Indebtedness being so redeemed, repurchased, acquired or retired and (D)
such Indebtedness has a Weighted Average Life to Maturity equal to or
greater than the remaining Weighted Average Life to Maturity of the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired;
85
<PAGE>
(iv) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of common Equity Interests of the
Company held by any future, present or former employee, director or
consultant of the Company or any Subsidiary pursuant to any management
equity plan or stock option plan or any other management or employee benefit
plan or agreement; PROVIDED, HOWEVER, that the aggregate Restricted Payments
made under this clause (iv) does not exceed in any calendar year $10.0
million (with unused amounts in any calendar year being carried over to
succeeding calendar years subject to a maximum (without giving effect to the
following proviso) of $20.0 million in any calendar year); PROVIDED FURTHER
that such amount in any calendar year may be increased by an amount not to
exceed (A) the cash proceeds from the sale of Equity Interests of the
Company to members of management, directors or consultants of the Company
and its Subsidiaries that occurs after the Issuance Date (to the extent the
cash proceeds from the sale of such Equity Interest have not otherwise been
applied to the payment of Restricted Payments by virtue of the preceding
paragraph (c)) plus (B) the cash proceeds of key man life insurance policies
received by the Company and its Restricted Subsidiaries after the Issuance
Date less (C) the amount of any, Restricted Payments previously made
pursuant to clauses (A) and (B) of this subparagraph (iv); and PROVIDED
FURTHER that cancellation of Indebtedness owing to the Company from members
of management of the Company or any of its Restricted Subsidiaries in
connection with a repurchase of Equity Interests of the Company will not be
deemed to constitute a Restricted Payment for purposes of this covenant or
any other provision of the Indenture;
(v) (A) the declaration and payment of dividends to holders of any class
or series of Designated Preferred Stock (other than Disqualified Stock)
issued after the Issuance Date or (B) the declaration and payment of
dividends on Refunding Capital Stock in excess of the dividends declarable
and payable thereon pursuant to clause (ii); PROVIDED, HOWEVER, in either
case, that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Designated Preferred Stock or the declaration of such
dividends on Refunding Capital Stock, after giving effect to such issuance
or declaration on a pro forma basis, the Company and its Restricted
Subsidiaries would have had a Fixed Charge Coverage Ratio of at least 1.75
to 1.00;
(vi) Investments in Unrestricted Subsidiaries having an aggregate fair
market value, taken together with all other Investments made pursuant to
this clause (vi) that are at that time outstanding, not to exceed $25.0
million at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);
(vii) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(viii) the payment of dividends on the Company's Common Stock, following
the first public offering of the Company's Common Stock after the Issuance
Date, of up to 6% per annum of the net proceeds received by the Company in
such public offering, other than public offerings with respect to the
Company's Common Stock registered on Form S-8;
(ix) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of Equity Interests of the Company in
existence on the Issuance Date and which are not held by KKR or any of its
Affiliates on the Issuance Date (including any Equity Interests issued in
respect of such Equity Interests as a result of a stock split,
recapitalization, merger, combination, consolidation or otherwise), PROVIDED
that the aggregate Restricted Payments made under this clause (ix) shall not
exceed $105 million; PROVIDED FURTHER that the aggregate amount expended
under this clause (ix) shall not exceed $35 million in the fiscal year
ending June 27, 1998; or $70 million in the two fiscal years ending June 26,
1999; PROVIDED FURTHER that notwithstanding the foregoing provisos, the
Company shall be permitted to make Restricted Payments under this clause
(ix) only if after giving effect thereto, the Company would be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first sentence of the covenant
described under "--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock";
86
<PAGE>
(x) Investments in Unrestricted Subsidiaries that are made with Excluded
Contributions;
(xi) other Restricted Payments in an aggregate amount not to exceed
$20.0 million;
(xii) the payment of any amount in connection with the Recapitalization
and the Financings and the documents executed in connection therewith,
including, without limitation, payments in respect of the Putable Shares
Reserve Fund; and
(xiii) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of Equity Interests owned by the
Employee Stock Ownership Plan or the Key Employee Stock Ownership Plan;
PROVIDED HOWEVER, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (iii) through (ix) and clauses (xi)
and (xiii), no Default or Event or Default shall have occurred and be continuing
or would occur as a consequence thereof.
As of the Issuance Date, all of the Company's Subsidiaries were Restricted
Subsidiaries. The Company will not permit any Unrestricted Subsidiary to become
a Restricted Subsidiary except pursuant to the second to last sentence of the
definition of "Unrestricted Subsidiary." For purposes of designating any
Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid) in
the Subsidiary so designated will be deemed to be Restricted Payments in an
amount determined as set forth in the last sentence of the definition of
"Investments." Such designation will be permitted only if a Restricted Payment
in such amount would be permitted at such time (whether pursuant to the first
paragraph of this covenant or under clauses (vi) and (x) and (xi)) and if such
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
Unrestricted Subsidiaries will not be subject to any of the restrictive
covenants set forth in the Indenture.
LIMITATIONS ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED
STOCK. The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "INCUR" and
collectively, an "INCURRENCE") any Indebtedness (including Acquired
Indebtedness) and that the Company will not issue any shares of Disqualified
Stock and will not permit any of its Restricted Subsidiaries to issue any shares
of preferred stock; PROVIDED, HOWEVER, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock if the
Fixed Charge Coverage Ratio for the Company's and the Restricted Subsidiaries'
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 1.75 to 1.00, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, and the application of proceeds therefrom had occurred at the beginning of
such four-quarter period.
The foregoing limitations will not apply to:
(a) the incurrence by the Company of Indebtedness under Credit
Facilities and the issuance and creation of letters of credit and bankers'
acceptances thereunder (with letters of credit and bankers' acceptances
being deemed to have a principal amount equal to the face amount thereof) up
to an aggregate principal amount of $450 million outstanding at any one
time;
(b) the incurrence by the Company of Indebtedness represented by the
Notes;
(c) the Existing Indebtedness (other than Indebtedness described in
clauses (a) and (b));
(d) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries, to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
incurred pursuant to this clause
87
<PAGE>
(d) and including all Refinancing Indebtedness incurred to refund, refinance
or replace any other Indebtedness incurred pursuant to this clause (d), does
not exceed 20% of Total Assets;
(e) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(f) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; PROVIDED, HOWEVER, that (i) such Indebtedness is
not reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote to financial
statements and not otherwise reflected on the balance sheet will not be
deemed to be reflected on such balance sheet for purposes of this clause
(i)) and (ii) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including noncash
proceeds (the fair market value of such noncash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(g) Indebtedness of the Company to a Restricted Subsidiary; PROVIDED
that any such Indebtedness is made pursuant to an intercompany note and is
subordinated in right of payment to the Notes; PROVIDED further that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any other subsequent transfer of any such Indebtedness (except
to the Company or another Restricted Subsidiary) shall be deemed, in each
case to be an incurrence of such Indebtedness;
(h) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; PROVIDED that (i) any such Indebtedness is made
pursuant to an intercompany note and (ii) if a Guarantor incurs such
Indebtedness from a Restricted Subsidiary that is not a Guarantor such
Indebtedness is subordinated in right of payment to the Guarantee of such
Guarantor; PROVIDED FURTHER that any subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case to be an incurrence of such Indebtedness;
(i) Hedging Obligations that are incurred in the ordinary course of
business for the purpose of fixing or hedging interest rate risk with
respect to any Indebtedness that is permitted by the terms of the Indenture
to be outstanding;
(j) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(k) Indebtedness of any Guarantor in respect of such Guarantor's
Guarantee;
(l) Indebtedness of the Company and any of its Restricted Subsidiaries
not otherwise permitted hereunder in an aggregate principal amount, which
when aggregated with the principal amount of all other Indebtedness then
outstanding and incurred pursuant to this clause (l), does not exceed $150.0
million at any one time outstanding; PROVIDED, HOWEVER, that the aggregate
principal amount of such Indebtedness which may be incurred by Restricted
Subsidiaries does not exceed $100.0 million at any one time outstanding; (it
being understood that any Indebtedness incurred under this clause (l) shall
cease to be deemed incurred or outstanding for purposes of this clause (l)
but shall be deemed to be incurred for purposes of the first paragraph of
this covenant from and after the first date on which the
88
<PAGE>
Company could have incurred such Indebtedness under the first paragraph of
this covenant without reliance upon this clause (l));
(m) (i) any guarantee by the Company of Indebtedness or other
obligations of any of its Restricted Subsidiaries so long as the incurrence
of such Indebtedness incurred by such Restricted Subsidiary is permitted
under the terms of the Indenture and (ii) any Excluded Guarantee (as defined
below under "--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries") of a Restricted Subsidiary;
(n) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness which serves to refund, refinance or restructure any
Indebtedness incurred as permitted under the first paragraph of this
covenant and clauses (b) and (c) above, or any Indebtedness issued to so
refund, refinance or restructure such Indebtedness including additional
Indebtedness incurred to pay premiums and fees in connection therewith (the
"REFINANCING INDEBTEDNESS") prior to its respective maturity; PROVIDED,
HOWEVER, that such Refinancing Indebtedness (i) has a Weighted Average Life
to Maturity at the time such Refinancing Indebtedness is incurred which is
not less than the remaining Weighted Average Life to Maturity of
Indebtedness being refunded or refinanced, (ii) to the extent such
Refinancing Indebtedness refinances Indebtedness subordinated or PARI PASSU
to the Notes, such Refinancing Indebtedness is subordinated or PARI PASSU to
the Notes at least to the same extent as the Indebtedness being refinanced
or refunded and (iii) shall not include (x) Indebtedness of a Subsidiary
that refinances Indebtedness of the Company or (y) Indebtedness of the
Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary; and PROVIDED FURTHER that subclauses (i) and (ii)
of this clause (n) will not apply to any refunding or refinancing of any
Senior Indebtedness;
(o) Indebtedness or Disqualified Stock of Persons that are acquired by
the Company or any of its Restricted Subsidiaries or merged into a
Restricted Subsidiary in accordance with the terms of the Indenture;
PROVIDED that such Indebtedness or Disqualified Stock is not incurred in
contemplation of such acquisition or merger; and PROVIDED FURTHER that after
giving effect to such acquisition, either (i) the Company would be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first sentence of this covenant
or (ii) the Fixed Charge Coverage Ratio is greater than immediately prior to
such acquisition; and
(p) Contingent Obligations in the form of guarantees, whether by
operation of law or otherwise, of Indebtedness of joint ventures in
existence on the Issuance Date to which the Company or its Restricted
Subsidiaries is a party.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
permitted Indebtedness described in clauses (a) through (p) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any manner
that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof except as otherwise set forth in clause (l). Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
LIENS. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
Pari Passu Indebtedness or Subordinated Indebtedness on any asset or property of
the Company or such Restricted Subsidiary, or any income or profits therefrom,
or assign or convey any right to receive income therefrom, unless the Notes are
equally and ratably secured with the obligations so secured or until such time
as such obligations are no longer secured by a Lien.
The Indenture provides that no Guarantor will directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
Pari Passu Indebtedness or Subordinated Indebtedness of
89
<PAGE>
such Guarantor on any asset or property of such Guarantor or any income or
profits therefrom, or assign or convey any right to receive income therefrom,
unless the Guarantee of such Guarantor is equally and ratably secured with the
obligations so secured or until such time as such obligations are no longer
secured by a Lien.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. The
Indenture provides that the Company may not consolidate or merge with or into or
wind up into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to any Person
unless (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made is a corporation organized or existing under the laws of the
United States, any state thereof, the District of Columbia, or any territory
thereof (the Company or such Person, as the case may be, being herein called the
"SUCCESSOR COMPANY"); (ii) the Successor Company (if other than the Company)
expressly assumes all the obligations of the Company under the Indenture and the
Notes pursuant to a supplemental indenture or other documents or instruments in
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) immediately after giving
pro forma effect to such transaction, as if such transaction had occurred at the
beginning of the applicable four-quarter period, (A) the Successor Company would
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first sentence of the covenant
described under "--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock" or (B) the Fixed Charge Coverage Ratio for the Successor
Company and its Restricted Subsidiaries would be greater than such Ratio for the
Company and its Restricted Subsidiaries immediately prior to such transaction;
(v) each Guarantor, if any, unless it is the other party to the transactions
described above, in which case clause (ii) shall apply, shall have by
supplemental indenture confirmed that its Guarantee shall apply to such Person's
obligations under the Indenture and the Notes; and (vi) the Company shall have
delivered to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture. The Successor Company will succeed
to, and be substituted for, the Company under the Indenture and the Notes.
Notwithstanding the foregoing clause (iv), (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
State of the United States so long as the amount of Indebtedness of the Company
and its Restricted Subsidiaries is not increased thereby.
Each Guarantor, if any, shall not, and the Company will not permit a
Guarantor to, consolidate or merge with or into or wind up into (whether or not
such Guarantor is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any Person unless (i) such
Guarantor is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) or to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made is a corporation organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory thereof
(such Guarantor or such Person, as the case may be, being herein called the
"SUCCESSOR GUARANTOR"); (ii) the Successor Guarantor (if other than such
Guarantor) expressly assumes all the obligations of such Guarantor under the
Indenture and such Guarantor's Guarantee pursuant to a supplemental indenture or
other documents or instruments in form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
and (iv) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture. The Successor Guarantor will succeed to, and be substituted for, such
Guarantor under the Indenture and such Guarantor's Guarantee.
90
<PAGE>
TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, make any payment
to, or sell, lease, transfer or otherwise dispose of any of its properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an
"AFFILIATE TRANSACTION") involving aggregate payments or consideration in excess
of $5.0 million, unless (a) such Affiliate Transaction is on terms that are not
materially less favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person and (b) the
Company delivers to the Trustee with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, a resolution adopted by the majority of the Board of
Directors approving such Affiliate Transaction and set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (a)
above.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments permitted by the provisions of the Indenture described above
under the covenant "--Limitation on Restricted Payments"; (iii) the payment of
customary annual management, consulting and advisory fees and related expenses
to KKR and its Affiliates; (iv) the payment of reasonable and customary fees
paid to, and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any Restricted Subsidiary; (v) payments by the
Company or any of its Restricted Subsidiaries to KKR and its Affiliates made for
any financial advisory, financing, underwriting or placement services or in
respect of other investment banking activities, including, without limitation,
in connection with acquisitions or divestitures which payments are approved by a
majority of the Board of Directors of the Company in good faith; (vi)
transactions in which the Company or any of its Restricted Subsidiaries, as the
case may be, delivers to the Trustee a letter from an Independent Financial
Advisor stating that such transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view or meets the requirements of clause
(a) of the preceding paragraph; (vii) payments or loans to employees or
consultants which are approved by a majority of the Board of Directors of the
Company in good faith; (viii) any agreement as in effect as of the Issuance Date
or any amendment thereto (so long as any such amendment is not disadvantageous
to the Holders in any material respect) or any transaction contemplated thereby;
(ix) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any stockholders
agreement (including any registration rights agreement or purchase agreement
related thereto) to which it is a party as of the Issuance Date and any similar
agreements which it may enter into thereafter; PROVIDED, HOWEVER, that the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under any future amendment to any such existing
agreement or under any similar agreement entered into after the Issuance Date
shall only be permitted by this clause (ix) to the extent that the terms of any
such amendment or new agreement are not otherwise disadvantageous to the Holders
in any material respect; (x) the Recapitalization and the Financings and the
payment of all fees and expenses related to the Recapitalization and the
Financings; and (xi) transactions with customers, clients, suppliers, or
purchasers or sellers of goods or services, in each case in the ordinary course
of business and otherwise in compliance with the terms of the Indenture which
are fair to the Company or its Restricted Subsidiaries, in the reasonable
determination of the Board of Directors of the Company or the senior management
thereof, or are on terms at least as favorable as might reasonably have been
obtained at such time from an unaffiliated party.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to:
(a) (i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or
91
<PAGE>
measured by, its profits, or (ii) pay any Indebtedness owed to the Company
or any of its Restricted Subsidiaries;
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(c) sell, lease or transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries; except (in each case) for
such encumbrances or restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions in effect on the Issuance
Date, including, without limitation, pursuant to Existing Indebtedness or
the Senior Credit Facilities and their related documentation;
(2) the Indenture and the Notes;
(3) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed in
clause (c) above on the property so acquired;
(4) applicable law or any applicable rule, regulation or order;
(5) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person,
so acquired;
(6) contracts for the sale of assets, including, without limitation
customary restrictions with respect to a Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary;
(7) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "--Limitations on Incurrence of Indebtedness
and Issuance of Disqualified Stock" and "--Liens" that limit the right of
the debtor to dispose of the assets securing such Indebtedness;
(8) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(9) other Indebtedness of Restricted Subsidiaries permitted to be
incurred subsequent to the Issuance Date pursuant to the provisions of the
covenant described under "--Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock";
(10) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
(11) any Mortgage Financing or Mortgage Refinancing that imposes
restrictions on the real property securing such Indebtedness;
(12) customary provisions contained in leases and other agreements
entered into in the ordinary course of business; or
(13) any encumbrances or restrictions of the type referred to in clauses
(a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in
clauses (1) through (12) above, PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the
Company's Board of Directors, no more restrictive with respect to such
dividend and other payment restrictions than those contained in the dividend
or other payment restrictions prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding, replacement or
refinancing.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED
SUBSIDIARIES. (a) The Indenture provides that the Company will not permit any
Restricted Subsidiary to guarantee the payment of any Indebtedness
92
<PAGE>
of the Company or any Indebtedness of any other Restricted Subsidiary unless (i)
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee of payment of the Notes by
such Restricted Subsidiary except that with respect to a guarantee of
Indebtedness of the Company (A) if the Notes are subordinated in right of
payment to such Indebtedness, the Guarantee under the supplemental indenture
shall be subordinated to such Restricted Subsidiary's guarantee with respect to
such Indebtedness substantially to the same extent as the Notes are subordinated
to such Indebtedness under the Indenture and (B) if such Indebtedness is by its
express terms subordinated in right of payment to the Notes, any such guarantee
of such Restricted Subsidiary with respect to such Indebtedness shall be
subordinated in right of payment to such Restricted Subsidiary's Guarantee with
respect to the Notes substantially to the same extent as such Indebtedness is
subordinated to the Notes; (ii) such Restricted Subsidiary waives and will not
in any manner whatsoever claim or take the benefit or advantage of, any rights
of reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Guarantee; and (iii) such Restricted Subsidiary
shall deliver to the Trustee an opinion of counsel to the effect that (A) such
Guarantee of the Notes has been duly executed and authorized and (B) such
Guarantee of the Notes constitutes a valid, binding and enforceable obligation
of such Restricted Subsidiary, except insofar as enforcement thereof may be
limited by bankruptcy, insolvency or similar laws (including, without
limitation, all laws relating to fraudulent transfers) and except insofar as
enforcement thereof is subject to general principles of equity; PROVIDED that
this paragraph (a) shall not be applicable to any guarantee of any Restricted
Subsidiary (x) that (A) existed at the time such Person became a Restricted
Subsidiary of the Company and (B) was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary of the Company or
(y) that guarantees the payment of Obligations of the Company or any Restricted
Subsidiary under the Senior Credit Facilities or any other Senior Indebtedness
and any refunding, refinancing or replacement thereof, in whole or in part,
PROVIDED that such refunding, refinancing or replacement thereof constitutes
Senior Indebtedness and is not incurred pursuant to a registered offering of
securities under the Securities Act or a private placement of securities
(including under Rule 144A) pursuant to an exemption from the registration
requirements of the Securities Act, which private placement provides for
registration rights under the Securities Act (any guarantee excluded by
operations of this clause (y) being an "Excluded Guarantee").
(b) Notwithstanding the foregoing and the other provisions of the Indenture,
any Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture) or (ii) the release or discharge of the
guarantee which resulted in the creation of such Guarantee, except a discharge
or release by or as a result of payment under such guarantee.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The Indenture
provides that the Company will not, and will not permit any Guarantor to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
that is subordinate in right of payment to any Indebtedness of the Company or
any Indebtedness of any Guarantor, as the case may be, unless such Indebtedness
is either (a) PARI PASSU in right of payment with the Notes or such Guarantor's
Guarantee, as the case may be or (b) subordinate in right of payment to the
Notes, or such Guarantor's Guarantee, as the case may be, in the same manner and
at least to the same extent as the Notes are subordinate to Senior Indebtedness
or such Guarantor's Guarantee is subordinate to such Guarantor's Senior
Indebtedness, as the case may be.
REPORTS AND OTHER INFORMATION. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
or otherwise report on an annual and quarterly basis on forms PROVIDED for such
annual and quarterly reporting pursuant to rules and regulations promulgated by
the Securities and Exchange Commission (the "COMMISSION"), the Indenture
requires the Company to file with the Commission (and provide the Trustee and
Holders with copies thereof, without cost to each Holder, within 15 days after
it files them with the Commission), (a) within 90 days after the
93
<PAGE>
end of each fiscal year, annual reports on Form 10-K (or any successor or
comparable form) containing the information required to be contained therein (or
required in such successor or comparable form); (b) within 45 days after the end
of each of the first three fiscal quarters of each fiscal year, reports on Form
10-Q (or any successor or comparable form); (c) promptly from time to time after
the occurrence of an event required to be therein reported, such other reports
on Form 8-K (or any successor or comparable form); and (d) any other
information, documents and other reports which the Company would be required to
file with the Commission if it were subject to Section 13 or 15(d) of the
Exchange Act; PROVIDED, HOWEVER, the Company shall not be so obligated to file
such reports with the Commission if the Commission does not permit such filing,
in which event the Company will make available such information to prospective
purchasers of Notes, in addition to providing such information to the Trustee
and the Holders, in each case within 15 days after the time the Company would be
required to file such information with the Commission, if it were subject to
Sections 13 or 15(d) of the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute Events of Default under the Indenture:
(i) default in payment when due and payable, upon redemption,
acceleration or otherwise, of principal of, or premium on, if any, the Notes
whether or not such payment shall be prohibited by the subordination
provisions relating to the Notes;
(ii) default for 30 days or more in the payment when due of interest on
or with respect to the Notes whether or not such payment shall be prohibited
by the subordination provisions relating to the Notes;
(iii) failure by the Company or any Guarantor for 30 days after receipt
of written notice given by the Trustee or the holders of at least 30% in
principal amount of the Notes then outstanding to comply with any of its
other agreements in the Indenture or the Notes;
(iv) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries (other than Indebtedness owed to the Company or a Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or is created
after the Issuance Date, if both (A) such default either (1) results from
the failure to pay any such Indebtedness at its stated final maturity (after
giving effect to any applicable grace periods) or (2) relates to an
obligation other than the obligation to pay principal of any such
Indebtedness at its stated final maturity and results in the holder or
holders of such Indebtedness causing such Indebtedness to become due prior
to its stated maturity and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at stated final maturity (after giving effect
to any applicable grace periods), or the maturity of which has been so
accelerated, aggregate $20.0 million or more at any one time outstanding;
(v) failure by the Company or any of its Significant Subsidiaries to pay
final judgments aggregating in excess of $20.0 million, which final
judgments remain unpaid, undischarged and unstayed for a period of more than
60 days after such judgment becomes final, and in the event such judgment is
covered by insurance, an enforcement proceeding has been commenced by any
creditor upon such judgment or decree which is not promptly stayed;
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; or
(vii) the Guarantee of any Significant Subsidiary shall for any reason
cease to be in full force and effect or be declared null and void or any
responsible officer of the Company or any Guarantor that is a Significant
Subsidiary denies that it has any further liability under its Guarantee or
gives notice to
94
<PAGE>
such effect (other than by reason of the termination of the Indenture or the
release of any such Guarantee in accordance with the Indenture).
If any Event of Default (other than of a type specified in clause (vi)
above) occurs and is continuing under the Indenture, the Trustee or the Holders
of at least 30% in principal amount of the then outstanding Notes may declare
the principal, premium, if any, interest and any other monetary obligations on
all the then outstanding Notes to be due and payable immediately; PROVIDED,
HOWEVER, that, so long as any Indebtedness permitted to be incurred pursuant to
the Senior Credit Facilities shall be outstanding, no such acceleration shall be
effective until the earlier of (i) acceleration of any such Indebtedness under
the Senior Credit Facilities or (ii) five business days after the giving of
written notice to the Company and the administrative agent under the Senior
Credit Facilities of such acceleration. Upon the effectiveness of such
declaration, such principal and interest will be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising under
clause (vi) of the first paragraph of this section, all outstanding Notes will
become due and payable without further action or notice. Holders may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Indenture provides that the Trustee may withhold from Holders notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal, premium, if any, or interest) if it
determines that withholding notice is in their interest. In addition, the
Trustee shall have no obligation to accelerate the Notes if in the best judgment
of the Trustee acceleration is not in the best interest of the Holders of such
Notes.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the then outstanding Notes issued thereunder by notice to the Trustee
may on behalf of the Holders of all of such Notes waive any existing Default or
Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, premium, if any, or
the principal of any such Note held by a non-consenting Holder. In the event of
any Event of Default specified in clause (iv) above, such Event of Default and
all consequences thereof (including without limitation any acceleration or
resulting payment default) shall be annulled, waived and rescinded,
automatically and without any action by the Trustee or the Holders, if within 20
days after such Event of Default arose (x) the Indebtedness or guarantee that is
the basis for such Event of Default has been discharged, or (y) the holders
thereof have rescinded or waived the acceleration, notice or action (as the case
may be) giving rise to such Event of Default, or (z) if the default that is the
basis for such Event of Default has been cured.
The Indenture provides that the Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required, within five Business Days, upon becoming aware of any
Default or Event of Default or any default under any document, instrument or
agreement representing Indebtedness of the Company or any Guarantor, to deliver
to the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, shall have any liability for any obligations of the Company or
the Guarantors under the Exchange Notes, the Guarantees or the Indenture or for
any claim based on, in respect of, or by reason of such obligations or their
creation. Each Holder by accepting an Exchange Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Exchange Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The obligations of the Company and the Guarantors, if any, under the
Indenture will terminate (other than certain obligations) and will be released
upon payment in full of all of the Notes. The Company may, at its option and at
any time, elect to have all of its obligations discharged with respect to the
outstanding
95
<PAGE>
Notes and have each Guarantor's obligation discharged with respect to its
Guarantee ("LEGAL DEFEASANCE") and cure all then existing Events of Default
except for (i) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due solely out of the trust created pursuant to the Indenture,
(ii) the Company's obligations with respect to Notes concerning issuing
temporary Notes, registration of such Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and each Guarantor released with respect to certain
covenants that are described in the Indenture ("COVENANT DEFEASANCE") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment on other
indebtedness, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Notes:
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest due on
the outstanding Notes on the stated maturity date or on the applicable
redemption date, as the case may be, of such principal, premium, if any, or
interest on the outstanding Notes;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that, subject to customary assumptions
and exclusions, (A) the Company has received from, or there has been
published by, the United States Internal Revenue Service a ruling or (B)
since the Issuance Date, there has been a change in the applicable U.S.
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, subject to
customary assumptions and exclusions, the Holders will not recognize income,
gain or loss for U.S. federal income tax purposes as a result of such Legal
Defeasance and will be subject to U.S. federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders will not recognize income, gain or
loss for U.S. federal income tax purposes as a result of such Covenant
Defeasance and will be subject to such tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing with respect to certain Events of Default on the date of such
deposit or with respect to certain bankruptcy or insolvency Events of
Default on the 91st day after such date of deposit;
96
<PAGE>
(v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the Indenture) to which, the Company or
any Guarantor is a party or by which the Company or any Guarantor is bound;
(vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, as of the date of such opinion and subject to
customary assumptions and exclusions following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. federal or state law, and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of
the Holders;
(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of defeating, hindering, delaying or defrauding any creditors of the
Company or any Guarantor or others; and
(viii) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel in the United States (which opinion of
counsel may be subject to customary assumptions and exclusions) each stating
that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all Notes issued thereunder, when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust) have been delivered to the Trustee for cancellation; or (b)
(i) all such Notes not theretofore delivered to such Trustee for cancellation
have become due and payable by reason of the making of a notice of redemption or
otherwise or will become due and payable within one year and the Company or any
Guarantor has irrevocably deposited or caused to be deposited with such Trustee
as trust funds in trust solely for the benefit of the Holders, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient without consideration of any reinvestment of
interest to pay and discharge the entire indebtedness on such Notes not
theretofore delivered to the Trustee for cancellation for principal, premium, if
any, and accrued interest to the date of maturity or redemption; (ii) no Default
or Event of Default with respect to the Indenture or the Notes shall have
occurred and be continuing on the date of such deposit or shall occur as a
result of such deposit and such deposit will not result in a breach or violation
of, or constitute a default under, any other instrument to which the Company or
any Guarantor is a party or by which the Company or any Guarantor is bound;
(iii) the Company or any Guarantor has paid or caused to be paid all sums
payable by it under such Indenture; and (iv) the Company has delivered
irrevocable instructions to the Trustee under such Indenture to apply the
deposited money toward the payment of such Notes at maturity or the redemption
date, as the case may be. In addition, the Company must deliver an Officers'
Certificate and an opinion of counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder will be treated as the owner of it for all purposes.
97
<PAGE>
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, any
Guarantee and the Notes issued thereunder may be amended or supplemented with
the consent of the Holders of at least a majority in principal amount of the
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing default or compliance with any provision of the Indenture or
the Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a purchase of or tender offer or exchange offer for Notes).
The Indenture provides that without the consent of each Holder affected, an
amendment or waiver may not (with respect to any Notes held by a non-consenting
Holder): (i) reduce the principal amount of Notes whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any such Note or alter or waive the provisions with respect to
the redemption of the Notes (other than provisions relating to the covenants
described above under the caption "-- Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of such Notes and a waiver of the payment default that resulted from such
acceleration), or in respect of a covenant or provision contained in the
Indenture or any Guarantee which cannot be amended or modified without the
consent of all Holders, (v) make any Note payable in money other than that
stated in such Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders to receive
payments of principal of or premium, if any, or interest on the Notes, (vii)
make any change in the foregoing amendment and waiver provisions, (viii) impair
the right of any Holder to receive payment of principal of, or interest on such
Holder's Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such Holder's Notes or (ix)
make any change in the subordination provisions of the Indenture that would
adversely affect the Holders.
The Indenture provides that, notwithstanding the foregoing, without the
consent of any Holder, the Company, any Guarantor (with respect to a Guarantee
or the Indenture to which it is a party) and the Trustee may amend or supplement
the Indenture, any Guarantee or the Notes (i) to cure any ambiguity, defect or
inconsistency, (ii) to provide for uncertificated Notes in addition to or in
place of certificated Notes, (iii) to comply with the covenant relating to
mergers, consolidations and sales of assets, (iv) to provide for the assumption
of the Company's or any Guarantor's obligations to Holders, (v) to make any
change that would provide any additional rights or benefits to the Holders or
that does not adversely affect the legal rights under the Indenture of any such
Holder, (vi) to add covenants for the benefit of the Holders or to surrender any
right or power conferred upon the Company, (vii) to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act, (viii) to evidence and provide for the acceptance
and appointment under the Indenture of a successor Trustee pursuant to the
requirements thereof, or (ix) to add a Guarantor under the Indenture.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
98
<PAGE>
The Indenture provides that the Holders of a majority in principal amount of
the outstanding Notes issued thereunder will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. The Indenture provides
that in case an Event of Default shall occur (which shall not be cured), the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of his own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of such Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
GOVERNING LAW
The Indenture, the Notes and the Guarantees, if any, are and will be,
subject to certain exceptions, governed by and construed in accordance with the
internal laws of the State of New York, without regard to the choice of law
rules thereof.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of the Indenture, unless otherwise specifically indicated, the term
"consolidated" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"ASSET SALE" means (i) the sale, conveyance, transfer or other disposition
(whether in a single transaction or a series of related transactions) of
property or assets (including by way of a sale and leaseback) of the Company or
any Restricted Subsidiary (each referred to in this definition as a
"DISPOSITION") or (ii) the issuance or sale of Equity Interests of any
Restricted Subsidiary (whether in a single transaction or a series of related
transactions), in each case, other than:
(a) a disposition of Cash Equivalents or Investment Grade Securities or
obsolete equipment in the ordinary course of business or inventory or goods
held for sale in the ordinary course of business;
(b) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above
under "--Merger, Consolidation or Sale of All or Substantially All Assets"
or any disposition that constitutes a Change of Control pursuant to the
Indenture;
(c) any Restricted Payment that is permitted to be made, and is made,
under the first paragraph of the covenant described above under
"--Limitation on Restricted Payments";
99
<PAGE>
(d) any disposition of assets with an aggregate fair market value of
less than $1.0 million;
(e) any disposition of property or assets by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Restricted Subsidiary;
(f) any exchange of like property pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended, for use in a Similar Business;
(g) the lease, assignment or a lease or sub-lease of any real or
personal property in the ordinary course of business;
(h) any financing transaction with respect to property built or acquired
by the Company or any Restricted Subsidiary including, without limitation,
sale-leasebacks and asset securitizations;
(i) up to $10.0 million in the aggregate from (A) any disposition of
undeveloped land owned by the Company or its Restricted Subsidiaries on the
Issuance Date which the Company in good faith determines it will not use in
its consolidated operations and (B) the sale of interests in joint ventures
to which the Company or one of its Restricted Subsidiaries is a party on the
Issuance Date;
(j) foreclosures on assets; and
(k) any sale of Equity Interests in, or Indebtedness or other securities
of, an Unrestricted Subsidiary.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CAPITALIZED LEASE OBLIGATION"means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500.0 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness or preferred stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(i) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of the
Company and its Subsidiaries, taken as a whole; or
(ii) the Company becomes aware of (by way of a report or any
other filing pursuant to Section 13(d) of the Exchange Act, proxy,
vote, written notice or otherwise) the acquisition by any Person or
group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of
the
100
<PAGE>
Exchange Act, or any successor provision), including any group acting
for the purpose of acquiring, holding or disposing of securities
(within the meaning of Rule 13d-5(b)(1) under the Exchange Act),
other than the Permitted Holders and their Related Parties, in a
single transaction or in a related series of transactions, by way of
merger, consolidation or other business combination or purchase of
beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act, or any successor provision) of 50% or more of the total
Voting Stock of the Company.
"CONSOLIDATED DEPRECIATION AND AMORTIZATION EXPENSE" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense and other noncash charges (excluding any noncash item that represents an
accrual, reserve or amortization of a cash expenditure for a future period) of
such Person and its Restricted Subsidiaries for such period on a consolidated
basis and otherwise determined in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the sum,
without duplication, of: (a) consolidated interest expense of such Person and
its Restricted Subsidiaries for such period (including amortization of original
issue discount, non-cash interest payments, the interest component of
Capitalized Lease Obligations, and net payments (if any) pursuant to Hedging
Obligations, excluding amortization of deferred financing fees) and (b)
consolidated capitalized interest of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income, of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, and otherwise determined in accordance
with GAAP; PROVIDED, HOWEVER, that (i) any net after-tax extraordinary gains or
losses (less all fees and expenses relating thereto) shall be excluded, (ii) the
Net Income for such period shall not include the cumulative effect of a change
in accounting principles during such period, (iii) any net after-tax income
(loss) from discontinued operations and any net after-tax gains or losses on
disposal of discontinued operations shall be excluded, (iv) any net after-tax
gains or losses (less all fees and expenses relating thereto) attributable to
asset dispositions other than in the ordinary course of business (as determined
in good faith by the Board of Directors of the Company) shall be excluded, (v)
the Net Income for such period of any Person that is not a Subsidiary, or is an
Unrestricted Subsidiary, or that is accounted for by the equity method of
accounting, shall be included only to the extent of the amount of dividends or
distributions or other payments paid in cash (or to the extent converted into
cash) to the referent Person or a Wholly Owned Restricted Subsidiary thereof in
respect of such period, (vi) the Net Income of any Person acquired in a pooling
of interests transaction shall not be included for any period prior to the date
of such acquisition, (vii) the Net Income for such period of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of its Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or indirectly,
by the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule, or governmental regulation applicable to
that Restricted Subsidiary or its stockholders, unless such restriction with
respect to the payment of dividends or in similar distributions has been legally
waived and (viii) non-recurring expenses which are not capitalized and which are
incurred in connection with the expansion of the Company's self-distribution
capabilities shall be excluded.
"CONTINGENT OBLIGATIONS" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("PRIMARY OBLIGATIONS") of any other Person (the
"PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner
101
<PAGE>
of any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation against loss in respect thereof.
"CREDIT FACILITIES" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facilities) or
commercial paper facilities with banks or other institutional lenders or
indentures providing for revolving credit loans, term loans, letters of credit
or other long-term indebtedness, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"DESIGNATED PREFERRED STOCK" means preferred stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in paragraph
(c) of the "--Limitation on Restricted Payments" covenant.
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock of
such Person which, by its terms (or by the terms of any security into which it
is convertible or for which it is putable or exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable (other than as a
result of a Change of Control or Asset Sale), pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof
(other than as a result of a Change of Control or Asset Sale), in whole or in
part, in each case prior to the date 91 days after the maturity date of the
Notes; PROVIDED, HOWEVER, that if such Capital Stock is issued to any plan for
the benefit of employees of the Company or its Subsidiaries or by any such plan
to such employees, such Capital Stock shall not constitute Disqualified Stock
solely because it may be required to be repurchased by the Company in order to
satisfy applicable statutory or regulatory obligations.
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period plus (a) provision for taxes based on
income or profits of such Person for such period deducted in computing
Consolidated Net Income, plus (b) Consolidated Interest Expense of such Person
for such period to the extent the same was deducted in calculating such
Consolidated Net Income, plus (c) Consolidated Depreciation and Amortization
Expense of such Person for such period to the extent such depreciation and
amortization were deducted in computing Consolidated Net Income, plus (d) any
expenses or charges related to any Equity Offering, Permitted Investment or
Indebtedness permitted to be incurred by the Indenture (including such expenses
or charges related to the Recapitalization and the Financings) and deducted in
such period in computing Consolidated Net Income, plus (e) the amount of any
restructuring charge (including, without limitation, charges incurred in
connection with the closing or exchange of stores, which are accrued prior to
June 27, 1998) deducted in such period in computing Consolidated Net Income,
plus (f) without duplication, any other non-cash charges reducing Consolidated
Net Income for such period (excluding any such charge which requires an accrual
of a cash reserve for anticipated cash charges for any future period), plus (g)
the amount of any minority interest expense deducted in calculating Consolidated
Net Income, less, without duplication (h) non-cash items increasing Consolidated
Net Income of such Person for such period (excluding any items which represent
the reversal of any accrual of, or cash reserve for, anticipated cash charges in
any prior period).
102
<PAGE>
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than (i)
public offerings with respect to the Company's Common Stock registered on Form
S-8 and (ii) any such public or private sale that constitutes an Excluded
Contribution.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"EXCLUDED CONTRIBUTION" means the net cash proceeds received by the Company
from (a) contributions to its common equity capital and (b) the sale (other than
to a Subsidiary or to any Company or Subsidiary management equity plan or stock
option plan or any other management or employee benefit plan or agreement) of
Capital Stock (other than Disqualified Stock) of the Company, in each case
designated as Excluded Contributions pursuant to an Officers' Certificate
executed by the principal executive officer and the principal financial officer
of the Company on the date such capital contributions are made or the date such
Equity Interests are sold, as the case may be, the cash proceeds of which are
excluded from the calculation set forth in paragraph (c) under "--Limitation on
Restricted Payments."
"EXISTING INDEBTEDNESS" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issuance Date, plus interest accruing thereon,
after application of the net proceeds of the sale of the Old Notes as described
in this Prospectus.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
(other than in the case of revolving credit borrowings, in which case interest
expense shall be computed based upon the average daily balance of such
Indebtedness during the applicable period) or issues or redeems Disqualified
Stock or preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"CALCULATION DATE"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of Disqualified Stock or
preferred stock, as if the same had occurred at the beginning of the applicable
four-quarter period. For purposes of making the computation referred to above,
Investments, acquisitions, dispositions, mergers, consolidations and
discontinued operations (as determined in accordance with GAAP) that have been
made by the Company or any of its Restricted Subsidiaries during the
four-quarter reference period or subsequent to such reference period and on or
prior to or simultaneously with the Calculation Date shall be calculated on a
pro forma basis assuming that all such Investments, acquisitions, dispositions,
mergers, consolidations and discontinued operations (and the reduction of any
associated fixed charge obligations and the change in EBITDA resulting
therefrom) had occurred on the first day of the four-quarter reference period.
If since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Investment,
acquisition, disposition, merger, consolidation or discontinued operation that
would have required adjustment pursuant to this definition, then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect thereto for
such period as if such Investment, acquisition, disposition, merger,
consolidation or discontinued operation had occurred at the beginning of the
applicable four-quarter period. For purposes of this definition, whenever pro
forma effect is to be given to a transaction, the pro forma calculations shall
be made in good faith by a responsible financial or accounting officer of the
Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest on such Indebtedness shall be calculated as
if the rate in effect on the Calculation Date had been the applicable rate for
the entire period (taking into account any Hedging Obligations applicable to
such Indebtedness). Interest on a Capitalized Lease Obligation shall be deemed
to accrue at an interest rate reasonably determined by a responsible financial
or accounting officer of the Company to be the rate of
103
<PAGE>
interest implicit in such Capitalized Lease Obligation in accordance with GAAP.
For purposes of making the computation referred to above, interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period. Interest on Indebtedness that may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have been
based upon the rate actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate.
"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(a) Consolidated Interest Expense of such Person for such period and (b) all
cash dividend payments (excluding items eliminated in consolidation) on any
series of preferred stock of such Person.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date. For the purposes of the
Indenture, the term "consolidated" with respect to any Person shall mean such
Person consolidated with its Restricted Subsidiaries, and shall not include any
Unrestricted Subsidiary.
"GOVERNMENT SECURITIES" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Securities
or a specific payment of principal of or interest on any such Government
Securities held by such custodian for the account of the holder of such
depository receipt; PROVIDED that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the Government Securities or the specific payment of principal of or interest on
the Government Securities evidenced by such depository receipt.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"GUARANTEE" means any guarantee of the obligations of the Company under the
Indenture and the Notes by any Person in accordance with the provisions of the
Indenture. When used as a verb, "Guarantee" shall have a corresponding meaning.
No Guarantees will be issued in connection with the initial offering and sale of
the Notes.
"GUARANTOR" means any Person that incurs a Guarantee; PROVIDED that upon the
release and discharge of such Person from its Guarantee in accordance with the
Indenture, such Person shall cease to be a Guarantor. No Guarantees will be
issued in connection with the initial offering of the Notes.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"HOLDER" means a holder of the Notes.
"INDEBTEDNESS" means, with respect to any Person, (a) any indebtedness of
such Person, whether or not contingent (i) in respect of borrowed money, (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or bankers' acceptances (or, without double counting, reimbursement
agreements in respect thereof), (iii) representing the balance deferred and
unpaid of the purchase price of
104
<PAGE>
any property (including Capitalized Lease Obligations), except any such balance
that constitutes a trade payable or similar obligation to a trade creditor, in
each case accrued in the ordinary course of business or (iv) representing any
Hedging Obligations, if and to the extent of any of the foregoing Indebtedness
(other than letters of credit and Hedging Obligations) that would appear as a
liability upon a balance sheet (excluding the footnotes thereto) of such Person
prepared in accordance with GAAP, (b) to the extent not otherwise included, any
obligation by such Person to be liable for, or to pay, as obligor, guarantor or
otherwise, on the Indebtedness of another Person (other than by endorsement of
negotiable instruments for collection in the ordinary course of business) and
(c) to the extent not otherwise included, Indebtedness of another Person secured
by a Lien on any asset owned by such Person (whether or not such Indebtedness is
assumed by such Person); PROVIDED, HOWEVER, that Contingent Obligations incurred
in the ordinary course of business shall be deemed not to constitute
Indebtedness.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal, investment
banking firm or consultant to Persons engaged in Similar Businesses of
nationally recognized standing that is, in the judgment of the Company's Board
of Directors, qualified to perform the task for which it has been engaged.
"INVESTMENT GRADE SECURITIES" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding advances to customers,
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities issued by any other Person
and investments that are required by GAAP to be classified on the balance sheet
of the Company in the same manner as the other investments included in this
definition to the extent such transactions involve the transfer of cash or other
property. For purposes of the definition of "Unrestricted Subsidiary" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments," (i) "Investments" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of a Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"ISSUANCE DATE" means the closing date for the sale and original issuance of
the Old Notes under the Indenture.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction); PROVIDED that in
no event shall an operating lease be deemed to constitute a Lien.
105
<PAGE>
"MANAGEMENT GROUP" means the group consisting of all or certain Officers of
the Company on the Issuance Date whether or not such person remains in that
capacity.
"MOODY'S" means Moody's Investors Service, Inc.
"MORTGAGE FINANCING" means the incurrence by the Company or a Subsidiary of
the Company of any Indebtedness secured by a mortgage or other Lien on real
property acquired or improved by the Company or any Subsidiary of the Company
after the date of the Indenture.
"MORTGAGE REFINANCING" means the incurrence by the Company or a Subsidiary
of the Company of any Indebtedness secured by a mortgage or other Lien on real
property subject to a mortgage or other Lien existing on the date of the
Indenture or created or incurred subsequent to the date of the Indenture as
permitted by the terms of the Indenture and owned by the Company or any
Subsidiary of the Company.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
Designated Noncash Consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions),
any relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of principal, premium (if any) and interest on Indebtedness
required (other than required by clause (i) of the second paragraph of "--
Repurchase at the Option of Holders--Asset Sales") to be paid as a result of
such transaction and any deduction of appropriate amounts to be provided by the
Company as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such transaction and retained by the Company after
such sale or other disposition thereof, including, without limitation, pension
and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and banker's acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness.
"OFFICER" means the Chairman of the Board, the President, any Executive Vice
President, Senior Vice President or Vice President, the Treasurer or the
Secretary of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Company
by two officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company that meets the requirements set forth in the
Indenture.
"PARI PASSU INDEBTEDNESS" means (a) with respect to the Notes, Indebtedness
which ranks pari passu in right of payment to the Notes and (b) with respect to
any Guarantee, Indebtedness which ranks PARI PASSU in right of payment to such
Guarantee.
"PERMITTED HOLDERS" means KKR and any of its Affiliates and the Management
Group.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or any
Restricted Subsidiary; (b) any Investment in cash and Cash Equivalents or
Investment Grade Securities; (c) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person that is engaged in a Similar Business if
as a result of such Investment (i) such Person becomes a Restricted Subsidiary
or (ii) such Person, in one transaction or a series of related transactions, is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary; (d) any Investment in securities or other assets not
constituting cash or Cash Equivalents and received in connection with an Asset
Sale made pursuant to the provisions of "-- Repurchase at the Option of
Holders--Asset Sales" or any other disposition of assets not constituting an
Asset Sale; (e) any Investment existing on the Issuance Date; (f) advances to
employees not in excess of
106
<PAGE>
$10.0 million outstanding at any one time, in the aggregate; (g) any Investment
acquired by the Company or any of its Restricted Subsidiaries (i) in exchange
for any other Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in connection with or as a result of a bankruptcy,
workout, reorganization or recapitalization of the issuer of such other
Investment or accounts receivable or (ii) as a result of a foreclosure by the
Company or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured Investment in
default; (h) Hedging Obligations permitted under clause (i) of the "Limitation
of Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant; (i)
loans and advances to officers, directors and employees for business-related
travel expenses, moving expenses and other similar expenses, in each case
incurred in the ordinary course of business; (j) any Investment in a Similar
Business (other than an Investment in an Unrestricted Subsidiary) having an
aggregate fair market value, taken together with all other Investments made
pursuant to this clause (j) that are at that time outstanding, not to exceed the
greater of (x) $75.0 million or (y) 15% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value); (k)
Investments the payment for which consists of Equity Interests of the Company
(exclusive of Disqualified Stock); PROVIDED, HOWEVER, that such Equity Interests
will not increase the amount available for Restricted Payments under clause (c)
of the "Limitation on Restricted Payments" covenant; (l) additional Investments
having an aggregate fair market value, taken together with all other Investments
made pursuant to this clause (l) that are at that time outstanding, not to
exceed the greater of (x) $30.0 million or (y) 5% of Total Assets at the time of
such Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value); (m) any
Investment by Restricted Subsidiaries in Wholly Owned Restricted Subsidiaries
and Investments by Subsidiaries that are not Restricted Subsidiaries in other
Subsidiaries that are not Restricted Subsidiaries; (n) guarantees (including
Guarantees) of Indebtedness permitted under the covenant "--Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock;" and (o) any
transaction to the extent it constitutes an investment that is permitted and
made in accordance with the provisions of the second paragraph of the covenant
described under "Certain Covenants--Transactions with Affiliates" (except
transactions described in clauses (ii), (vi), (vii) and (xi) of such paragraph).
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"PREFERRED STOCK" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"RELATED PARTIES" means any Person controlled by a Permitted Holder,
including any partnership or limited liability company of which a Permitted
Holder or its Affiliates is the general partner or managing member, as the case
may be.
"REPURCHASE OFFER" means an offer made by the Company to purchase all or any
portion of a Holder's Notes pursuant to the provisions described under the
covenants entitled "--Repurchase at the Option of Holders-Change of Control" or
"--Repurchase at the Option of Holders--Asset Sales."
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" means, at any time, any direct or indirect
Subsidiary of the Company that is not then an Unrestricted Subsidiary; PROVIDED,
HOWEVER,that upon the occurrence of an Unrestricted Subsidiary ceasing to be an
Unrestricted Subsidiary, such Subsidiary shall be included in the definition of
"Restricted Subsidiary."
"S&P" means Standard and Poor's Ratings Group.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
107
<PAGE>
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"SENIOR CREDIT FACILITIES" means that certain term loan credit facility and
revolving credit facility described in this Prospectus among the Company and the
lenders from time to time party thereto, including any collateral documents,
instruments and agreements executed in connection therewith, and any amendments,
supplements, modifications, extensions, renewals, restatements or refundings
thereof and any indentures or credit facilities or commercial paper facilities
with banks or other institutional lenders that replace, refund or refinance any
part of the loans, notes, other credit facilities or commitments thereunder,
including any such replacement, refunding or refinancing facility or indenture
that increases the amount borrowable thereunder or alters the maturity thereof,
PROVIDED, HOWEVER, that in connection with any facilities which refund, replace
or refinance the original term loan and revolving credit facilities there shall
not be more than one facility at any one time that is identified as the Senior
Credit Facilities and, if at any time there is more than one facility which
would constitute the Senior Credit Facilities, the Company will designate to the
Trustee which one of such facilities will be the Senior Credit Facilities for
purposes of the Indenture.
"SIMILAR BUSINESS" means the supermarket and retail food sale business and
any activity or business incidental, directly related or similar thereto, or any
line of business engaged in by the Company or its Subsidiaries on the Issuance
Date or any business activity that is a reasonable extension, development or
expansion thereof or ancillary thereto.
"SUBORDINATED INDEBTEDNESS" means (a) with respect to the Notes, any
Indebtedness of the Company which is by its terms subordinated in right of
payment to the Notes and (b) with respect to any Guarantee, any Indebtedness of
the applicable Guarantor which is by its terms subordinated in right of payment
to such Guarantee.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership, joint venture
or limited liability company) of which more than 50% of the total voting power
of shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time of determination owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person or a
combination thereof and (ii) any partnership, joint venture, limited liability
company or similar entity of which (x) more than 50% of the capital accounts,
distribution rights, total equity and voting interests or general or limited
partnership interests, as applicable, are owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person or a combination thereof whether in the form of membership, general,
special or limited partnership or otherwise and (y) such Person or any Wholly
Owned Restricted Subsidiary of such Person is a controlling general partner or
otherwise controls such entity.
"TOTAL ASSETS" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company, as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company (including any existing Subsidiary and any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary or any of its Subsidiaries owns any Equity Interests of, or
owns, or holds any Lien on, any property of, the Company or any Subsidiary of
the Company (other than any Subsidiary of the Subsidiary to be so designated),
PROVIDED that (a) any Unrestricted Subsidiary must be an entity of which shares
of the capital stock or other equity interests (including partnership interests)
entitled to cast at least a majority of the votes that may be cast by all shares
or equity interests having ordinary voting power for the election of directors
or other governing body are owned, directly or indirectly, by the Company, (b)
the Company certifies that such designation
108
<PAGE>
complies with the covenants described under "--Certain Covenants--Limitation on
Restricted Payments" and (c) each of (I) the Subsidiary to be so designated and
(II) its Subsidiaries has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable with respect to any Indebtedness pursuant to which the
lender has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; PROVIDED that, immediately after giving effect to
such designation, (i) the Company could incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test described under
"--Certain Covenants--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock" or (ii) the Fixed Charge Coverage Ratio for the Company and
its Restricted Subsidiaries would be greater than such ratio for the Company and
its Restricted Subsidiaries immediately prior to such designation, in each case
on a pro forma basis taking into account such designation. Any such designation
by the Board of Directors shall be notified by the Company to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
EXCHANGE OFFER; REGISTRATION RIGHTS
EXCHANGE OFFER. The Company and the Initial Purchasers entered into the
Registration Rights Agreement on the Issuance Date, pursuant to which the
Company agreed, for the benefit of the holders of the Old Notes, that it will,
at its own expense, (i) file the Exchange Offer Registration Statement with the
Commission with respect to the Exchange Offer to exchange the Old Notes for
Exchange Notes having substantially identical terms in all material respects to
the Old Notes (except that the Exchange Notes will not contain terms with
respect to transfer restrictions or interest rate increases as described herein)
within 100 calendar days after the Issuance Date, (ii) use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective by the
Commission under the Securities Act within 200 calendar days after the Issuance
Date and (iii) use its best efforts to consummate the Exchange Offer within 230
calendar days after the Issuance Date. Upon the Exchange Offer Registration
Statement being declared effective, the Company will offer the Exchange Notes in
exchange for surrender of the Old Notes. The Company will keep the Exchange
Offer open for at least 20 business days (or longer if required by applicable
law) after the date that notice of the Exchange Offer is mailed to the Holders.
For each Old Note surrendered to the Company pursuant to the Exchange Offer, the
Holder who surrendered such Old Note will receive an Exchange Note having a
principal amount equal to that of the surrendered Old Note. Interest on each
Exchange Note will accrue from the last interest payment date on which interest
was paid on the Old Note surrendered in exchange therefor or, if no interest has
been paid on such Old Note, from the Issuance Date. Under existing
interpretations of the staff of the Commission contained in several no-action
letters to third parties, the Exchange Notes would generally be freely
transferable after the Exchange Offer without further registration under the
Securities Act (subject to certain representations required to be made by each
Holder, as set forth below). However, any purchaser of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange
109
<PAGE>
Notes (i) will not be able to rely on the interpretations of the staff of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Old Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements. In addition, in connection with any resales of Exchange Notes, any
broker-dealer (a "Participating Broker-Dealer") which acquired the Old Notes for
its own account as a result of market making or other trading activities must
deliver a prospectus meeting the requirements of the Securities Act. The
Commission has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the Exchange Notes (other
than a resale of an unsold allotment from the original sale of the Old Notes)
with the prospectus contained in the Exchange Offer Registration Statement. The
Company will agree to make available for a period of up to 90 days after
consummation of the Exchange Offer a prospectus meeting the requirements of the
Securities Act to any Participating Broker- Dealer and any other persons, if
any, with similar prospectus delivery requirements, for use in connection with
any resale of Exchange Notes. A Participating Broker-Dealer or any other person
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations thereunder).
Each holder of the Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it will
be acquired in the ordinary course of its business, (ii) it has no arrangement
or understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes, (iii) it is not an
"affiliate" (as defined in Rule 405 under the Securities Act) of the Company or,
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable and (iv) it
is not acting on behalf of any person who could not truthfully make the
foregoing representations.
SHELF REGISTRATION. In the event that (i) any changes in law or the
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the Exchange
Offer is not consummated within 230 calendar days after the Issuance Date, (iii)
under certain circumstances, if the Initial Purchasers shall so request or (iv)
any holder of the Old Notes (other than the Initial Purchasers) is not eligible
to participate in the Exchange Offer, the Company will upon receipt of notice
within specified time periods of one or more of the preceding events, at its
expense, use its best efforts (a) to file and cause to become effective by the
230th calendar day after the Issuance Date a Shelf Registration Statement (or in
the case of a Shelf Registration Statement required to be filed in response to a
change in law or applicable interpretations of the Staff of the Commission, if
later, within 45 days after publication of the change in law or interpretations
but in no event before 100 calendar days after the Issuance Date) and (b) to
keep effective the Shelf Registration Statement until the earlier of two years
from the Issuance Date (or one year from the date the Shelf Registration
Statement is declared effective if such Shelf Registration Statement is filed
upon the request of any Initial Purchaser pursuant to clause (iii) above) or
such shorter period ending when all Old Notes covered by the Shelf Registration
Statement have been sold in the manner set forth and as contemplated in the
Shelf Registration Statement or when the Old Notes become eligible for resale
pursuant to Rule 144 under the Securities Act without volume restrictions, if
any. The Company, will, in the event of the filing of the Shelf Registration
Statement, provide to each holder of the Old Notes copies of the prospectus
which is a part of the Shelf Registration Statement, notify each such holder of
the Old Notes when the Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of the
Old Notes. A holder of the Old Notes that sells its Old Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification rights and obligations thereunder). In
110
<PAGE>
addition, each holder of the Old Notes will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and to benefit from the provisions regarding
any increase in interest applicable to the Old Notes set forth in the following
paragraph.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration statements
will be filed, or, if filed, that they will become effective. In the event that
(a) the Exchange Offer Registration Statement has not been filed with the
Commission on or prior to the 100th calendar day following the Issuance Date,
(b) the Exchange Offer Registration Statement is not declared effective on or
prior to the 200th calendar day following the Issuance Date, or (c) the Exchange
Offer is not consummated or a Shelf Registration Statement is not declared
effective on or prior to the 230th calendar day following the Issuance Date, the
interest rate borne by the Old Notes shall be increased by one-quarter of one
percent per annum following such 100-day period in the case of clause (a) above,
following such 200-day period in the case of clause (b) above, or following such
230-day period in the case of clause (c) above (or in the case of a Shelf
Registration Statement required to be filed in response to a change in law or
applicable interpretations of the Staff of the Commission, if later, within a
45-day period after publication of the change in law or interpretations but in
no event before 100 calendar days after the Issuance Date), which rate will be
increased by an additional one-quarter of one percent per annum for each 90-day
period that any additional interest continues to accrue; PROVIDED that the
aggregate increase in such annual interest rate may in no event exceed one
percent. Upon (x) the filing of the Exchange Offer Registration Statement after
the 100-day period described in clause (a) above, (y) the effectiveness of the
Exchange Offer Registration Statement after the 200-day period described in
clause (b) above, or (z) the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement, as the case may be, after the
230-day period described in clause (c) above (or in the case of a Shelf
Registration Statement required to be filed in response to a change in law or
applicable interpretations of the Staff of the Commission, if later, following
such 45-day period after publication of the change in law or interpretations but
in no event before 100 calendar days after the Issuance Date), the interest rate
borne by the Old Notes from the date of such effectiveness, consummation or that
the applicable registration statement again becomes effective and usable, as the
case may be, will be reduced to the original interest rate if the Company is
otherwise in compliance with this paragraph; PROVIDED, HOWEVER, that if, after
any such reduction in interest rate, a different event specified in clause (a),
(b) or (c) above occurs, the interest rate may again be increased and thereafter
decreased pursuant to the foregoing provisions. Notwithstanding the foregoing,
the Company may issue a notice that the Shelf Registration Statement is unusable
pending the announcement of a material corporate transaction and may issue any
notice suspending use of the Shelf Registration Statement required under
applicable securities laws to be issued and, in the event that the aggregate
number of days in any consecutive twelve-month period for which all such notices
are issued and effective exceeds 30 days in the aggregate, then the interest
rate borne by the Old Notes will be increased by one quarter of one percent per
annum following the date that such Shelf Registration Statement ceases to be
usable beyond the 30-day period permitted above, which rate shall be increased
by an additional one quarter of one percent per annum at the beginning of each
subsequent 90-day period that such additional interest continues to accrue;
PROVIDED that the aggregate increase in such annual interest rate may in no
event exceed one percent per annum. Upon the Company declaring that the Shelf
Registration Statement is usable after the period of time described in the
preceding sentence, the interest rate borne by the Old Notes will be reduced to
the original interest rate if the Company is otherwise in compliance with this
paragraph.
The summary herein of material provisions of the Registration Rights
Agreement is subject to, and is qualified in its entirety by, all the provisions
of the Registration Rights Agreement. The Registration Rights Agreement is an
exhibit to the Registration Statement of which this Prospectus is a part.
111
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Simpson Thacher & Bartlett (a partnership which includes
professional corporations), the following is an accurate summary of the material
United States federal income tax consequences that may be relevant to Holders
exchanging Old Notes for Exchange Notes pursuant to the Exchange Offer. The
exchange of Old Notes for Exchange Notes will not constitute a recognition event
for federal income tax purposes. Consequently, no gain or loss will be
recognized by Holders upon receipt of the Exchange Notes, the holding period of
the Exchange Notes will include the holding period of the Old Notes, and a
Holder's basis in Exchange Notes will be the same as such Holder's basis in the
Old Notes immediately before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTIONS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. A broker-dealer may not participate in the Exchange
Offer with respect to Old Notes acquired in connection with the initial
placement of the Old Notes. To the extent any such broker-dealer participates in
the Exchange Offer and so notifies the Company, or causes the Company to be so
notified in writing, the Company has agreed for a period of 90 days after the
date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to such broker-dealer for use in connection with any
such resale, and will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. In addition, until , 1997
(90 days after the date of this Prospectus), all dealers effecting transactions
in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at prevailing market prices at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers or any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act, and any profit on any such resale of Exchange Notes and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
112
<PAGE>
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer of
Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
or which may impose upon the Company disclosure obligations that may have a
material adverse effect on the Company (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
the Prospectus until the Company has notified such broker-dealer that delivery
of the Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
113
<PAGE>
BOOK ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. The Exchange Notes initially will be represented by a single,
permanent global Exchange Note, in definitive, fully registered form without
interest coupons (the "Global Exchange Note") and will be deposited with the
Trustee as custodian for The Depository Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants (the "Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants").
So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Exchange
Note for all purposes under the Indenture. No beneficial owner of an interest in
the Global Exchange Note will be able to transfer that interest except in
accordance with DTC's procedures, in addition to those provided for under the
Indenture with respect to the Exchange Notes.
Payments of the principal of, premium (if any), and interest on, the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records,
relating to or payments made on account of beneficial ownership interests in the
Global Exchange Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest (including liquidated damages) on the
Global Exchange Note, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Exchange Note as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Exchange Note held through such Participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
Participants.
Transfers between Participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Exchange Notes to
persons in states which require physical delivery of the Exchange Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
Participants to whose account the DTC interests in the Global Exchange Note are
credited and only in respect of such portion of the aggregate principal amount
of Exchange Notes as to which such Participant or Participants has or have given
such direction. However, if there is an Event of
114
<PAGE>
Default under the Indenture, DTC will exchange the Global Exchange Note for
Certificated Securities, which it will distribute to its Participants.
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Exchange Note to the
accounts of persons who have accounts with such depositary. Such accounts
initially will be designated by or on behalf of the Initial Purchasers.
Ownership of beneficial interests in the Global Exchange Note will be limited to
Participants or persons who hold interests through Participants. Ownership of
beneficial interests in the Global Exchange Note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of Participants (with respect to interests of persons other than Participants).
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Exchange Note among Participants, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its Participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, Certificated Securities will be issued in exchange for
the Global Exchange Note.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Simpson Thacher
& Bartlett (a partnership which includes professional corporations), New York,
New York and, with regard to the laws of the State of Texas, Vinson & Elkins
L.L.P. Certain partners of Simpson Thacher & Bartlett and related persons have
an indirect interest, through KKR 1996 Fund L.P., in less than 1% of the Common
Stock.
EXPERTS
The consolidated balance sheet as of June 28, 1997 and the related
consolidated statements of operations, redeemable stock and stockholders' equity
and cash flows for fiscal year 1997 of Randall's Food Markets, Inc. included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing. The consolidated balance sheet as of June 29, 1996 and
the related consolidated statements of operations, redeemable stock and
stockholders' equity and cash flows for fiscal years 1996 and 1995 of Randall's
Food Markets, Inc. included in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
CHANGE IN ACCOUNTANTS
On May 30, 1997, the Company dismissed its certified public accountants,
Arthur Andersen LLP, and replaced them with Deloitte & Touche LLP. Arthur
Andersen LLP's report dual-dated September 19, 1996 and April 5, 1997 on the
Company's financial statements as of and for the years ended June 29, 1996 and
June 24, 1995 did not contain an adverse opinion or a disclaimer of opinion;
however, it included an emphasis of a matter paragraph discussing the Company's
violations of certain debt covenants. In connection with this Registration
Statement, Arthur Andersen LLP reissued their report referred to above to
eliminate the reference to this emphasis of a matter. During the Company's two
fiscal years ended June 29, 1996 and June 24, 1995 and the subsequent interim
period through May 30, 1997, there were no disagreements with Arthur Andersen
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
115
<PAGE>
INDEX
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- -------------------------------------------------------------------------------------------------------- -----------
<S> <C>
1994 Option Grant.......................................................................................
1997 Plan...............................................................................................
1997 Plan Grant.........................................................................................
1997 Plan Options.......................................................................................
1997 Plan Purchase Stock................................................................................
Acquired Indebtedness...................................................................................
Administrative Agent....................................................................................
Afffiliate Transaction..................................................................................
Affiliation.............................................................................................
Albertsons..............................................................................................
APB.....................................................................................................
Applicable Premium......................................................................................
Asset Sale..............................................................................................
Asset Sale Offer........................................................................................
Board of Directors......................................................................................
Borrower................................................................................................
Business Day............................................................................................
Capital Stock...........................................................................................
Capitalized Lease Obligation............................................................................
Cash Equivalents........................................................................................
Certificated Security...................................................................................
Change of Control.......................................................................................
Change of Control Offer.................................................................................
Change of Control Payment...............................................................................
Change of Control Payment Date..........................................................................
Charter Amendment.......................................................................................
Class A Preferred Stock.................................................................................
Closing.................................................................................................
Coastal.................................................................................................
Commission..............................................................................................
Common Stock............................................................................................
Company.................................................................................................
Consent Decree..........................................................................................
Consolidated Depreciation and Amortization Expense......................................................
Consolidated Interest Expense...........................................................................
Consolidated Net Income.................................................................................
Consolidation Date......................................................................................
Consulting Period.......................................................................................
Contingent Obligation...................................................................................
Convertible Preferred Stock.............................................................................
Covenant Defeasance.....................................................................................
Credit Facilities.......................................................................................
Cullum Acquisition......................................................................................
Debt Prepayment.........................................................................................
Default.................................................................................................
Depositior..............................................................................................
Designated Noncash Consideration........................................................................
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- -------------------------------------------------------------------------------------------------------- -----------
Designated Preferred Stock..............................................................................
<S> <C>
Designated Senior Indebtedness..........................................................................
Disqualified Stock......................................................................................
DTC.....................................................................................................
EBITDA..................................................................................................
EEOC....................................................................................................
Effective Date..........................................................................................
Eligible Institution....................................................................................
Employee Stock Ownership Plan...........................................................................
Employment Agreements...................................................................................
EPS.....................................................................................................
Equity Interests........................................................................................
Equity Investment.......................................................................................
Equity Offering.........................................................................................
ESOP....................................................................................................
ESOP Shares.............................................................................................
Event of Default........................................................................................
Exchange Act............................................................................................
Exchange Agent..........................................................................................
Exchange Notes..........................................................................................
Exchange Offer..........................................................................................
Exchange Offer Registration Statement...................................................................
Excluded Contribution...................................................................................
Excluded Guarantee......................................................................................
Existing Indebtedness...................................................................................
Expiration Date.........................................................................................
FASB....................................................................................................
Fee Properties..........................................................................................
FIFO....................................................................................................
Financings..............................................................................................
fiscal year 1993........................................................................................
fiscal year 1994........................................................................................
fiscal year 1995........................................................................................
fiscal year 1996........................................................................................
fiscal year 1997........................................................................................
fiscal year 1998........................................................................................
Fixed Charge Coverage Ratio.............................................................................
Fixed Charges...........................................................................................
Fleming.................................................................................................
Former Cullum Shareholders..............................................................................
Former Cullum Shareholders Agreement....................................................................
GAAP....................................................................................................
Global Exchange Note....................................................................................
Government Securities...................................................................................
Gowens Agreement........................................................................................
Guarantee...............................................................................................
Guarantor...............................................................................................
H.E.B...................................................................................................
Hedging Obligations.....................................................................................
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- -------------------------------------------------------------------------------------------------------- -----------
Holder..................................................................................................
<S> <C>
Indebtedness............................................................................................
Indenture...............................................................................................
Independent Financial Advisor...........................................................................
Indirect Participants...................................................................................
Initial Period..........................................................................................
Initial Purchasers......................................................................................
Interest Payment Date...................................................................................
Investment Grade Securities.............................................................................
Investments.............................................................................................
IRS.....................................................................................................
Issuance Date...........................................................................................
Joint Venture Properties................................................................................
Key Employee Stock Ownership Plan.......................................................................
Key SOP.................................................................................................
KKR.....................................................................................................
Kroger..................................................................................................
Leased Properties.......................................................................................
Legal Defeasance........................................................................................
Lenders.................................................................................................
Leverage Ratio..........................................................................................
LIBOR...................................................................................................
Lien....................................................................................................
LIFO....................................................................................................
Make-Whole Premium......................................................................................
Management Group........................................................................................
Minyard.................................................................................................
Moody's.................................................................................................
Mortgage Financing......................................................................................
Mortgage Refinancing....................................................................................
MSP.....................................................................................................
Named Executive Officers................................................................................
NDEQ....................................................................................................
Nebraska Fund...........................................................................................
Net Income..............................................................................................
Net Proceeds............................................................................................
Non-ESOP Shares.........................................................................................
Non-Payment Default.....................................................................................
Non-Severance Termination...............................................................................
Note Purchase Agreement.................................................................................
Notes...................................................................................................
Notice of Guaranteed Delivery...........................................................................
Obligations.............................................................................................
Officer.................................................................................................
Officers' Certificate...................................................................................
Old Indebtedness........................................................................................
Old Notes...............................................................................................
Pari Passu Indebtedness.................................................................................
Participants............................................................................................
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- -------------------------------------------------------------------------------------------------------- -----------
Participating Broker-Dealer.............................................................................
<S> <C>
Payment Default.........................................................................................
Payment Blockage Notice.................................................................................
Payment Blockage Period.................................................................................
Permitted Holders.......................................................................................
Permitted Investments...................................................................................
Person..................................................................................................
PORTAL..................................................................................................
Preferred Stock.........................................................................................
Preferred Stock Redemption..............................................................................
Pro Forma Financial Statement...........................................................................
Putable Shares..........................................................................................
Putable Shares Reserve Fund.............................................................................
Qualified Shareholders..................................................................................
Randall's...............................................................................................
Recapitalization........................................................................................
Redemption Date.........................................................................................
Refinancing Indebtedness................................................................................
Refunding Capital Stock.................................................................................
Registrar...............................................................................................
Registration Rights Agreement...........................................................................
Registration Statement..................................................................................
Related Parties.........................................................................................
Repurchase Offer........................................................................................
Restricted Investment...................................................................................
Restricted Payments.....................................................................................
Restricted Subsidiary...................................................................................
Retired Capital Stock...................................................................................
Revolving Credit Facility...............................................................................
RFM Acquisition.........................................................................................
RFM Drag Along..........................................................................................
RFM Option..............................................................................................
RFM Registration Rights Agreement.......................................................................
RFM Tag Along...........................................................................................
S & P...................................................................................................
Savings Plan............................................................................................
Securities Act..........................................................................................
Senior Credit Facilities................................................................................
Senior Indebtedness.....................................................................................
Senior Notes............................................................................................
Serial Preferred Stock..................................................................................
Series A Senior Notes...................................................................................
Series B-1 Senior Notes.................................................................................
Series B-2 Senior Notes.................................................................................
Settlement Agreement....................................................................................
Severance and Release Agreement.........................................................................
SFAS....................................................................................................
Shareholder Proposal....................................................................................
Shareholders Agreement..................................................................................
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- -------------------------------------------------------------------------------------------------------- -----------
Shelf Registration Statement............................................................................
<S> <C>
Significant Subsidiary..................................................................................
Similar Business........................................................................................
Soffe...................................................................................................
Special Meeting.........................................................................................
Stock Plan..............................................................................................
Subordinated Indebtedness...............................................................................
Subordinated Note Obligations...........................................................................
Subscription Agreement..................................................................................
Subsidiary..............................................................................................
Successor Company.......................................................................................
Successor Guarantor.....................................................................................
TBCA....................................................................................................
TCB Credit Facility.....................................................................................
Tender Offer............................................................................................
Term Loan Facility......................................................................................
Texas Commerce..........................................................................................
Total Assets............................................................................................
Transferor..............................................................................................
Treasury Date...........................................................................................
Trust Indenture Act.....................................................................................
Trustee.................................................................................................
Uniform Guarantees......................................................................................
Unrestricted Subsidiary.................................................................................
UTY.....................................................................................................
Voting Stock............................................................................................
Weighted Average Life to Maturity.......................................................................
Wholly Owned Restricted Judiciary.......................................................................
Wholly Owned Subsidiary.................................................................................
</TABLE>
I-5
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEPENDENT AUDITORS' REPORTS.............................................................................. F-2
Consolidated Balance Sheets As of June 28, 1997 and June 29, 1996.......................................... F-4
Consolidated Statements of Operations for the Fiscal Years Ended June 28, 1997, June 29, 1996 and June 24,
1995..................................................................................................... F-5
Consolidated Statements of Redeemable Stock and Stockholders' Equity for the Fiscal Years Ended June 28,
1997, June 29, 1996 and June 24, 1995.................................................................... F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 28, 1997, June 29, 1996 and June 24,
1995..................................................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Randall's Food Markets, Inc.:
We have audited the accompanying consolidated balance sheet of Randall's
Food Markets, Inc. and subsidiaries (the "Company") as of June 28, 1997, and the
related consolidated statements of operations, redeemable stock and
stockholders' equity, and cash flows for the fiscal year ended June 28, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Randall's Food Markets, Inc.
and subsidiaries as of June 28, 1997, and the results of their operations and
their cash flows for the fiscal year ended June 28, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 15, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Randall's Food Markets, Inc.:
We have audited the accompanying consolidated balance sheet of Randall's
Food Markets, Inc. and subsidiaries (the "Company") as of June 29, 1996, and the
related consolidated statements of operations, redeemable stock and
stockholders' equity, and cash flows for the fiscal years ended June 29, 1996
and June 24, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 auditor's report dual-dated September 19, 1996 and April 5, 1997, our
opinion was modified with an emphasis-of-a-matter paragraph discussing the
Company's violations of certain debt covenants. As discussed in Notes 2 and 5,
the Company received an Equity Investment and refinanced all such debt on June
27, 1997.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Randall's Food Markets, Inc.
and subsidiaries as of June 29, 1996, and the results of their operations and
their cash flows for the fiscal years ended June 29, 1996 and June 24, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 19, 1996 (except with respect
to the matter discussed in the eighth
paragraph of Note 5, as to which the
date is June 27, 1997)
F-3
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND JUNE 29, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 23,115 $ 31,686
Receivables, net........................................................................ 44,664 27,464
Merchandise inventories................................................................. 164,174 167,792
Deferred tax assets..................................................................... 21,109 9,631
Prepaid expenses and other.............................................................. 9,703 5,209
---------- ----------
Total current assets.............................................................. 262,765 241,782
PROPERTY AND EQUIPMENT, net............................................................... 336,548 329,051
GOODWILL, net............................................................................. 224,350 230,730
OTHER ASSETS, net......................................................................... 38,711 21,702
---------- ----------
TOTAL..................................................................................... $ 862,374 $ 823,265
---------- ----------
---------- ----------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................................................... $ 774 $ 29,586
Current maturities of obligations under capital leases.................................. 4,166 2,464
Accounts payable........................................................................ 112,026 88,718
Accrued expenses and other.............................................................. 131,736 85,119
Accrued income taxes.................................................................... 2,634 6,000
---------- ----------
Total current liabilities......................................................... 251,336 211,887
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities............................................... 279,729 322,686
Obligations under capital leases, net of current maturities............................. 77,479 83,246
Deferred income tax liability........................................................... 11,067 13,324
Other liabilities....................................................................... 24,400 24,427
---------- ----------
Total liabilities................................................................. 644,011 655,570
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
REDEEMABLE CLASS A PREFERRED STOCK, $10 par value, 8,250 shares authorized, issued and
outstanding............................................................................. -- 825
8% CONVERTIBLE PREFERRED STOCK, $10 par value, 5,000,000 shares authorized, 292,043 shares
issued and 278,201 shares outstanding................................................... -- 11,613
REDEEMABLE COMMON STOCK, $12.11 and $18.15 redemption value, respectively, 413,022 and
1,025,181 shares issued and outstanding, respectively................................... 5,002 18,607
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value, 75,000,000 and 25,000,000 shares authorized,
respectively, 28,889,515 and 15,984,819 shares issued, respectively, and 28,889,515
and 15,984,819 shares outstanding, respectively....................................... 7,223 3,996
Additional paid in capital.............................................................. 169,823 37,629
Retained earnings....................................................................... 36,315 95,025
---------- ----------
Total stockholders' equity........................................................ 213,361 136,650
---------- ----------
TOTAL..................................................................................... $ 862,374 $ 823,265
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, JUNE 29, JUNE 24,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES............................................................... $ 2,344,983 $ 2,368,645 $ 2,328,247
COST OF SALES........................................................... 1,710,345 1,737,987 1,728,698
------------ ------------ ------------
Gross profit.................................................... 634,638 630,658 599,549
------------ ------------ ------------
OPERATING EXPENSES:
Store operating, selling and administrative expenses................ 558,065 507,894 501,634
Depreciation and amortization....................................... 48,875 45,814 47,447
Litigation and severance/benefits................................... 14,012 1,000 --
Estimated store closing costs....................................... 32,790 1,215 --
------------ ------------ ------------
Total operating expenses........................................ 653,742 555,923 549,081
------------ ------------ ------------
OPERATING INCOME (LOSS)................................................. (19,104) 74,735 50,468
INTEREST EXPENSE, net................................................... 36,828 38,981 43,411
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................ (55,932) 35,754 7,057
BENEFIT (PROVISION) FOR INCOME TAXES.................................... 15,215 (16,316) (7,020)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM................................. (40,717) 19,438 37
EXTRAORDINARY ITEM--Loss on early extinguishment of debt (Net of taxes
of $6,006)............................................................ (9,798) -- --
------------ ------------ ------------
NET INCOME (LOSS)....................................................... $ (50,515) $ 19,438 $ 37
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCKHOLDERS'
REDEEMABLE STOCK EQUITY
------------------------------------- -----------
<S> <C> <C> <C> <C>
8%
CLASS A CONVERTIBLE
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
----------- ----------- ----------- -----------
BALANCE, JUNE 25, 1994............................................... $ 825 $ 6,045 $ 9,227 $ 3,723
Issuance of common stock........................................... 262
Issuance of restricted stock.......................................
Earned portion of restricted stock compensation....................
Reversal of contingent shares of Tom Thumb acquisition............. (128)
Accretion to redemption value...................................... 986 1,794
Reduction of deferred cost of Employee Stock Option Plan...........
Net income.........................................................
----- ----------- ----------- -----------
BALANCE, JUNE 24, 1995............................................... 825 6,903 11,021 3,985
Preferred stock dividends..........................................
Issuance of common stock........................................... 11
Reversal of contingent shares of Tom Thumb acquisition............. (10)
Accretion to redemption value...................................... 4,720 7,586
Earned portion of restricted stock compensation....................
Net income.........................................................
----- ----------- ----------- -----------
BALANCE, JUNE 29, 1996............................................... 825 11,613 18,607 3,996
Preferred stock dividends..........................................
Issuance of restricted stock....................................... 34
Issuance of common stock........................................... 4,645
Accretion to redemption value...................................... (3,865) (5,404)
Earned portion of restricted stock compensation....................
Purchase of treasury stock.........................................
Retirement of treasury stock....................................... (13)
Purchase and retirement of ESOP and Non-ESOP shares................ (1,346)
Redemption of common stock......................................... (93)
Redemption of putable common stock................................. (8,201)
Redemption of preferred stock...................................... (825) (7,748)
Impairment of loan to ESOP.........................................
Net loss...........................................................
----- ----------- ----------- -----------
BALANCE, JUNE 28, 1997............................................... $ $ $ 5,002 $ 7,223
----- ----------- ----------- -----------
----- ----------- ----------- -----------
<CAPTION>
<S> <C>
ADDITIONAL
PAID-IN RETAINED RESTRICTED TREASURY
CAPITAL EARNINGS STOCK STOCK
----------- ----------- ----------- -----------
BALANCE, JUNE 25, 1994............................................... $ 28,920 $ 96,522
Issuance of common stock........................................... 9,348
Issuance of restricted stock....................................... $ (250)
Earned portion of restricted stock compensation.................... 125
Reversal of contingent shares of Tom Thumb acquisition............. (1,154)
Accretion to redemption value...................................... (2,780)
Reduction of deferred cost of Employee Stock Option Plan...........
Net income......................................................... 37
----------- ----------- ----------- -----
BALANCE, JUNE 24, 1995............................................... 37,114 93,779 (125)
Preferred stock dividends.......................................... (5,886)
Issuance of common stock........................................... 608
Reversal of contingent shares of Tom Thumb acquisition............. (93)
Accretion to redemption value...................................... (12,306)
Earned portion of restricted stock compensation.................... 125
Net income......................................................... 19,438
----------- ----------- ----------- -----
BALANCE, JUNE 29, 1996............................................... 37,629 95,025
Preferred stock dividends.......................................... (2,407)
Issuance of restricted stock....................................... 2,405 (2,439)
Issuance of common stock........................................... 220,355
Accretion to redemption value...................................... 9,269
Earned portion of restricted stock compensation.................... 29 2,439
Purchase of treasury stock......................................... $ (919)
Retirement of treasury stock....................................... (906) 919
Purchase and retirement of ESOP and Non-ESOP shares................ (84,810)
Redemption of common stock......................................... (4,407)
Redemption of putable common stock................................. 4,995
Redemption of preferred stock...................................... (20,052)
Impairment of loan to ESOP......................................... (472)
Net loss........................................................... (50,515)
----------- ----------- ----------- -----
BALANCE, JUNE 28, 1997............................................... $ 169,823 $ 36,315 $ $
----------- ----------- ----------- -----
----------- ----------- ----------- -----
<CAPTION>
DEFERRED
COSTS OF
EMPLOYEE
STOCK
OWNERSHIP
PLAN
-----------
BALANCE, JUNE 25, 1994............................................... $ (1,000)
Issuance of common stock...........................................
Issuance of restricted stock.......................................
Earned portion of restricted stock compensation....................
Reversal of contingent shares of Tom Thumb acquisition.............
Accretion to redemption value......................................
Reduction of deferred cost of Employee Stock Option Plan........... 1,000
Net income.........................................................
-----------
BALANCE, JUNE 24, 1995...............................................
Preferred stock dividends..........................................
Issuance of common stock...........................................
Reversal of contingent shares of Tom Thumb acquisition.............
Accretion to redemption value......................................
Earned portion of restricted stock compensation....................
Net income.........................................................
-----------
BALANCE, JUNE 29, 1996...............................................
Preferred stock dividends..........................................
Issuance of restricted stock.......................................
Issuance of common stock...........................................
Accretion to redemption value......................................
Earned portion of restricted stock compensation....................
Purchase of treasury stock.........................................
Retirement of treasury stock.......................................
Purchase and retirement of ESOP and Non-ESOP shares................
Redemption of common stock.........................................
Redemption of putable common stock.................................
Redemption of preferred stock......................................
Impairment of loan to ESOP.........................................
Net loss...........................................................
-----------
BALANCE, JUNE 28, 1997............................................... $
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, JUNE 29, JUNE 24,
1997 1996 1995
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss):............................................................... $ (50,515) $ 19,438 $ 37
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 48,874 45,814 47,447
Amortization of debt issuance costs............................................ 662 360 503
LIFO reserve................................................................... 3,434 2,092 1,067
Loss on early extinguishment of debt........................................... 15,804 -- --
Settlement of ESOP litigation.................................................. 10,500 -- --
Severance/benefits............................................................. 3,594 -- --
Loss (gain) from sale of assets................................................ (905) 793 (1,046)
Store closing costs............................................................ 32,790 -- --
Earned portion of restricted stock compensation................................ 2,468 125 125
Equity in earnings of unconsolidated joint ventures............................ (137) (69) (51)
Deferred tax (benefit)/provision............................................... (13,735) (9,552) 2,812
(Increase) decrease in receivables............................................. (2,291) (1,777) 3,746
Increase (decrease) in merchandise inventories................................. 184 (10,005) (650)
(Increase) decrease in prepaid expenses and other.............................. (1,216) (2,798) 2,423
Increase in note receivable from ESOP.......................................... (2,250) (1,500) --
Increase in federal income tax receivable...................................... (16,409) -- --
(Increase) decrease in other assets............................................ (15,963) (1,423) 802
Increase (decrease) in accounts payable........................................ 23,308 7,163 (8,129)
Increase (decrease) in accrued expenses and other.............................. (18,994) 10,453 13,244
Increase (decrease) in accrued income taxes.................................... (3,366) 2,549 825
Increase (decrease) in other long-term liabilities............................. 2,555 2,183 (9,647)
--------- ----------- -----------
Net cash provided by operating activities.................................... 18,392 63,846 53,508
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (104,455) (66,131) (59,850)
Proceeds from sale of assets..................................................... 55,434 30,317 59,332
Contributions to joint ventures.................................................. (138) (13) (12)
Proceeds from sale of joint ventures............................................. 524 1,808 --
Distributions from joint ventures................................................ 167 237 422
--------- ----------- -----------
Net cash used in investing activities........................................ (48,468) (33,782) (108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt............................................................... (399,524) (50,711) (61,408)
Cost of early extinguishment of debt............................................. (15,804) -- --
Proceeds from issuance of debt................................................... 178,000 27,000 --
Proceeds from issuance of senior subordinated notes.............................. 149,755 -- --
Additions to (reductions in) obligations under capital leases.................... 5,390 (2,251) (2,283)
Proceeds from issuance of common stock........................................... 225,000 619 9,360
Redemption of common stock....................................................... (89,363) -- --
Redemption of preferred stock.................................................... (28,645) -- --
Purchase of treasury stock....................................................... (919) -- --
Preferred dividends paid......................................................... (2,385) (5,886) --
--------- ----------- -----------
Net cash provided by (used in) financing activities.......................... 21,505 (31,229) (54,331)
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (8,571) (1,165) (931)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 31,686 32,851 33,782
--------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 23,115 $ 31,686 $ 32,851
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CONCENTRATION RISK--The consolidated financial statements
include the accounts of Randall's Food Markets, Inc., a Texas corporation, and
its wholly owned subsidiaries, Randalls Food and Drugs, Inc. (d.b.a. Randalls
Food and Pharmacy or Randalls and Tom Thumb Food and Pharmacy or Tom Thumb) and
Randalls Properties, Inc. (collectively referred to as the Company).
The Company operates in a highly competitive marketplace with its retail
grocery stores concentrated in north, central and southeast Texas. The debt
agreements relating to debt outstanding until June 27, 1997 contained numerous
financial and operating covenants for which waivers had been obtained for
certain matters of non-compliance (see Note 5). In connection with the Equity
Investment described in Note 2, such debt was refinanced. The Company is also
subject to certain litigation and administrative matters (see Note 10).
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES--All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
STATEMENTS OF CASH FLOWS--The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. The statements of cash flows provide information about changes
in cash and cash equivalents and excludes the effects of noncash transactions.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company's most significant
financial instruments are long-term debt obligations which are reflected in the
accompanying financial statements at approximately $281 million and $352 million
at June 28, 1997, and June 29, 1996, respectively, which management believes
approximates fair value at those dates. The fair value of debt was estimated by
discounting the future cash flows using rates currently available for debt of
similar terms and maturity. Management believes the fair values of all other
financial instruments are not materially different from their carrying values.
RECEIVABLES--Receivables consist of federal income tax receivable and
amounts due from charge customers, vendor promotions, manufacturer coupons and
returned checks and are net of an allowance for uncollectible amounts totaling
$3.1 million and $1 million at June 28, 1997 and June 29, 1996, respectively.
FISCAL YEAR--The Company's fiscal year ends on the last Saturday in June of
each calendar year, resulting in either a 52- or 53-week fiscal year. There are
53 weeks in the fiscal year ended June 29, 1996.
MERCHANDISE INVENTORIES--The Company uses the last-in first-out ("LIFO")
method of costing for all of its inventories in fiscal years 1997 and 1996 and
for a significant portion of its inventories in fiscal year 1995. The effect in
1996 of converting the remaining inventories to LIFO was not material to the
consolidated financial statements.
At June 24, 1995, inventories consisted of approximately $129 million costed
under the LIFO method and approximately $31 million costed under the first-in
first-out ("FIFO") method. If the FIFO method had been used for costing all
inventories, the valuation assigned to inventories would have been approximately
$19.0 million and $15.5 million higher as of June 28, 1997 and June 29, 1996,
respectively.
In 1997 the Internal Revenue Service ("IRS") approved the Company's
application for a change from one LIFO method to another LIFO method, effective
at the beginning of fiscal year 1996. At June 28, 1997
F-8
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and June 29, 1996, inventories have been recorded in accordance with the change
requested. This method change did not have a significant effect on the
consolidated financial statements.
DEPRECIATION AND AMORTIZATION--Property and equipment are stated at cost.
The Company uses the straight-line method of accounting to provide for
depreciation over the estimated useful lives of buildings and improvements (20
years) and fixtures, leaseholds and equipment (3 to 10 years). Properties held
under capital leases are amortized over the lease terms. Maintenance, repairs
and minor replacements are charged to expense as incurred; major replacements
and betterments are capitalized. The net book value of assets sold, retired or
otherwise disposed of is removed from the accounts at the time of disposition,
and any resulting gain or loss is reflected in operations for that period.
Goodwill associated with the August 1992 Tom Thumb acquisition of $256
million is being amortized on a straight-line basis over 40 years. Goodwill was
reduced by approximately $103,000 in fiscal year 1996 and $1.2 million in fiscal
year 1995 as amounts recorded for shares contingently issuable for the Tom Thumb
acquisition were reversed upon resolution of a contingency. The accumulated
amortization was $31.8 million and $25.4 million at June 28, 1997 and June 29,
1996, respectively. The Company utilizes undiscounted estimated cash flows to
evaluate any possible impairment of goodwill.
ACCRUED EXPENSES AND OTHER--Accrued expenses and other as of June 28, 1997
and June 29, 1996, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Payroll and related benefits $ 39,875 32,322
Rent 7,527 6,439
Property taxes 6,480 4,083
Insurance and related costs 17,957 14,439
Deferred income, current 3,288 1,439
Legal and other contingencies 6,947 11,212
Accrual for planned store closings 34,005 1,215
Accrued transaction costs 5,800 --
Other 9,857 13,970
---------- ---------
$ 131,736 $ 85,119
---------- ---------
---------- ---------
</TABLE>
COST OF SALES--Cost of sales includes cost of merchandise sold and warehouse
salaries and benefits.
STORE OPENING AND CLOSING COSTS--The costs associated with opening new store
locations are expensed in the period the store is opened. Estimated costs
associated with closing a store are recognized in the period the Company
determines to close the store. During the fiscal year ended June 28, 1997, the
Company decided to close approximately 20 stores and accrued costs of $29.1
million relating to inventory losses, lease termination costs and the write-off
of certain store assets. At fiscal year end 1997, 2 of the 20 stores accrued for
were closed. Management's plan provides for various closing dates from June 1997
to June 1999.
ACCOUNTING FOR JOINT VENTURES--The Company accounts for its investment in
joint ventures under the Equity Method.
F-9
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW PRONOUNCEMENTS--In March 1995 the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," effective for financial statements for fiscal years beginning
after December 15, 1995. This statement requires losses to be recognized for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flow estimates to be generated by those assets are
less than the assets' carrying amount. The Company has adopted this standard for
fiscal year 1997, effective June 30, 1996. The adoption of this standard did not
have a significant impact on the consolidated financial position or operating
results of the Company because the SFAS No. 121 methodology of accounting is not
materially different than the Company's previously existing policy.
In October 1995 the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. This statement defines a fair value-based method of
accounting for employee stock options or similar equity instruments. As the
statement permits, the Company will continue to account for these types of
instruments using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion ("APB") 25, "Accounting for Stock Issued to
Employees." The adoption of this statement did not have a material affect on
reported amounts for net income (loss) and earnings (loss) per share in fiscal
years 1997 and 1996.
In February 1997 the FASB issued SFAS 128, "Earnings Per Share". SFAS 128,
which is effective for the Company for the year ended June 27, 1998, specifies
the computation, presentation and disclosure requirements of earnings per share
("EPS") and supersedes APB 15. SFAS 128 requires a dual presentation of basic
and diluted EPS. Basic EPS, which excludes the impact of common share
equivalents, replaces primary EPS. Diluted EPS, which utilizes the average
market price per share as opposed to the greater of the average market price per
share or ending market price per share when applying the treasury stock method
in determining common share equivalents, replaces fully diluted EPS. Also in
February 1997, the FASB issued SFAS 129, "Disclosure of Information About
Capital Structure," which establishes standards for disclosing information about
an entity's capital structure. This statement is effective for the Company for
the year ended June 27, 1998. Management is evaluating what, if any, additional
disclosures may be required upon the implementation of SFAS 128 and 129.
RECLASSIFICATIONS--Certain reclassifications have been made to amounts
related to the years ended June 29, 1996 and June 24, 1995 to conform with the
current year's presentation.
2. EQUITY INVESTMENT
The Company and its majority stockholder entered into a subscription
agreement dated April 1, 1997 (the "Subscription Agreement"), with RFM
Acquisition LLC ("RFM Acquisition"). RFM Acquisition is a Delaware limited
liability company formed at the direction of Kohlberg Kravis Roberts & Co., L.P.
(KKR). Following approval of the stockholders of the Company at a special
meeting held in June 1997, RFM Acquisition paid an aggregate of $225 million to
the Company (the Equity Investment) as consideration for the Company's issuance
to RFM Acquisition of 18,579,686 shares of common stock and a 25-year option to
purchase 3,606,881 shares of common stock at $12.11 per share, subject to
adjustments in the event of stock dividends, subdivisions and combinations,
distributions to common stock holders of securities such as debt or preferred
stock, sales of common stock of the Company below fair market value and the
issuance of convertible securities with an exercise price below fair market
value. Subsequent to this transaction, approximately 63 percent of the common
stock of the Company is owned by RFM Acquisition.
F-10
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at June 28, 1997 and June 29, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land.................................................................................... $ 51,115 $ 51,429
Buildings and improvements.............................................................. 42,399 49,004
Fixtures, leaseholds and equipment...................................................... 374,022 317,921
Property held under capital leases...................................................... 91,921 95,081
Construction-in-progress................................................................ 22,560 36,449
----------- -----------
582,017 549,884
Accumulated depreciation................................................................ (245,469) (220,833)
----------- -----------
Property and equipment, net............................................................. $ 336,548 $ 329,051
----------- -----------
----------- -----------
</TABLE>
4. JOINT VENTURES
The Company participates as a general partner in various joint ventures for
the purpose of developing shopping centers in which store facilities are
located. The Company's ownership interests range from 50 percent to 83.3
percent. Joint ventures that are greater than 50 percent owned are consolidated
in the accompanying consolidated financial statements from the date that the
majority interest was acquired. The following represents the activity in
investments in unconsolidated joint ventures for the years ended June 28, 1997,
June 29, 1996 and June 24, 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ (3,208) $ (5,188) $ (4,829)
Equity in earnings of unconsolidated joint ventures 137 69 51
Contributions made 138 13 12
Distributions received (524) (237) (422)
Sales of certain joint ventures (167) 2,135 --
--------- --------- ---------
Balance at end of period $ (3,624) $ (3,208) $ (5,188)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The balance for investments in unconsolidated joint ventures is included in
other assets. The unconsolidated joint ventures have debt outstanding at June
28, 1997 and June 29, 1996 of approximately $20.6 million and $20.5 million,
respectively, that is nonrecourse. The debt outstanding at June 28, 1997 and
June 29, 1996 represents 100 percent of the joint ventures debt.
During fiscal year 1995, the Company's three consolidated joint ventures
sold substantially all of their assets and retired the related debt which
resulted in an insignificant gain. During fiscal year 1996, the Company sold its
interest in two unconsolidated joint ventures for approximately $1.8 million.
The Company continues to operate stores at each of these locations which are
accounted for as sale leaseback transactions. A gain of approximately $3.9
million related to these transactions was deferred and is being recognized over
the remaining lease terms. During fiscal 1997, the Company sold its interest in
one unconsolidated joint venture and is recognizing the sale on a cash basis. As
of June 28, 1997, approximately $167,000 had been recognized. Additional cash
receipts will be recorded as a reduction of the asset and subsequently, a gain
or loss, as appropriate. The Company does not operate a store at this location.
F-11
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. JOINT VENTURES (CONTINUED)
The Company paid to the joint ventures approximately $3.4 million, $4.1
million and $4.8 million in fiscal years 1997, 1996 and 1995, respectively, in
rent, common area maintenance and other lease-related costs for shopping centers
owned by the joint ventures.
5. LONG-TERM DEBT
At June 28, 1997 and June 29, 1996, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Senior subordinated notes--
Unsecured, with interest at 9.375% payable semiannually, principal matures on July 1,
2007.................................................................................. $ 150,000 $ --
Discount on senior subordinated notes................................................... (245) --
Notes payable to banks:
Principal due in annual installments beginning June 27, 1998 and interest due in
quarterly installments, final installment due June 27, 2006 , interest at the London
Interbank Offered Rate ("LIBOR") plus an adjustable margin rate (1.5%), interest at
7.187% at June 28, 1997............................................................... 125,000 169,500
Principal due June 27, 2004, interest due in quarterly installments, principal balance
not to exceed $225 million, interest at LIBOR plus an adjustable margin rate at 6.9%
at June 29, 1996...................................................................... -- 40,000
Principal due June 22, 2004, interest due in quarterly installments beginning September
30, 1997, interest at Alternate Base Rate plus an adjustable margin rate (0%),
interest at 8.5% at June 28, 1997..................................................... 3,000 --
Other................................................................................... -- 955
---------- ----------
Total notes payable to banks........................................................ 128,000 210,455
---------- ----------
Notes payable to insurance companies:
Principal was due in annual installments beginning December 1998, note paid in full in
June 1997............................................................................. -- 135,500
Principal and interest due in monthly installments, final installment due in 2005,
interest from 8.3% to 9.0%............................................................ 2,748 6,317
---------- ----------
Total notes payable to insurance companies.......................................... 2,748 141,817
---------- ----------
Total long-term debt...................................................................... 280,503 352,272
Less--current maturities of long-term debt................................................ 774 29,586
---------- ----------
Long-term debt, net of current maturities................................................. $ 279,729 $ 322,686
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Aggregate principal payments applicable to existing long-term debt
outstanding as of June 28, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
FISCAL YEAR ENDING
- ------------------------------------------------------------------------------------------------------
1998.............................................................................................. $ 774
1999.............................................................................................. 774
2000.............................................................................................. 774
2001.............................................................................................. 774
2002.............................................................................................. 774
Thereafter.......................................................................................... 276,633
----------
Total............................................................................................. $ 280,503
----------
----------
</TABLE>
The senior subordinated notes (the "Notes") are redeemable, in whole or in
part, at specified redemption prices together with accrued and unpaid interest,
if any, to the date of redemption. In addition, at any time on or prior to July
1, 2000, the Company may redeem up to $60 million of the original aggregate
principal amount of the Notes at a redemption price equal to 109.375% of the
aggregate principal amount to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption, provided that at least $90 million
of the original aggregate principal amount of the Notes remains outstanding
immediately after each such redemption.
Upon the occurrence of a change of control or certain transfer events, the
Company will have the option, at any time prior to July 1, 2002, to redeem the
Notes, in whole but not in part, at a redemption price equal to 100% of the
aggregate principal amount thereof plus a premium, together with accrued and
unpaid interest, if any, to the date of redemption.
The Notes are unsecured and are subordinated in right of payment to all
existing and future senior indebtedness of the Company.
The indenture under which the Notes were sold contains covenants that limit
the ability of the Company to (i) pay dividends or make certain other restricted
payments; (ii) incur additional indebtedness and issue disqualified stock and
preferred stock; (iii) create liens on assets; (iv) merge, consolidate or sell
all or substantially all assets; (v) enter into certain transactions with
affiliates; (vi) restrict dividends or other payments by subsidiaries to the
Company or its subsidiaries; (vii) permit guarantees of indebtedness by
subsidiaries of the Company; and (viii) incur other senior subordinated
indebtedness. At June 28, 1997, the Company was in compliance with all such
covenants.
Pursuant to a registration rights agreement entered into between the Company
and the purchasers of the Notes, the Company agreed to file a registration
statement with the Securities and Exchange Commission with respect to an offer
to exchange the senior subordinated notes for Series B senior subordinated notes
of the Company having substantially identical terms in all material respects.
The Notes are subject to the payment of additional interest if the Company does
not comply with its obligations under the registration rights agreement within
specified time periods.
In November 1993 the Company entered into a credit agreement with various
banks and a note purchase agreement with certain insurance companies. The banks
provided a term loan commitment for $225 million, and the insurance companies
provided three series of private placement debt for a total of $135.5 million.
In March 1997 the Company obtained waivers for certain debt covenants for the
period
F-13
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
from January 12, 1997, through April 5, 1997. The Company refinanced all such
debt in conjunction with the equity investment described in Note 2. On June 27,
1997, the Company paid in full the notes payable to the insurance companies and
the term loan to the banks. In connection with this early extinguishment of
debt, a make whole premium, including accrued interest, of approximately $14.9
million was paid to the insurance companies. This payment is shown as an
extraordinary item of $8.5 million, which is net of taxes of $6.0 million, in
the accompanying statement of operations for the year ended June 28, 1997.
As part of the credit agreement dated June 27, 1997, a revolving credit
commitment for $225 million, a swingline credit commitment for $25 million and a
letter of credit limit of $25 million were established, with the outstanding
revolving credit loans, swingline borrowings and the letters of credit loans not
to exceed $225 million. As of June 28, 1997, the Company had no borrowings under
the revolver, $3 million of borrowings under the swingline and $1.8 million of
letters of credit outstanding. As of June 29, 1996, the Company had
approximately $40 million under the revolver and $5.1 million of letters of
credit outstanding, and approximately $39.9 million was available under these
facilities. There are no scheduled reductions to the amounts available to the
Company prior to June 27, 2004. There is an annual credit commitment fee of 0.25
percent charged on the unused portion of the revolver.
The bank debt agreements contain covenants, the more significant of which
require the Company to maintain certain debt ratios which are calculated based
on EBITDA (earnings before interest, taxes, depreciation and amortization). The
Company is also restricted as to maximum lease expense and the capital
expenditures it can make. At June 28, 1997, the Company was in compliance with
all such covenants.
Cash interest paid during fiscal years 1997, 1996 and 1995 was $29.4
million, $39.2 million and $40.1 million, respectively. Interest capitalized
associated with construction was $556,000, $115,000 and $513,000 in fiscal years
1997, 1996 and 1995, respectively.
6. INCOME TAXES
The Company files a consolidated federal income tax return. Deferred income
taxes are provided to recognize temporary differences between financial and tax
reporting.
The provision for income taxes for the years ended June 28, 1997, June 29,
1996 and June 24, 1995, is summarized below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Current (benefit) provision...................................................... $ (7,486) $ 25,868 $ 4,208
Deferred (benefit) provision..................................................... (13,735) (9,552) 2,812
---------- --------- ---------
Total tax (benefit) provision.................................................... (21,221) 16,316 7,020
Less: tax (benefit) on extraordinary item........................................ 6,006 -- --
---------- --------- ---------
Total tax (benefit) provision, net of extraordinary item..................... $ (15,215) $ 16,316 $ 7,020
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-14
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets result from differences in the basis of
assets and liabilities for income tax and financial reporting purposes. The
cumulative tax effect of these items at June 28, 1997 and June 29, 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Assets:
Deferred income......................................................................... $ (8,422) $ (6,390)
Employee benefits....................................................................... (11,723) (12,996)
Insurance............................................................................... (6,824) (5,703)
Alternative minimum tax credit carryforward............................................. -- (418)
Closed store accruals................................................................... (12,922) --
Other................................................................................... (5,137) (6,370)
---------- ----------
Total gross deferred tax assets..................................................... (45,028) (31,877)
---------- ----------
Liabilities:
Property and equipment.................................................................. 11,035 13,246
Tax benefit lease....................................................................... 5,206 6,250
LIFO.................................................................................... 13,051 12,197
Other................................................................................... 5,694 3,877
---------- ----------
Total gross deferred tax liabilities................................................ 34,986 35,570
Net deferred income tax (asset) liability................................................. (10,042) 3,693
Current deferred income tax asset......................................................... (21,109) (9,631)
---------- ----------
Long-term deferred income tax liability................................................... $ 11,067 $ 13,324
---------- ----------
---------- ----------
</TABLE>
The actual (benefit) provision for income taxes from continuing operations
differs from the U.S. federal corporate tax rate as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Taxes at federal statutory tax rate.............................................. $ (25,108) $ 12,514 $ 2,470
Increase (decrease) in income taxes resulting from:
Goodwill....................................................................... 2,233 2,271 2,266
State taxes based on income.................................................... (2,152) 1,899 1,136
Nondeductible transaction costs................................................ 2,800 -- --
Previously overprovided taxes and other, net................................... 1,006 (368) 1,148
---------- --------- ---------
Total tax (benefit) provision................................................ $ (21,221) $ 16,316 $ 7,020
---------- --------- ---------
---------- --------- ---------
</TABLE>
Income taxes paid were approximately $17.7 million, $23.3 million and $3.3
million in fiscal years 1997, 1996 and 1995, respectively.
F-15
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN--The Company has a defined benefit pension plan
which is a noncontributory plan for all full-time hourly employees who are at
least 21 years of age and have completed one year of continuous employment
consisting of at least 1,000 hours of service as of year end. The Company makes
annual contributions to the plan equal to the amounts actuarially required to
fund current pension costs.
Net periodic pension costs for the years ended June 28, 1997, June 29, 1996
and June 24, 1995 include the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost/benefits earned during the year................... $ 1,796 $ 1,677 $ 1,889
Interest cost on projected benefit obligation.................. 1,354 1,180 1,076
Actual return on assets........................................ (1,969) (1,601) (1,354)
Amortization of unrecognized net transition asset and net
losses....................................................... 672 537 844
Change in assumed discount rate................................ -- -- (273)
--------- --------- ---------
Net periodic pension expense................................... $ 1,851 $ 1,793 $ 2,182
--------- --------- ---------
--------- --------- ---------
The following table sets forth the plan's funded status and the amount recognized in the
Company's consolidated balance sheets at June 28, 1997, June 29, 1996 and June 24, 1995 (in
thousands):
Actuarial present value of benefit obligations:
Vested....................................................... $ 13,023 $ 11,075 $ 9,850
--------- --------- ---------
--------- --------- ---------
Accumulated.................................................. $ 14,847 $ 12,801 $ 11,502
--------- --------- ---------
--------- --------- ---------
Projected.................................................... $ (18,814) $ (15,454) $ (14,438)
Plan assets at fair value.................................... 17,491 15,765 11,539
--------- --------- ---------
Excess of plan assets (estimated benefit obligations).......... (1,323) 311 (2,899)
Unrecognized net loss.......................................... 5 223 2,416
--------- --------- ---------
Accrued pension asset (liability) recognized in the
accompanying consolidated balance sheets..................... $ (1,318) $ 534 $ (483)
--------- --------- ---------
--------- --------- ---------
Contributions by the Company to the plan....................... $ 705 $ 2,810 $ 3,718
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used in determining the actuarial present value of plan benefits
reflect a weighted average discount rate of 8.0 percent, 7.9 percent and 8.0
percent for fiscal years 1997, 1996 and 1995, respectively, and an investment
rate of return of 9.0 percent for fiscal years 1997, 1996 and 1995. The assumed
rate of salary increase averaged 5.0 percent for fiscal year 1997 and averaged
6.0 percent for fiscal years 1996 and 1995.
EMPLOYEE STOCK OWNERSHIP PLAN--On April 1, 1997 the Employee Stock Ownership
Plan ("ESOP") was amended and restated to become Randall's ESOP/401k Savings
Plan. The ESOP/401k Savings Plan is for all full-time employees who are at least
21 years of age and have completed one year of continuous service.
F-16
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BENEFIT PLANS (CONTINUED)
Participants in the ESOP/401k may elect to contribute up to 5 percent of their
compensation, which will be matched 100 percent by the Company. Participants in
the ESOP/401k may make voluntary contributions up to an additional 10 percent of
their compensation, unmatched by the Company. The Company also has a Key
Employee Stock Purchase Plan ("KeySop") to provide specified benefits to
eligible managers and highly compensated employees. The Company's cash
contributions to the ESOP/401k for fiscal years 1997, 1996 and 1995 totaled
approximately $3.3 million, $3.4 million and $2.4 million, respectively. The
Company's cash contributions to the KeySop were $0 for fiscal year 1997, $3,500
for fiscal year 1996 and $94,000 for fiscal year 1995.
The Company loaned $2.25 million and $1.5 million to the ESOP in 1997 and
1996, respectively. The notes receivable are included in prepaid expenses and
other in fiscal year end 1997 and other assets in fiscal year end 1996. The
notes receivable are secured by 244,482 shares of the Company's common stock. At
fiscal year-end 1997, the value of the common stock was not adequate to secure
the fair value of the note. Due to the impairment of the note, a $472,000
reduction in equity was recorded. The notes receivable do not bear interest and
mature in April 1998. No shares of the Company's common stock were purchased by
the ESOP during fiscal year 1997.
During fiscal year 1996, the ESOP purchased 43,000 shares of the Company's
common stock for approximately $619,000 and, during fiscal year 1995, the ESOP
purchased 1,007,998 shares for total consideration of approximately $9.2
million.
The Company was a defendant in a lawsuit related to the ESOP. As further
discussed in Note 10, a settlement was reached that provides for cash payments
and changes in the operation of the ESOP, including the addition of a 401(k)
feature offering a variety of professionally managed mutual fund investments and
the cessation of additional investments by the ESOP in the Company's common
stock. Court approval of the settlement was granted in June 1997.
TOM THUMB PROFIT-SHARING AND RETIREMENT PLANS--In fiscal year 1994, the
Cullum Companies, Inc. and Affiliated Companies Profit Sharing Plan was
terminated by the Board of Directors, and the participants were given the
opportunity to transfer their balances into the Company's ESOP.
The Board of Directors of Tom Thumb terminated a management security plan
("MSP") and a senior corporate officer plan effective December 31, 1992. With
respect to the participants who retired prior to the termination of the plans,
the present value of the remaining obligation (approximately $5.5 million) is
recorded, net of the current portion of $1.1 million, as other long-term
liabilities as of June 28, 1997, based on a discount rate of 8.56 percent. As
further discussed in Note 10, certain MSP participants who received payments in
connection with the MSP's termination have instituted a claim against the
Company.
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
PREFERRED STOCK--The Class A Redeemable preferred stock, which was redeemed
in June 1997, had a par value of $10 per share, and 8,250 shares authorized,
issued and outstanding in 1996 and 1995. This class of stock was nonvoting and
dividends accrued at $10.50 per year per share. These dividends were payable
quarterly and before dividends were declared or paid on the common stock. The
liquidation value was $100 per share plus all accrued and unpaid dividends.
The 8 percent convertible preferred stock, which was redeemed in June 1997,
had a par value of $10 per share, with 5,000,000 shares authorized and 292,043
shares issued at June 29, 1996. There were 212,043
F-17
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
shares outstanding at June 24, 1995, and there were 80,000 contingent shares
related to the Tom Thumb acquisition. During fiscal year 1995, the contingent
shares were reduced to 67,185 shares, based on the anticipated resolution of the
contingency, and goodwill was reduced $1.2 million for the amount assigned to
the 12,815 shares. During fiscal year 1996, a total of 66,158 shares of
convertible preferred stock was issued upon resolution of these contingencies,
and goodwill was reduced $103,000 for the amount assigned to the remaining 1,027
shares. At June 29, 1996, 278,201 shares of 8 percent convertible preferred
stock were outstanding. This class of stock was nonvoting and dividends accrued
at $8 per year per share. These dividends were payable quarterly before
dividends were declared or paid on the common stock. Upon resolution of the
contingency and issuance of the shares, dividends were paid on the issued shares
as if they had been issued on August 24, 1992. The liquidation value was $100
per share plus all accrued and unpaid dividends. The excess of the liquidation
value over the redemption value is recorded as a charge to retained earnings.
Each convertible preferred share is convertible at the rate of 2.3 shares of
common stock for each full convertible share. Shares were redeemable at the
liquidation value at the option of the Company and were required to be either
redeemed or converted by October 15, 1999. All of the preferred stockholders had
agreed in principle not to require the redemption on October 15, 1999 it would
cause the Company to be in default of its loan agreements.
In connection with the equity investment described in Note 2, the Class A
preferred stock and the 8 percent convertible preferred stock were redeemed at
liquidation value for a total of $28.7 million.
COMMON STOCK--In connection with the acquisition of Tom Thumb, certain
shares of common stock are subject to an agreement between the Company and
certain stockholders, whereby the stockholders have the right to sell such
shares to the Company at the most recently appraised fair value beginning
October 15, 1997 and each October 15 up to and including October 15, 2001. At
June 28, 1997, there were 60,028 shares of common stock subject to this
agreement and outstanding.
The Company also has 935,038 shares of redeemable common stock, not
associated with the acquisition, subject to an agreement between the Company and
certain stockholders whereby the stockholders have the option to sell such
shares to the Company at the most recently appraised fair value if first refused
by the other existing stockholders. During fiscal year 1997, certain
stockholders canceled their redeemable rights on 571,411 shares of redeemable
common stock and one stockholder redeemed 10,500 shares at a purchase price of
$15 per share for $157,500. At June 28, 1997, 352,994 shares of redeemable
common stock (not associated with the Tom Thumb acquisition) remained
outstanding.
During fiscal year 1997, the Company purchased an additional 53,027 shares
of its common stock from certain stockholders for approximately $919,023. These
treasury shares were purchased at the then estimated fair values. At the end of
fiscal year 1997, all treasury shares had been retired.
STOCK OPTION AND RESTRICTED STOCK PLAN--The Company has adopted the
Randall's Food Markets, Inc. Stock Option and Restricted Stock Plan which
provides for the issuance of incentive stock options, nonqualified stock options
and restricted stock to the Company's key employees and directors. A total of
1,500,000 shares of the Company's common stock, subject to an antidilution
adjustment, may be issued under this plan as determined by the Executive
Committee of the Board of Directors. All options granted through June 29, 1996,
were exercisable for a ten-year period. At June 28, 1997, approximately 710,243
shares of common stock are available for future issuances of options or
restricted stock under this plan.
During December 1994, the Company granted options to purchase $1,300,000 of
the Company's common stock to certain employees. The number of shares which may
be issued to the employees is based
F-18
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
on the estimated fair value of the common stock at each vesting date. These
options vest at $300,000 of total value on December 31, 1995, 1996 and 1997, and
$200,000 of total value on December 31, 1998 and 1999. At June 28, 1997, an
additional 25,209 shares vested with an exercise price of $11.90. At June 29,
1996, 31,088 shares vested with an exercise price of $9.65. The unvested portion
of the grant would be issuable into approximately 58,000 shares of common stock
based on the most recent estimated fair value. The difference between the
exercise price and the estimated fair value at the measurement dates was not
significant. Also during December 1994, the Company granted 25,907 shares of
restricted stock. The $250,000 estimated aggregate fair value of the restricted
stock is being recognized as compensation expense over two years, the period in
which the restrictions lapse.
During fiscal year 1996, the Company granted certain employees options to
purchase 37,500 shares of the Company's common stock at an exercise price of
$10.75 per share, the estimated fair value of the stock at the grant date. The
options were fully vested at the date of grant and are exercisable at June 29,
1996. During fiscal year 1997, the difference between the exercise price and the
then estimated fair value of 17,500 of these options was paid to departing
employees and was charged as compensation expense.
Stock option activity under the Company's plans for the three years ended
June 28, 1997, June 29, 1996 and June 24, 1995 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
---------------------------- ---------------------------- ----------------------------
Stock options outstanding,
beginning of year.............. 137,634 11.16 128,951 10.44 -- --
Change in Option Value.......... 19,100 (28,817)
Changes during the year:
Granted (per share):
1997, at $18.15............. 523,355 18.15
1996, at $10.75 37,500 10.75
1995, $9.65 to $10.75 128,951 10.44
Exercised/forfeited (per
share):
1997, at $18.15............. (27,545) 15.28
1996, at $10.75............. (17,500)
---------
Stock options outstanding, end
of year........................ 635,044 16.63 137,634 12.71 128,951 10.44
---------
Stock options exercisable, end
of year........................ 96,296 11.58 93,795 10.69 31,086 9.65
Weighted Average--fair value of
options granted during the
year........................... $ 8.88 $ 4.96 $ 4.88
</TABLE>
F-19
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for fiscal
years 1995, 1996 and 1997, respectively: risk-free interest rates of 7.84, 6.18
and 6.72 percent; dividend yield of 0.0 percent for all years, expected lives of
10 years for all options; and volatility of 0.0 percent for all years. For
options granted during fiscal year 1995, we assumed both the fair market value
of the stock and the exercise price of the option to be $9.65.
In fiscal year 1997, the Company granted certain employees 139,382 shares of
restricted stock, of which 5,000 have been forfeited. The $2.4 million estimated
aggregate fair value of the restricted stock was recognized as compensation
expense in the fiscal year ended June 28, 1997. In addition, these employees
were granted options to purchase 523,355 shares, of which 27,545 have been
forfeited, of the Company's common stock at $18.15, the then estimated fair
value. These options become exercisable on September 30, 2000 and expire on
September 30, 2006.
As a result of the Equity Investment discussed in Note 2, the Company issued
to KKR a 25-year option to purchase 3,606,881 shares of common stock at $12.11
per share, subject to adjustments.
9. LEASE COMMITMENTS
LEASES--Minimum rental commitments for future periods are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR ENDING TOTAL LEASES LEASES
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
1998 $ 56,746 $ 45,678 $ 11,068
1999 56,683 45,671 11,012
2000 55,443 44,577 10,866
2001 55,350 44,484 10,866
2002 53,014 43,388 9,626
Thereafter 577,908 464,023 113,885
---------- ---------- ----------
$ 855,144 $ 687,821 167,323
---------- ----------
---------- ----------
Amount representing interest 85,678
----------
Present value of net minimum lease payments including current maturities
of $4,166: $ 81,645
----------
----------
</TABLE>
The Company leases substantially all of its store facilities and some equipment.
Included in the above operating lease commitments are future minimum rentals to
the joint ventures discussed in Note 4 aggregating approximately $36.1 million.
The store leases generally cover an initial term of 20 to 30 years with renewal
options for 5 to 15 additional years. Most leases require the payment of fixed
minimum rentals as well as payment of property taxes and insurance, or a
percentage of sales, whichever is greater.
F-20
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASE COMMITMENTS (CONTINUED)
Included in store operating, selling and administrative expense for the
fiscal years ended June 28, 1997, June 29, 1996 and June 24, 1995 is rent
expense comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Minimum rental................................................................... $ 47,073 $ 42,998 $ 35,859
Percentage rental................................................................ 939 713 1,281
--------- --------- ---------
$ 48,012 $ 43,711 $ 37,140
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LITIGATION--On November 28, 1995, two individuals filed a lawsuit on behalf
of the ESOP and certain participants and former participants in and
beneficiaries of the ESOP. The lawsuit alleged that the Company, certain
employees thereof and certain entities which engaged in a variety of services
relating to the ESOP, including Arthur Andersen LLP, had violated various
federal and state laws in connection with the operation of the ESOP, including
transactions by the ESOP involving the common stock. During fiscal year 1997,
the plaintiffs' representatives, the Company and the other defendants agreed to
settle the litigation, although the defendants continue to deny all charges of
wrongdoing or liability against them.
The Company and other defendants elected to settle the suit for $16.5
million, of which the Company was liable for $11.3 million plus $0.2 million in
administrative expenses. Net of insurance proceeds, the Company paid $10.5
million in the aggregate in connection with the settlement and has increased its
existing litigation reserves by $9.5 million during the year ended June 28, 1997
to fully reserve for such matter. In addition, the settlement provides for
certain changes in the operation of the ESOP, including the addition of a 401(k)
feature offering a variety of professionally managed mutual fund investments and
the cessation of additional investments by the ESOP in the Company's common
stock. The U.S. District Court granted preliminary approval of the settlement on
April 2, 1997 and final approval on June 18, 1997. Upon approval of the
settlement, the litigation was dismissed with prejudice and the Company and the
other defendants were released from further liability relating to the litigation
by all the members of the plaintiffs' class.
The Company has received the approval of the Equal Employment Opportunity
Commission (the "EEOC") and the federal district court of a consent decree (the
"Consent Decree") settling a charge by the EEOC Commissioner filed in 1989 that
the Company violated Title VII of the Civil Rights Act of 1964, as amended.
Under the terms of the Consent Decree, the Company is required to pay
$2,255,000, representing back pay and interest, into a fund to be divided among
entry level claimants, and $245,000 into a fund to be divided among grocery
department management trainee claimants. The Company bears the costs of
administering the settlement, which the Company estimates to be approximately
$750,000. The Consent Decree includes certain requirements to properly notify
potential claimants and certain enhanced reporting requirements. The Consent
Decree is effective for a two-year period, except that the obligations to
distribute back pay, offer employment, retain information and make reports
extend beyond the two-year term. The Company has accrued $3,250,000 in full
settlement of this matter.
Following the Tom Thumb acquisition, the Company terminated the MSP and in
respect of such terminations paid participants the greater of (i) the amount of
such participant's deferral and (ii) the present value of the participant's
accrued benefit (prorated for the years of service compared to the years
required to reach the age of 65). Thirty of the former MSP participants have
instituted a claim against the Company on behalf of all persons who were
participants in the MSP on its date of termination (which is alleged by
plaintiffs to be approximately 250 persons). On May 7, 1997, the plaintiffs
filed an amended
F-21
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
complaint for the court to recognize their action as a class action, to recover
additional amounts under the MSP, for a declaration of rights under an employee
pension benefit plan and for breach of fiduciary duty. The plaintiffs assert
that the yearly plan agreement executed by each participant in the MSP was a
contract for a specified retirement and death benefit set forth in such plan
agreements and that such benefits were vested and nonforfeitable. Summary
judgment motions have been filed by both parties with respect to various
matters, and judicial rulings on such motions are currently pending. The trial
is scheduled to commence during the 1997 calendar year. Although there can be no
assurance that the Company will prevail in respect of this claim, the Company
intends to vigorously contest the MSP claim A judgment against the Company on
the MSP litigation could have a material adverse effect on the Company's
financial position, results of operations and cash flow.
Other than the matter relating to the termination of the MSP, the Company
believes it is not a party to any pending legal proceedings, including ordinary
litigation incidental to the conduct of its business and the ownership of its
property, the adverse determination of which would have a materially adverse
effect on the Company, its operations, its financial condition or its cash
flows.
INSURANCE--The Company maintains a self-insurance program covering portions
of workers' compensation (employee safety program) and general and automobile
liability costs. The amounts in excess of the self-insured levels are fully
insured. Self-insurance accruals are based on claims filed and an estimate for
significant claims incurred but not reported.
ARBITRATION--The Company has initiated a legal action against Fleming, one
of its long-time suppliers. In the action, the Company alleges, among other
things, that Fleming violated the terms of a supply agreement signed in 1993.
Under the terms of the supply agreement, the Company was to purchase groceries
and other items at Fleming's cost, plus a small markup. Among the violations
alleged by the Company are claims that Fleming wrongfully manipulated its
costing procedures, which resulted in overcharges, and then unilaterally changed
the overall pricing formula. Additionally, the Company alleged that Fleming
failed to provide supporting documentation for purchases as required under the
contract. Since 1993 when the supply agreement was signed, the Company has
purchased approximately $2.0 billion in products from Fleming. Based on the
supporting documents provided to the Company by Fleming to date, the Company
will be seeking a substantial amount of damages from Fleming and termination of
the supply agreement. Fleming has filed an answer denying each allegation and a
counterclaim alleging that the Company failed to purchase the quantities
required by the supply agreement.
COMMITMENTS--The Company purchases a significant portion of its products
from Fleming and has signed a purchase commitment to buy certain levels of the
products from Fleming. If certain levels of purchases are not achieved, the
Company can incur certain penalties, none of which are material at this time.
The Company entered into severance and employment agreements with certain
officers and employees. Management has determined the expected severance
payments and postemployment benefits to approximate $4.5 million, which has been
accrued and reflected in the accompanying consolidated financial statements as
of June 28, 1997.
In connection with the Company's capital expenditure program, as of June 28,
1997, the Company had commitments to make $19.5 million in capital expenditures.
The Company is continually evaluating possible additional site locations and
related financing opportunities.
******
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... i
Prospectus Summary.............................. 1
Risk Factors.................................... 13
The Recapitalization............................ 19
Use of Proceeds................................. 21
Capitalization.................................. 22
Pro Forma Consolidated Condensed Financial
Statement..................................... 23
Selected Historical Consolidated Condensed
Financial and Other Data...................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 27
Business........................................ 34
Management...................................... 48
Principal Shareholders.......................... 58
Certain Relationships and Related
Transactions.................................. 60
Description of Capital Stock.................... 61
Description of Credit Facilities................ 63
The Exchange Offer.............................. 66
Description of the Exchange Notes............... 77
Exchange Offer; Registration Rights............. 109
Certain U.S. Federal Income Tax Consequences.... 112
Plan of Distribution............................ 112
Book Entry; Delivery and Form................... 114
Legal Matters................................... 115
Experts......................................... 115
Index........................................... I-1
Index to Consolidated Financial Statements...... F-1
</TABLE>
-------------------------------------------
PROSPECTUS
----------------------------
$150,000,000
[LOGO]
RANDALL'S FOOD MARKETS, INC.
OFFER TO EXCHANGE $150,000,000 OF ITS
9 3/8% SERIES B SENIOR SUBORDINATED NOTES
DUE 2007, WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT, FOR $150,000,000 OF ITS
OUTSTANDING 9 3/8% SENIOR SUBORDINATED
NOTES DUE 2007.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1.B of the Texas Business Corporation Act, as amended (the
"TBCA"), grants to a corporation the power to indemnify a person who was, is or
is threatened to be made a named defendant or respondent in a proceeding because
the person is or was a director of the corporation against judgments, penalties
(including excise and similar taxes), fines, settlements and reasonable expenses
actually incurred in connection therewith, only if it is determined that the
person (1) conducted himself in good faith; (2) reasonably believed that (a) in
the case of conduct in his official capacity as a director of the corporation,
his conduct was in the corporation's best interests, and (b) in all other cases,
his conduct was at least not opposed to the corporation's best interests; and
(3) in the case of any criminal proceeding, he had no reasonable cause to
believe that his conduct was unlawful. Article 2.02-1.C limits the allowable
indemnification by providing that, except to the extent permitted by Article
2.02-1.E, a director may not be indemnified in respect of a proceeding in which
the person was found liable (1) on the basis that he improperly received a
personal benefit, whether or not the benefit resulted from an action taken in
his official capacity, or (2) to the corporation. Article 2.02-1.E provides that
if a director is found liable to the corporation or is found liable on the basis
that he received a personal benefit, the permissible indemnification (1) is
limited to reasonable expenses actually incurred by the person in connection
with the proceeding, and (2) shall not be made in respect of any proceeding in
which the person shall have been found liable for willful or intentional
misconduct in the performance of his duty to the corporation. Finally, Article
2.02-1.H provides that a corporation shall indemnify a director against
reasonable expenses incurred by him in connection with a proceeding in which he
is a named defendant or respondent because he is or was a director if he has
been wholly successful, on the merits or otherwise, in defense of the
proceeding.
With respect to the officers of a corporation, Article 2.02-1.O of the TBCA
provides that a corporation may indemnify and advance expenses to an officer of
the corporation to the same extent that it may indemnify and advance expenses to
directors under Article 2.02-I. Further, Article 2.02-1.O provides that an
officer of a corporation shall be indemnified as, and to the same extent,
provided by Article 2.02-1.H for a director.
The Articles of Incorporation and Bylaws of the Registrant provide for
indemnification of officers and directors as and to the fullest extent permitted
by the TBCA. In addition, the Registrant maintains officers' and directors'
insurance covering certain liabilities that may be incurred by officers and
directors in the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereto, which, individually or in
II-1
<PAGE>
the aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed to be underwriters, in addition to the information
called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 30, 1997.
RANDALL'S FOOD MARKETS, INC.
BY: *
-----------------------------------------
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 30th day of October, 1997 by
the following persons in the capacities indicated:
SIGNATURE TITLE
- ------------------------------ ---------------------------
* Chief Executive Officer and
- ------------------------------ Director (Principal
R. Randall Onstead, Jr. Executive Officer)
Senior Vice President of
/s/ LEE E. STRAUS Finance, Secretary and
- ------------------------------ Treasurer (Principal
Lee E. Straus Financial Officer)
* Vice President, Corporate
- ------------------------------ Controller (Principal
Curtis D. McClellan Accounting Officer)
* Director
- ------------------------------
Henry R. Kravis
* Director
- ------------------------------
George R. Roberts
* Director
- ------------------------------
Paul E. Raether
* Director
- ------------------------------
James H. Greene, Jr.
* Director
- ------------------------------
Nils P. Brous
* Director
- ------------------------------
Robert R. Onstead
*BY: /s/ LEE E. STRAUS
.........................
ATTORNEY-IN-FACT
II-3
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Randall's Food Markets, Inc.,
do hereby constitute and appoint R. Randall Onstead, Jr., Lee E. Straus and
Curtis D. McClellen, or any of them, our true and lawful attorneys and agents,
to do any and all acts and things in our name and on our behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorneys and
agents, or either of them, may deem necessary or advisable to enable said
Corporation to comply with the Securities Act of 1933 and any rules, regulations
and requirements of the Securities and Exchange Commission, in connection with
this Registration Statement, including specifically, but without limitation,
power and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereto and we do hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 30th day of October, 1997 by the
following persons in the capacities indicated:
SIGNATURE TITLE
- ------------------------------ ---------------------------
* Chief Executive Officer and
- ------------------------------ Director (Principal
R. Randall Onstead, Jr. Executive Officer)
Senior Vice President of
* Finance, Secretary and
- ------------------------------ Treasurer (Principal
Lee E. Straus Financial Officer)
Vice President and
* Corporate Controller
- ------------------------------ (Principal Accounting
Curtis D. McClellen Officer)
* Director
- ------------------------------
Henry R. Kravis
/s/ GEORGE R. ROBERTS Director
- ------------------------------
George R. Roberts
* Director
- ------------------------------
Paul E. Raether
/s/ JAMES H. GREENE, JR. Director
- ------------------------------
James H. Greene, Jr.
/s/ NILS P. BROUS Director
- ------------------------------
Nils P. Brous
* Director
- ------------------------------
Robert R. Onstead
* Power of Attorney previously filed on September 12, 1997.
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
*2.1 Subscription Agreement dated as of April 1, 1997, among Randall's Food Markets, Inc. ("Randall's"),
Robert R. Onstead and RFM Acquisition LLC ("RFM Acquisition").
*2.2 Letter Agreement dated as of April 1, 1997 between Randall's and RFM Acquisition relating to
certain indemnification obligations of Randall's.
*2.3 Letter Agreement dated as of June 18, 1997 between Randall's and RFM Acquisition relating to
certain indemnification obligations of Randall's.
*3.1 Amended and Restated Articles of Incorporation of Randall's.
*3.2 By-Laws of Randall's.
*4.1 Indenture dated as of June 27, 1997 between Randall's and Marine Midland Bank, as Trustee (the
'Indenture').
*4.2 Form of 9 3/8% Senior Subordinated Note due 2007 (included in Exhibit 4.1).
*4.3 Form of 9 3/8% Series B Senior Subordinated Note due 2007 (included in Exhibit 4.1).
*4.4 Registration Rights Agreement dated as of June 27, 1997 among Randall's, BT Securities Corporation,
Chase Securities Inc., Goldman, Sachs & Co. and PaineWebber Incorporated.
*4.5 First Supplemental Indenture to the Indenture, dated as of September 8, 1997 between Randall's and
Marine Midland Bank, as Trustee.
**5.1 Opinion of Simpson Thacher & Bartlett.
**5.2 Opinion of Vinson & Elkins L.L.P.
**8 Tax opinion of Simpson Thacher & Bartlett.
*10.1 Settlement Agreement among Randall's and the other parties named therein relating to the Randall's
Food Markets, Inc. Employee Stock Ownership Plan.
*10.2 Voting, Repurchase and Shareholders Agreement, dated as of April 1, 1997, between RFM Acquisition
and the shareholders party thereto.
*10.3 Credit Agreement, dated as of June 27, 1997, among Randall's, the several lenders from time to time
parties thereto, and The Chase Manhattan Bank, as administrative agent.
*10.4 Registration Rights Agreement, dated as of June 27, 1997, between RFM Acquisition and Randall's.
*10.5 Employment Agreement of Robert R. Onstead.
*10.6 Employment Agreement of R. Randall Onstead, Jr.
*10.7 Employment Agreement of Ron W. Barclay.
*10.8 Termination Agreement of Bob L. Gowens.
*10.9 Registration Rights and Repurchase Agreement dated as of August 24, 1992 among Randall's, the
Morgan Stanley Leveraged Equity Fund II, L.P. and certain other shareholders parties thereto.
*10.10 Shareholder Agreement dated March 29, 1984 among Randall's and John N. Frewin, Rosemary Frewin
Gambino and certain other shareholders parties thereto.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
*10.11 Shareholder Agreement dated April 8, 1985 among Randall's and John N. Frewin, Rosemary Frewin
Gambino and certain other shareholders parties thereto.
*10.12 Randall's Food Markets, Inc. Corporate Incentive Plan.
*10.13(a) Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.13(b) First Amendment to Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.13(c) Second Amendment to Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.13(d) Third Amendment to Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.14 Supply Agreement dated as of August 20, 1993 between Fleming Foods of Texas, Inc. and Randall's.
**10.15 Form of 1997 Stock Purchase and Option Plan for Key employees of Randall's Food Markets, Inc. and
Subsidiaries (the "1997 Plan").
**10.16 Form of Management Stockholder's Agreement to be executed by certain employees of Randall's in
connection with the 1997 Plan.
**10.17 Form of Non-Qualified Stock Option Agreement to be executed by certain employees of Randall's in
connection with the 1997 Plan.
**10.18 Form of Sale Participation Agreement to be executed by certain employees of Randall's in connection
with the 1997 Plan.
**10.19 Form of Pledge Agreement to be executed by certain employees of Randall's in connection with the
1997 Plan.
**10.20 Agreement dated December 31, 1980 between Topco Associates, Inc. (Cooperative) and Randall's.
*12 Computation of Ratio of Earnings to Fixed Charges.
**16 Letter regarding change in certifying accountant.
*21 Subsidiaries.
**23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5.1
hereto).
**23.2 Consent of Deloitte & Touche LLP, independent certified public accountants.
**23.3 Consent of Arthur Andersen LLP, independent certified public accountants.
**23.4 Consent of Vinson & Elkins LLP (included as part of its opinion filed as Exhibit 5.2 hereto).
**24 Powers of Attorney (included on page II-4).
*25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Marine Midland Bank, as
Trustee.
*27 Financial Data Schedule.
**99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
* Previously filed.
** Filed herewith.
<PAGE>
EXHIBIT 5.1
October 30, 1997
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Ladies and Gentlemen:
We have acted as special counsel for Randall's Food Markets, Inc., a Texas
corporation (the "Company"), in connection with the Registration Statement on
Form S-4 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the issuance by the Company of
$150,000,000 aggregate principal amount of its 9 3/8% Series B Senior
Subordinated Notes due 2007 (the "Exchange Notes"). The Exchange Notes are to be
offered by the Company in exchange (the "Exchange") for $150,000,000 aggregate
principal amount of its outstanding 9 3/8% Senior Subordinated Notes due 2007
(the "Notes"). The Notes have been, and the Exchange Notes will be, issued under
an Indenture dated as of June 27, 1997 between the Company and Marine Midland
Bank, as Trustee (the "Trustee"), as amended by the First Supplemental Indenture
dated as of September 8, 1997 (the "Indenture").
We have examined the Registration Statement and the Indenture which has been
filed with the Commission as Exhibits to the Registration Statement. In
addition, we have examined, and have relied as to matters of fact upon, the
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, documents and other instruments and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such other and further
investigations, as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals and the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of the
originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and limitations
stated herein, assuming the Indenture has been duly authorized and validly
executed and delivered by the Trustee, when (i) the Indenture has been duly
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), (ii) the Board of Directors of the Company, a duly constituted
and acting committee thereof or duly authorized officers thereof has taken all
necessary corporate action to approve the issuance and terms of the Exchange
Notes, the terms of the Exchange and related matters, and (iii) the Exchange
Notes have been duly executed, authenticated, issued and delivered in accordance
with the provisions of the Indenture upon the Exchange, we are of the opinion
that the Exchange Notes will constitute valid and legally binding obligations of
the Company, enforceable against the Company in accordance with their terms.
Our opinion set forth in the preceding sentence is subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
Insofar as the opinion expressed herein relates to or is dependent upon
matters governed by the laws of the State of Texas, we have relied upon the
opinion of Vinson & Elkins L.L.P. filed as Exhibit 5.2 to the Registration
Statement.
We are members of the Bar of the State of New York and we do not express any
opinion herein concerning any law other than the law of the State of New York
and, to the extent set forth herein, the law of the State of Texas.
<PAGE>
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 5.2
October 28, 1997
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Ladies and Gentlemen:
We have acted as Texas counsel for Randall's Food Markets, Inc., a Texas
corporation (the "Company"), in connection with the Registration Statement on
Form S-4 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the issuance by the Company of
$150,000,000 aggregate principal amount of its 9 3/8% Series B Senior
Subordinated Notes due 2007 (the "Exchange Notes"). The Exchange Notes are to be
offered by the Company in exchange (the "Exchange") for $150,000,000 aggregate
principal amount of the Company's outstanding 9 3/8% Senior Subordinated Notes
due 2007 (the "Notes"). The Notes have been, and the Exchange Notes will be,
issued under an Indenture dated as of June 27, 1997 between the Company and
Marine Midland Bank, as Trustee (the"Trustee"), as amended by the First
Supplemental Indenture dated as of September 8, 1997 (the "Indenture").
We have examined the Registration Statement and the Indenture which has been
filed with the Commission as an Exhibit to the Registration Statement. In
addition, we have examined, and have relied as to matters of fact upon, the
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, documents and other instruments and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such other and further
investigations, as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals and the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of the
originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and limitations
stated herein, we are of the opinion that the Indenture has been duly authorized
and validly executed and delivered by the Company.
We are members of the Bar of the State of Texas and we do not express any
opinion herein concerning any law other than the law of the State of Texas.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement, to the reliance upon this opinion by Simpson Thacher &
Bartlett with respect to matters relating to the law of the State of Texas, for
the purposes of their opinion filed as Exhibit 5.1 to the Registration
Statement, and to the reference to our Firm under the caption "Legal Matters" in
the Prospectus included therein.
Very truly yours,
/s/ Vinson & Elkins L.L.P.
----------------------------------------------------------------------
VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 8
October 29, 1997
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Ladies and Gentlemen:
We have acted as special counsel for Randall's Food Markets, Inc., a Texas
corporation (the "Company"), in connection with the Registration Statement on
Form S-4 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the issuance by the Company of
$150,000,000 aggregate principal amount of its 9 3/8% Series B Senior
Subordinated Notes due 2007 (the "Exchange Notes"). The Exchange Notes are to be
offered by the Company in exchange (the "Exchange") for $150,000,000 aggregate
principal amount of its outstanding 9 3/8% Senior Subordinated Notes due 2007
(the "Notes"). The Notes have been, and the Exchange Notes will be, issued under
an Indenture dated as of June 27, 1997 (the "Indenture") between the Company and
Marine Midland Bank, as Trustee (the "Trustee").
We have examined the Registration Statement and the Indenture which has been
filed with the Commission as an Exhibit to the Registration Statement. In
addition, we have examined, and have relied as to matters of fact upon, the
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, documents and other instruments and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such other and further
investigations, as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals and the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of the
originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and limitations
stated herein, we hereby confirm our opinion set forth in the Prospectus
included in the Registration Statement under the caption "Certain U.S. Federal
Income Tax Consequences."
We are members of the Bar of the State of New York and we do not express any
opinion herein concerning any law other than the Federal law of the United
States.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the captions
"Certain U.S. Federal Income Tax Consequences" and "Legal Matters" in the
prospectus included therein.
Very truly yours,
/S/ SIMPSON TACHER & BARTLETT
----------------------------------------------------------------------
SIMPSON THACHER & BARTLETT
<PAGE>
Exhibit 10.15
FORM OF
1997 STOCK PURCHASE AND OPTION PLAN
FOR KEY EMPLOYEES OF
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
1. Purpose of Plan
The 1997 Stock Purchase and Option Plan for Key Employees of Randall's Food
Markets, Inc. and Subsidiaries (the "Plan") is designed:
(a) to promote the long term financial interests and growth of Randall's
Food Markets, Inc. (the "Corporation") and its subsidiaries by attracting and
retaining management personnel with the training, experience and ability to
enable them to make a substantial contribution to the success of the
Corporation's business;
(b) to motivate management personnel by means of growth-related incentives
to achieve long range goals; and
(c) to further the identity of interests of participants with those of the
shareholders of the Corporation through opportunities for increased stock, or
stock-based, ownership in the Corporation.
2. Definitions
As used in the Plan, the following words shall have the following meanings:
(a) "Grant" means an award made to a Participant pursuant to the Plan and
described in Paragraph 5, including, without limitation, an award of an
Incentive Stock Option, Stock Option, Stock Appreciation Right, Dividend
Equivalent Right, Restricted Stock, Purchase Stock, Performance Units,
Performance Shares or Other Stock Based Grant or any combination of the
foregoing.
(b) "Grant Agreement" means an agreement between the Corporation and a
Participant that sets forth the terms, conditions and limitations applicable to
a Grant.
(c) "Board of Directors" means the Board of Directors of the Corporation.
(d) "Committee" means the Compensation Committee of the Board of
Directors.
<PAGE>
2
(e) "Common Stock" or "Share" means common stock of the Corporation which
may be authorized but unissued, or issued and reacquired.
(f) "Employee" means a person, including an officer, in the regular
full-time employment of the Corporation or one of its Subsidiaries who, in the
opinion of the Committee, is, or is expected, to be primarily responsible for
the management, growth or protection of some part or all of the business of the
Corporation.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Fair Market Value" means such value of a Share as reported for stock
exchange transactions and/or determined in accordance with any applicable
resolutions or regulations of the Committee in effect at the relevant time.
(i) "Participant" means an Employee, or other person having a unique
relationship with the Corporation or one of its Subsidiaries, to whom one or
more Grants have been made and such Grants have not all been forfeited or
terminated under the Plan; provided, however, a non-employee director of the
Corporation or one of its Subsidiaries may not be a Participant.
(j) "Stock-Based Grants" means the collective reference to the grant of
Stock Appreciation Rights, Dividend Equivalent Rights, Restricted Stocks,
Performance Units, Performance Shares and Other Stock Based Grants.
(k) "Stock Options" means the collective reference to "Incentive Stock
Options" and "Other Stock Options".
(l) "Subsidiary" means any corporation other than the Corporation in an
unbroken chain of corporations beginning with the Corporation if each of the
corporations other than the last corporation in the unbroken chain owns 50% or
more of the voting stock in one of the other corporations in such chain.
3. Administration of Plan
(a) The Plan shall be administered by the Committee. None of the members
of the Committee shall be eligible to be selected for Grants under the Plan, or
have been so eligible for selection within one year prior thereto; provided,
however, that the members of the Committee shall qualify to administer the Plan
for purposes of Rule 16b-3 (and any other applicable rule) promulgated under
Section 16(b) of the Exchange Act to the extent that the Corporation is subject
to such rule. The Committee may adopt its own rules of procedure, and the
action of a majority of the Committee, taken at a meeting or taken without a
meeting by a writing signed by such majority, shall constitute action by the
Committee. The Committee shall have the power and authority to
<PAGE>
3
administer, construe and interpret the Plan, to make rules for carrying it
out and to make changes in such rules. Any such interpretations, rules, and
administration shall be consistent with the basic purposes of the Plan.
(b) The Committee may delegate to the Chief Executive Officer and to other
senior officers of the Corporation its duties under the Plan subject to such
conditions and limitations as the Committee shall prescribe except that only the
Committee may designate and make Grants to Participants who are subject to
Section 16 of the Exchange Act.
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Corporation, and the
officers and directors of the Corporation shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Participants, the Corporation and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or the Grants, and all members of the Committee shall be fully
protected by the Corporation with respect to any such action, determination or
interpretation.
4. Eligibility
The Committee may from time to time make Grants under the Plan to such
Employees, or other persons having a unique relationship with the Corporation or
any of its Subsidiaries, and in such form and having such terms, conditions and
limitations as the Committee may determine. No Grants may be made under this
Plan to non-employee directors of the Corporation or any of its Subsidiaries.
Grants may be granted singly, in combination or in tandem. The terms,
conditions and limitations of each Grant under the Plan shall be set forth in a
Grant Agreement, in a form approved by the Committee, consistent, however, with
the terms of the Plan; provided, however, such Grant Agreement shall contain
provisions dealing with the treatment of Grants in the event of the termination,
death or disability of a Participant, and may also include provisions concerning
the treatment of Grants in the event of a change of control of the Corporation.
5. Grants
From time to time, the Committee will determine the forms and amounts of
Grants for Participants. Such Grants may take the following forms in the
Committee's sole discretion:
(a) Incentive Stock Options - These are stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), to
purchase Common Stock. In addition to other restrictions contained in the Plan,
an option granted
<PAGE>
4
under this Paragraph 5(a), (i) may not be exercised more than 10 years after
the date it is granted, (ii) may not have an option price less than the Fair
Market Value of Common Stock on the date the option is granted, (iii) must
otherwise comply with Code Section 422, and (iv) must be designated as an
"Incentive Stock Option" by the Committee. The maximum aggregate Fair Market
Value of Common Stock (determined at the time of each Grant) with respect to
which any Participant may first exercise Incentive Stock Options under this
Plan and any Incentive Stock Options granted to the Participant for such year
under any plans of the Corporation or any Subsidiary in any calendar year is
$100,000. Payment of the option price shall be made in cash or in shares of
Common Stock, or a combination thereof, in accordance with the terms of the
Plan, the Grant Agreement, and of any applicable guidelines of the Committee
in effect at the time.
(b) Other Stock Options - These are options to purchase Common Stock which
are not designated by the Committee as "Incentive Stock Options". At the time
of the Grant the Committee shall determine, and shall have contained in the
Grant Agreement or other Plan rules, the option exercise period, the option
price, and such other conditions or restrictions on the grant or exercise of the
option as the Committee deems appropriate, which may include the requirement
that the grant of options is predicated on the acquisition of Purchase Shares
under Paragraph 5(e) by the Optionee. In addition to other restrictions
contained in the Plan, an option granted under this Paragraph 5(b), (i) may not
be exercised more than 10 years after the date it is granted and (ii) may not
have an option exercise price less than 50% of the Fair Market Value of Common
Stock on the date the option is granted. Payment of the option price shall be
made in cash or in shares of Common Stock, or a combination thereof, in
accordance with the terms of the Plan and of any applicable guidelines of the
Committee in effect at the time.
(c) Stock Appreciation Rights - These are rights that on exercise entitle
the holder to receive the excess of (i) the Fair Market Value of a share of
Common Stock on the date of exercise over (ii) the Fair Market Value on the date
of Grant (the "base value") multiplied by (iii) the number of rights exercised
as determined by the Committee. Stock Appreciation Rights granted under the
Plan may, but need not be, granted in conjunction with an Option under Paragraph
5(a) or 5(b). The Committee, in the Grant Agreement or by other Plan rules, may
impose such conditions or restrictions on the exercise of Stock Appreciation
Rights as it deems appropriate, and may terminate, amend, or suspend such Stock
Appreciation Rights at any time. No Stock Appreciation Right granted under this
Plan may be exercised less than 6 months or more than 10 years after the date it
is granted except in the event of death or disability of a Participant. To the
extent that any Stock Appreciation Right that shall have become exercisable, but
shall not have been exercised or cancelled or, by reason of any termination of
employment, shall
<PAGE>
5
have become non-exercisable, it shall be deemed to have been exercised
automatically, without any notice of exercise, on the last day of which it is
exercisable, provided that any conditions or limitations on its exercise are
satisfied (other than (i) notice of exercise and (ii) exercise or election to
exercise during the period prescribed) and the Stock Appreciation Right shall
then have value. Such exercise shall be deemed to specify that the holder
elects to receive cash and that such exercise of a Stock Appreciation Right
shall be effective as of the time of automatic exercise.
(d) Restricted Stock - Restricted Stock is Common Stock delivered to a
Participant with or without payment of consideration with restrictions or
conditions on the Participant's right to transfer or sell such stock; provided
that the price of any Restricted Stock delivered for consideration and not as
bonus stock may not be less than 50% of the Fair Market Value of Common Stock on
the date such Restricted Stock is granted or the price of such Restricted Stock
may be the par value. If a Participant irrevocably elects in writing in the
calendar year preceding a Grant of Restricted Stock, dividends paid on the
Restricted Stock granted may be paid in shares of Restricted Stock equal to the
cash dividend paid on Common Stock. The number of shares of Restricted Stock
and the restrictions or conditions on such shares shall be as the Committee
determines, in the Grant Agreement or by other Plan rules, and the certificate
for the Restricted Stock shall bear evidence of the restrictions or conditions.
No Restricted Stock may have a restriction period of less than 6 months, other
than in the case of death or disability.
(e) Purchase Stock - Purchase Stock are shares of Common Stock offered to
a Participant at such price as determined by the Committee, the acquisition of
which will make him eligible to receive under the Plan, including, but not
limited to, Other Stock Options; provided, however, that the price of such
Purchase Shares may not be less than 50% of the Fair Market Value of the Common
Stock on the date such shares of Purchase Stock are offered.
(f) Dividend Equivalent Rights - These are rights to receive cash payments
from the Corporation at the same time and in the same amount as any cash
dividends paid on an equal number of shares of Common Stock to shareholders of
record during the period such rights are effective. The Committee, in the Grant
Agreement or by other Plan rules, may impose such restrictions and conditions on
the Dividend Equivalent Rights, including the date such rights will terminate,
as it deems appropriate, and may terminate, amend, or suspend such Dividend
Equivalent Rights at any time.
(g) Performance Units - These are rights to receive at a specified future
date, payment in cash of an amount equal to all or a portion of the value of a
unit granted by the Committee. At
<PAGE>
6
the time of the Grant, in the Grant Agreement or by other Plan rules, the
Committee must determine the base value of the unit, the performance factors
applicable to the determination of the ultimate payment value of the unit and
the period over which the Corporation performance will be measured. These
factors must include a minimum performance standard for the Corporation below
which no payment will be made and a maximum performance level above which no
increased payment will be made. The term over which the Corporation
performance will be measured shall be not less than six months.
(h) Performance Shares - These are rights to receive at a specified future
date, payment in cash or Common Stock, as determined by the Committee, of an
amount equal to all or a portion of the Fair Market Value for all days that the
Common Stock is traded during the last forty-five (45) days of the specified
period of performance of a specified number of shares of Common Stock at the end
of a specified period based on the Corporation performance during the period.
At the time of the Grant, the Committee, in the Grant Agreement or by Plan
rules, will determine the factors which will govern the portion of the rights so
payable and the period over which the Corporation performance will be measured.
The factors will be based on the Corporation performance and must include a
minimum performance standard for the Corporation below which no payment will be
made and a maximum performance level above which no increased payment will be
made. The term over which the Corporation performance will be measured shall be
not less than six months. Performance Shares will be granted for no
consideration.
(i) Other Stock-Based Grants - The Committee may make other Grants under
the Plan pursuant to which shares of Common Stock (which may, but need not, be
shares of Restricted Stock pursuant to Paragraph 5(d)), are or may in the future
be acquired, or Grants denominated in stock units, including ones valued using
measures other than market value. Other Stock-Based Grants may be granted with
or without consideration; provided, however, that the price of any such Grant
made for consideration that provides for the acquisition of shares of Common
Stock or other equity securities of the Corporation may not be less than 50% of
the Fair Market Value of the Common Stock or such other equity securities on the
date of grant of such Grant. Such Other Stock-Based Grants may be made alone,
in addition to or in tandem with any Grant of any type made under the Plan and
must be consistent with the purposes of the Plan.
6. Limitations and Conditions
(a) The number of Shares available for Grants under this Plan shall be
_________ shares of the authorized Common Stock as of the effective date of the
Plan. The number of Shares subject to Grants under this Plan to any one
Participant shall not be more than _______ shares. Unless restricted by
applicable law, Shares related to Grants that are forfeited, terminated,
<PAGE>
7
cancelled or expire unexercised, shall immediately become available for Grants.
(b) No Grants shall be made under the Plan beyond ten years after the
effective date of the Plan, but the terms of Grants made on or before the
expiration thereof may extend beyond such expiration. At the time a Grant is
made or amended or the terms or conditions of a Grant are changed, the Committee
may provide for limitations or conditions on such Grant.
(c) Nothing contained herein shall affect the right of the Corporation to
terminate any Participant's employment at any time or for any reason.
(d) Deferrals of Grant payouts may be provided for, at the sole discretion
of the Committee, in the Grant Agreements.
(e) Except as otherwise prescribed by the Committee, the amounts of the
Grants for any employee of a Subsidiary, along with interest, dividend, and
other expenses accrued on deferred Grants shall be charged to the Participant's
employer during the period for which the Grant is made. If the Participant is
employed by more than one Subsidiary or by both the Corporation and a Subsidiary
during the period for which the Grant is made, the Participant's Grant and
related expenses will be allocated between the companies employing the
Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the death of a
Participant, no benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to do so shall be void. No such benefit shall, prior to
receipt thereof by the Participant, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements, or torts of the Participant.
(g) Participants shall not be, and shall not have any of the rights or
privileges of, shareholders of the Corporation in respect of any Shares
purchasable in connection with any Grant unless and until certificates
representing any such Shares have been issued by the Corporation to such
Participants.
(h) No election as to benefits or exercise of Stock Options, Stock
Appreciation Rights, or other rights may be made during a Participant's lifetime
by anyone other than the Participant except by a legal representative appointed
for or by the Participant.
(i) Absent express provisions to the contrary, any grant under this Plan
shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Corporation or its Subsidiaries
and shall not affect any benefits under any other benefit plan of any kind or
subsequently
<PAGE>
8
in effect under which the availability or amount of benefits is related to
level of compensation. This Plan is not a "Retirement Plan" or "Welfare
Plan" under the Employee Retirement Income Security Act of 1974, as amended.
(j) Unless the Committee determines otherwise, no benefit or promise under
the Plan shall be secured by any specific assets of the Corporation or any of
its Subsidiaries, nor shall any assets of the Corporation or any of its
Subsidiaries be designated as attributable or allocated to the satisfaction of
the Corporation's obligations under the Plan.
7. Transfers and Leaves of Absence
For purposes of the Plan, unless the Committee determines otherwise: (a)
a transfer of a Participant's employment without an intervening period of
separation among the Corporation and any Subsidiary shall not be deemed a
termination of employment, and (b) a Participant who is granted in writing a
leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. Adjustments
In the event of any change in the outstanding Common Stock by reason of a
stock split, spin-off, stock dividend, stock combination or reclassification,
recapitalization or merger, change of control, or similar event, the Committee
may adjust appropriately the number of Shares subject to the Plan and available
for or covered by Grants and Share prices related to outstanding Grants and make
such other revisions to outstanding Grants as it deems are equitably required.
9. Merger, Consolidation, Exchange,
Acquisition, Liquidation or Dissolution
In its absolute discretion, and on such terms and conditions as it deems
appropriate, coincident with or after the grant of any Stock Option or any
Stock-Based Grant, the Committee may provide that such Stock Option or
Stock-Based Grant cannot be exercised after the merger or consolidation of the
Corporation into another corporation, the exchange of all or substantially all
of the assets of the Corporation for the securities of another corporation, the
acquisition by another corporation of 80% or more of the Corporation's then
outstanding shares of voting stock or the recapitalization, reclassification,
liquidation or dissolution of the Corporation, and if the Committee so provides,
it shall, on such terms and conditions as it deems appropriate in its absolute
discretion, also provide, either by the terms of such Stock Option or
Stock-Based Grant or by a resolution adopted prior to the occurrence of such
merger, consolidation, exchange, acquisition, recapitalization,
reclassification, liquidation or dissolution, that, for some period of time
prior to such event, such Stock Option or Stock-
<PAGE>
9
Based Grant shall be exercisable as to all shares subject thereto,
notwithstanding anything to the contrary herein (but subject to the
provisions of Paragraph 6(b)) and that, upon the occurrence of such event,
such Stock Option or Stock-Based Grant shall terminate and be of no further
force or effect; provided, however, that the Committee may also provide, in
its absolute discretion, that even if the Stock Option or Stock-Based Grant
shall remain exercisable after any such event, from and after such event, any
such Stock Option or Stock-Based Grant shall be exercisable only for the kind
and amount of securities and/or other property, or the cash equivalent
thereof, receivable as a result of such event by the holder of a number of
shares of stock for which such Stock Option or Stock-Based Grant could have
been exercised immediately prior to such event.
10. Amendment and Termination
The Committee shall have the authority to make such amendments to any terms
and conditions applicable to outstanding Grants as are consistent with this Plan
provided that, except for adjustments under Paragraph 8 or 9 hereof, no such
action shall modify such Grant in a manner adverse to the Participant without
the Participant's consent except as such modification is provided for or
contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the Plan except that
no such action, other than an action under Paragraph 8 or 9 hereof, may be taken
which would, without shareholder approval, increase the aggregate number of
Shares available for Grants under the Plan, decrease the price of outstanding
Options or Stock Appreciation Rights, change the requirements relating to the
Committee or extend the term of the Plan.
11. Foreign Options and Rights
The Committee may make Grants to Employees who are subject to the laws
of nations other than the United States, which Grants may have terms and
conditions that differ from the terms thereof as provided elsewhere in the Plan
for the purpose of complying with foreign laws.
12. Withholding Taxes
The Corporation shall have the right to deduct from any cash payment made
under the Plan any federal, state or local income or other taxes required by law
to be withheld with respect to such payment. It shall be a condition to the
obligation of the Corporation to deliver shares upon the exercise of an Option
or Stock Appreciation Right, upon payment of Performance units or shares, upon
delivery of Restricted Stock or upon exercise, settlement or payment of any
Other Stock-Based Grant that the Participant pay to the Corporation such amount
as may be requested by the Corporation for the purpose of satisfying any
<PAGE>
10
liability for such withholding taxes. Any Grant Agreement may provide that the
Participant may elect, in accordance with any conditions set forth in such Grant
Agreement, to pay a portion or all of such withholding taxes in shares of Common
Stock.
13. Effective Date and Termination Dates
The Plan shall be effective on and as of the date of its approval by the
shareholders of the Corporation and shall terminate ten years later, subject to
earlier termination by the Board of Directors pursuant to Paragraph 10.
<PAGE>
Exhibit 10.16
FORM OF MANAGEMENT STOCKHOLDER'S AGREEMENT
This Stockholder's Agreement (this "Agreement") is entered into as of
_____________ __, 199_ between RANDALL'S FOOD MARKETS, INC., a Texas corporation
(the "Company"), and _________________ (the "Purchaser") (the Company and the
Purchaser being hereinafter collectively referred to as the "Parties").
RECITALS
On June 9, 1997, a special meeting of the shareholders of the
Company was held at which the shareholders approved (i) an amendment to the
Company's Restated Articles of Incorporation to increase the number of
authorized shares of the voting common stock, par value $0.25 per share, of
the Company (the "Common Stock") from 25,000,000 shares to 75,000,000 shares,
(ii) the Subscription Agreement dated as of April 1, 1997 ("Subscription
Agreement") among the Company, Robert R. Onstead and RFM Acquisition LLC
("RFM Acquisition"), a Delaware limited liability company formed at the
direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), which provides,
among other things, for RFM Acquisition to pay an aggregate of $225 million
to the Company as consideration for the Company's issuance to RFM Acquisition
of 18,579,686 shares of Common Stock and an option to purchase an additional
3,606,881 shares of Common Stock at $12.11 per share, subject to adjustment,
at any time on or before 25 years from the closing of the Transaction (as
defined herein) and (iii) the Voting, Repurchase and Shareholders Agreement
dated as of April 1, 1997 (as the same may be amended, supplemented or
otherwise modified from time to time, the "Shareholders Agreement") among the
Company, RFM Acquisition and certain shareholders of the Company. The
transactions and events contemplated by the Subscription Agreement and the
Shareholders Agreement were consummated on June 27, 1997, and are
collectively referred to herein as the "Transaction." In connection with the
Transaction, the Company proposes to sell shares of its Common Stock to key
employees of the Company at a price of $12.11 per share of Common Stock (the
"Per Share Purchase Price").
This Agreement is one of several other agreements ("Other
Purchasers' Agreements") which have been, or which in the future will be,
entered into between the Company and other individuals who are or will be key
employees of the Company or one of its subsidiaries (collectively, the "Other
Purchasers").
The Company has agreed to sell, and the Purchaser has agreed to buy,
___________ shares of Common Stock (the "Purchase Stock") to Purchaser at the
Per Share Purchase Price for an aggregate purchase price of $___________. In
addition, the Company will grant to Purchaser an option or options to purchase
_________ shares of Common Stock ("Options") at an exercise price
<PAGE>
2
of $12.11 per share of Common Stock pursuant to the terms of the 1997 Stock
Purchase and Option Plan for Key Employees of Randall's Food Markets, Inc.
and Subsidiaries (the "Option Plan") and the Non-Qualified Stock Option
Agreement (the "Non-Qualified Stock Option Agreement").
AGREEMENT
To implement the foregoing and in consideration of the mutual
agreements contained herein, the Parties agree as follows:
1. Purchase of Stock; Issuance of Options.
(a) Subject to the terms and conditions hereinafter set forth, the
Purchaser hereby subscribes for and shall purchase, and the Company shall
sell to the Purchaser, the Purchase Stock at the Per Share Purchase Price on
_____________ ____, 199__ (the "Purchase Date"); provided that with respect
to Purchasers who enter into this Agreement on [insert date], the Purchase
Date shall be deemed to be June 29, 1997. The Company shall have no
obligation to sell any Purchase Stock to any person who (i) is a resident or
citizen of a state or other jurisdiction in which the sale of the Purchase
Stock to him or her would constitute a violation of the securities or "blue
sky" laws of such jurisdiction or (ii) is not an employee of the Company or
any of its subsidiaries on the Purchase Date.
(b) The aggregate price for the Purchase Stock shall be $__________
(such amount hereinafter sometimes referred to as the "Purchase Price"). The
Purchase Price shall be paid in the following manner: the Purchaser shall
deliver to the Company at least three business days prior to the Purchase
Date cash or a certified bank check or checks payable to the order of the
Company in the aggregate amount of the Purchase Price. On the Purchase Date,
in consideration of receipt of the Purchase Price, the Company will deliver
to the Purchaser a certificate, registered in the Purchaser's name, for the
Purchase Stock, which shall be subject to the terms and conditions
hereinafter set forth.
(c) Subject to the terms and conditions hereinafter set forth and
upon and as of the Purchase Date, the Company shall issue to the Purchaser
the Options and the Parties shall execute and deliver to each other copies of
the Non-Qualified Stock Option Agreement concurrently with the issuance of
the Options.
2. Purchaser's Representations, Warranties and Agreements.
(a) The Purchaser hereby represents and warrants that he is
acquiring the Purchase Stock, and, at the time of exercise, the Common Stock
issuable upon exercise of the Options (collectively, and, together with any
other shares of Common
<PAGE>
3
Stock beneficially owned by the Purchaser as of the date hereof or hereafter
acquired, the "Stock") for investment for his own account and not with a view
to, or for resale in connection with, the distribution or other disposition
thereof. The Purchaser agrees and acknowledges that he will not, directly or
indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise
dispose of any shares of the Stock unless (A) such offer, transfer, sale,
assignment, pledge, hypothecation or other disposition complies with Section
3 of this Agreement and (B) (i) the offer, transfer, sale, assignment,
pledge, hypothecation or other disposition is pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or the
rules and regulations in effect thereunder (the "Act") and in compliance with
applicable state securities laws or (ii) (A) counsel for the Purchaser (which
counsel shall be acceptable to the Company) shall have furnished the Company
with an opinion, satisfactory in form and substance to the Company, that no
such registration is required because of the availability of an exemption
from registration under the Act and such transfer, sale, assignment, pledge,
hypothecation or other disposition is in compliance with the applicable
provisions of state securities laws or (B) if the Purchaser is a citizen or
resident of any country other than the United States, or the Purchaser
desires to effect any transfer in any such country, counsel for the Purchaser
(which counsel shall be acceptable to the Company) shall have furnished the
Company with an opinion or other advice satisfactory in form and substance to
the Company to the effect that such transfer will comply with the securities
laws of such jurisdiction. Notwithstanding the foregoing, the Company
acknowledges and agrees that any of the following transfers are deemed to be
in compliance with the Act and this Agreement and no opinion of counsel is
required in connection therewith: (x) a transfer made pursuant to Section 4,
5 or 6 hereof, (y) a transfer upon the death of the Purchaser to his
executors, administrators, testamentary trustees, legatees or beneficiaries
(the "Purchaser's Estate") or a transfer to the executors, administrators,
testamentary trustees, legatees or beneficiaries of a person who has become a
holder of Stock in accordance with the terms of this Agreement, provided that
it is expressly understood that any such transferee shall be bound by the
provisions of this Agreement and (z) a transfer made after the Purchase Date
in compliance with the federal securities laws to a trust or custodianship
the beneficiaries of which may include only the Purchaser, his spouse or his
lineal descendants (a "Purchaser's Trust") or a transfer made after the third
anniversary of the Purchase Date to such a trust by a person who has become a
holder of Stock in accordance with the terms of this Agreement, provided that
such transfer is made expressly subject to this Agreement and that the
transferee agrees in writing to be bound by the terms and conditions hereof.
(b) The certificate (or certificates) representing the Stock shall
bear the following legend:
<PAGE>
4
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS
OF THE MANAGEMENT STOCKHOLDER'S AGREEMENT DATED AS OF
_______________ __199_, BETWEEN RANDALL'S FOOD MARKETS, INC. (THE
"COMPANY") AND THE PURCHASER NAMED ON THE FACE HEREOF (A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY). EXCEPT AS
OTHERWISE PROVIDED IN SUCH AGREEMENT, NO TRANSFER, SALE,
ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE
SHARES REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT (A)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND IN COMPLIANCE
WITH APPLICABLE STATE SECURITIES LAWS OR (B) IF (I) THE COMPANY
HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE
HOLDER THAT SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE PROVISIONS
OF SECTION 5 OF THE ACT OR THE RULES AND REGULATIONS IN EFFECT
THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE PROVISIONS OF STATE
SECURITIES LAWS, AND (II) IF THE HOLDER IS A CITIZEN OR RESIDENT
OF ANY COUNTRY OTHER THAN THE UNITED STATES, OR THE HOLDER
DESIRES TO EFFECT ANY SUCH TRANSACTION IN ANY SUCH COUNTRY, THE
COMPANY HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OR OTHER
ADVICE OF COUNSEL FOR THE HOLDER THAT SUCH TRANSACTION WILL NOT
VIOLATE THE LAWS OF SUCH COUNTRY."
(c) The Purchaser acknowledges that he has been advised that (i) the
Stock has not been registered under the Act, (ii) a restrictive legend in the
form heretofore set forth shall be placed on the certificates representing the
Stock and (iii) a notation shall be made in the appropriate records of the
Company indicating that the Stock is subject to restrictions on transfer and
appropriate stop transfer restrictions will be issued to the Company's transfer
agent with respect to the Stock. If the Purchaser is an Affiliate (as such term
is defined in Rule 501(b) of the Act), the Purchaser also acknowledges that (1)
the Stock must be held indefinitely and the Purchaser must continue to bear the
economic risk of the investment in the Stock unless it is subsequently
registered under the Act or an exemption from such registration is available,
(2) it is not anticipated that there will be any public market for the Stock,
(3) Rule 144 promulgated under the Act is not currently available with respect
to the sales of any securities of the Company, and the Company has made no
covenant to make such Rule available (except as provided in Section 9(b)
hereof), (4) when and if shares of the Stock may be disposed of without
registration in reliance on Rule 144, such disposition can be made only in
limited amounts in accordance
<PAGE>
5
with the terms and conditions of such Rule and (5) if the Rule 144 exemption
is not available, public sale without registration will require compliance
with Regulation A or some other exemption under the Act.
(d) If any shares of the Stock are to be disposed of in accordance
with Rule 144 under the Act or otherwise, the Purchaser shall promptly notify
the Company of such intended disposition and shall deliver to the Company at
or prior to the time of such disposition such documentation as the Company
may reasonably request in connection with such sale and, in the case of a
disposition pursuant to Rule 144, shall deliver to the Company an executed
copy of any notice on Form 144 required to be filed with the Securities and
Exchange Commission (the "SEC").
(e) The Purchaser agrees that, if any shares of the capital stock
of the Company are offered to the public pursuant to an effective
registration statement under the Act (other than registration of securities
issued under an employee plan), the Purchaser will not effect any public sale
or distribution of any shares of the Stock not covered by such registration
statement within 7 days prior to, or within 180 days after, the effective
date of such registration statement, unless otherwise agreed to in writing by
the Company.
(f) The Purchaser represents and warrants that (i) he has received
and reviewed a Private Placement Memorandum (the "Private Placement
Memorandum") relating to the Stock and the documents referred to therein,
certain of which documents set forth the rights, preferences and restrictions
relating to the Stock and (ii) he has been given the opportunity to obtain
any additional information or documents and to ask questions and receive
answers about such documents, the Company and the business and prospects of
the Company which he deems necessary to evaluate the merits and risks related
to his investment in the Stock and to verify the information contained in the
Private Placement Memorandum and the information received as indicated in
this Section 2(f)(ii), and he has relied solely on such information.
(g) The Purchaser further represents and warrants that (i) his
financial condition is such that he can afford to bear the economic risk of
holding the Stock for an indefinite period of time and has adequate means for
providing for his current needs and personal contingencies, (ii) he can
afford to suffer a complete loss of his investment in the Stock, (iii) all
information which he has provided to the Company concerning himself and his
financial position is correct and complete as of the date of this Agreement,
(iv) he understands and has taken cognizance of all risk factors related to
the purchase of the Stock, including those set forth in the Private Placement
Memorandum referred to above, and (v) his knowledge and experience in
financial and business matters are such that he is
<PAGE>
6
capable of evaluating the merits and risks of his purchase of the Stock as
contemplated by this Agreement.
(h) The Purchaser further acknowledges that, if he is a party to
the Shareholders Agreement, his shares of Stock will be subject, until
termination of the Shareholders Agreement, to the voting restrictions and
requirements contained in Section 4.01 (entitled "Certain Directors") of the
Shareholders Agreement.
3. Restriction on Transfer.
Except for transfers permitted by clauses (x), (y) and (z) of
Section 2(a) or a sale of shares of Stock pursuant to an effective
registration statement under the Act filed by the Company or pursuant to the
Sale Participation Agreement (as defined below), the Purchaser agrees that he
will not transfer, sell, assign, pledge, hypothecate or otherwise dispose of
any shares of the Stock at any time prior to the later of the fifth
anniversary of the Purchase Date or the first occurrence of a Qualified
Public Offering (as defined below) (such date being referred to as the
"Unrestricted Date"). No transfer of any such shares in violation hereof
shall be made or recorded on the books of the Company and any such transfer
shall be void and of no effect.
4. Right of First Refusal.
If at any time after the Unrestricted Date the Purchaser is
permitted to transfer shares of Stock pursuant to Sections 2 and 3
("Unrestricted Shares") and the Purchaser (i) receives a bona fide offer (the
"Offer") to purchase any or all of such Unrestricted Shares from a third
party (the "Offeror") which the Purchaser wishes to accept or (ii) if the
Purchaser wishes to sell any or all of his Unrestricted Shares in the open
market at the market price ("Proposed Market Sale"), the Purchaser shall
cause the Offer or Proposed Market Sale to be reduced to writing and shall
notify the Company in writing of his wish to accept the Offer or consummate
the Proposed Market Sale, as the case may be. The Purchaser's notice shall
constitute an irrevocable offer to sell such Unrestricted Shares to the
Company (in the manner set forth below) at a purchase price (i) in the case
of an Offer, equal to the price contained in, and on the same terms and
conditions of, the Offer, and shall be accompanied by a true copy of the
Offer (which shall identify the Offeror) and (ii) in the case of a Proposed
Market Sale, equal to the market price on the date of such notice. At any
time within 30 days after the date of the receipt by the Company of the
Purchaser's notice, the Company shall have the right and option to purchase,
or to arrange for a third party to purchase, all of the Unrestricted Shares
covered by the Offer or the Proposed Market Sale either (i) at the same price
and on the same terms and conditions as the Offer or the Proposed Market Sale
or (ii) if the Offer includes any consideration other than cash, then at
<PAGE>
7
the sole option of the Company, at the equivalent all cash price, determined
in good faith by the Company's Board of Directors, by delivering a certified
bank check or checks in the appropriate amount to the Purchaser at the
principal office of the Company against delivery of certificates or other
instruments representing the Unrestricted Shares so purchased, appropriately
endorsed by the Purchaser. If at the end of such 30-day period, the Company
has not tendered the purchase price for such Unrestricted Shares in the
manner set forth above, the Purchaser may during the succeeding 30-day period
sell not less than all of the Unrestricted Shares covered by the Purchaser's
notice in the case of an Offer to the Offeror at a price and on terms no less
favorable to the Purchaser than those contained in the Offer and in the case
of a Proposed Market Sale at the market price at the time of sale. Promptly
after such sale, the Purchaser shall notify the Company of the consummation
thereof and shall furnish such evidence of the completion and time of
completion of such sale and of the terms thereof as may reasonably be
requested by the Company. If, at the end of 30 days following the expiration
of the 30-day period for the Company to purchase the Stock, the Purchaser has
not completed the sale of such shares of the Stock as aforesaid, all the
restrictions on sale contained in this Section shall again be in effect with
respect to such Unrestricted Shares.
5. Purchaser's Resale of Stock and Options to the
Company Upon The Purchaser's Death or Disability.
(a) Except as otherwise provided herein, if at any time prior to
the Unrestricted Date, (i) the Purchaser is still in the employ of the
Company or any subsidiary of the Company or the Purchaser is in Retirement
(as defined in the Non-Qualified Stock Option Agreement) after having been
employed by the Company or any subsidiary of the Company for at least three
years after the Purchase Date and (ii) the Purchaser either dies or becomes
permanently disabled, then the Purchaser, the Purchaser's Estate or a
Purchaser's Trust, as the case may be, shall have the right, for six months
following the date of death or permanent disability, to (A) sell to the
Company, and the Company shall be required to purchase, on one occasion, all
or any portion of the shares of Stock then held by the Purchaser, the
Purchaser's Estate and/or the Purchaser's Trust, as the case may be, at the
Section 5 Repurchase Price, as determined in accordance with Section 7, and
(B) require the Company to pay, on the same occasion, to the Purchaser, the
Purchaser's Estate or the Purchaser's Trust, as the case may be, an
additional amount equal to the Option Excess Price determined on the basis of
a Section 5 Repurchase Price as provided in Section 8 with respect to the
termination of outstanding Options held by the Purchaser. The Purchaser, the
Purchaser's Estate and/or the Purchaser's Trust, as the case may be, shall
send written notice to the Company of its intention to sell shares of Stock
and to terminate such Options in exchange for the payment referred to in the
preceding sentence (the "Redemption Notice"). The completion of the
<PAGE>
8
purchase shall take place at the principal office of the Company on the tenth
business day after the giving of the Redemption Notice. The Section 5
Repurchase Price and any payment with respect to the Options as described
above shall be paid by delivery to the Purchaser, the Purchaser's Estate
and/or the Purchaser's Trust, as the case may be, of a certified bank check
or checks in the appropriate amount payable to the order of the Purchaser,
the Purchaser's Estate or the Purchaser's Trust, as the case may be, against
delivery of certificates or other instruments representing the Stock so
purchased and appropriate documents cancelling the Options so terminated,
each appropriately endorsed or executed by the Purchaser, the Purchaser's
Estate or the Purchaser's Trust, or his or her or its duly authorized
representative. For purposes of this Agreement, Purchaser shall be deemed to
have a "permanent disability" when the majority of the Board of Directors of
the Company shall, in good faith, so determine.
(b) Notwithstanding anything in Section 5(a) to the contrary and
subject to Section 11, the Company shall not be obligated to repurchase any
of the Stock or the Options from the Purchaser, the Purchaser's Estate or the
Purchaser's Trust, as the case may be, if there exists and is continuing, or
such repurchase would result in, (x) a default or an event of default on the
part of the Company or any subsidiary of the Company under any loan,
guarantee or other agreement under which the Company or any subsidiary of the
Company has borrowed money or (y) a violation under any applicable provision
of the Texas Business Corporation Act (or if the Company reincorporates, the
corporation law of that state) (such occurrence being a "Blocking Event").
The Company's obligation to repurchase any of the Stock or Options as set
forth in Section 5(a) shall be suspended until the first business day which
is 5 calendar days after all of the foregoing Blocking Events have ceased to
exist (the "Repurchase Eligibility Date"); provided, however, that (i) the
number of shares of Stock subject to repurchase under Section 5(a) at the
time of delivery of the Redemption Notice shall be that number of shares of
Stock, and (ii) the number of Exercisable Option Shares (as defined in
Section 8) for purposes of calculating the Option Excess Price payable after
the termination of all Blocking Events shall be the number of Exercisable
Option Shares held by the Purchaser, the Purchaser's Estate or the
Purchaser's Trust, as the case may be, at the time of delivery of a
Redemption Notice in accordance with Section 5(a) hereof; provided, further,
that the Repurchase Calculation Date shall be determined in accordance with
Section 7 as of the Repurchase Eligibility Date (unless the Section 5
Repurchase Price would be greater if the Repurchase Calculation Date had been
determined as if no Blocking Event had occurred in which case, solely for
purposes of this proviso, the Repurchase Calculation Date shall be determined
as if no Blocking Event had occurred). All Options exercisable as of the
date of a Redemption Notice shall continue to be exercisable until the
repurchase pursuant to such Redemption Notice.
<PAGE>
9
(c) Notwithstanding any other provision of this Section 5 to the
contrary and subject to Section 11, the Purchaser, the Purchaser's Estate or
the Purchaser's Trust, as the case may be, shall have the right to withdraw
any Redemption Notice which has been pending for 60 or more days and which
has remained unsatisfied because of the provisions of Section 5(b).
6. The Company's Option to Repurchase Stock
and Options of Purchaser.
(a) If, prior to the Unrestricted Date, (i) the Purchaser's active
employment with the Company (and/or, if applicable, its subsidiaries) is
either (A) terminated by the Purchaser without Good Reason or (B) terminated
by the Company for Cause, (ii) a Purchaser's Trust fails to comply with the
requirements set forth in Section 2(a)(z), or (iii) the Purchaser shall
effect a transfer of any of the Stock other than as permitted in this
Agreement, the Company shall have the right to purchase all, but not less
than all, of the shares of the Stock then held by the Purchaser, the
Purchaser's Estate or a Purchaser's Trust at the applicable Section 6(a)
Repurchase Price determined in accordance with Section 7 hereof. In the
event of the Purchaser's resignation without Good Reason, all unexercisable
Options shall terminate without any payment. In the event of Purchaser's
active employment with the Company is terminated by the Company for Cause,
all Options shall terminate without any payment.
(b) If, prior to the Unrestricted Date, the Purchaser's active
employment with the Company is terminated by the Purchaser with Good Reason
or terminated by the Company without Cause, the Company shall have the right
to purchase all, but not less than all, of the shares of the Stock then held
by the Purchaser, the Purchaser's Estate or a Purchaser's Trust at the
applicable Section 6(b) Repurchase Price determined in accordance with
Section 7 hereof.
(c) If, prior to the Unrestricted Date, the Purchaser either (i)
dies or becomes permanently disabled and on the date of such death or
permanent disability the Purchaser was still in the employ of the Company or
(ii) enters into Retirement after having been employed by the Company or any
subsidiary of the Company for at least three years after the Purchase Date,
the Company shall have the right to purchase all, but not less than all, of
the shares of the Stock then held by the Purchaser, the Purchaser's Estate or
a Purchaser's Trust, provided, however, that the Repurchase Price shall be
the Section 5 Repurchase Price.
(d) The circumstances under which the Company may elect to require
the repurchase of the shares of Stock pursuant to Sections 6(a), (b) and (c)
are hereinafter collectively referred to as "Call Events." The Company shall
have a period of 75 days from the date of a Call Event in which to give
notice in
<PAGE>
10
writing to the Purchaser of the exercise of such election ("Call Notice").
In the event that the Company exercises its right to repurchase shares of the
Stock pursuant to this Section 6, the Company shall also pay the Purchaser an
amount equal to the Option Excess Price determined on the basis of the
Section 6(a) Repurchase Price, the Section 6(b) Repurchase Price or the
Section 5 Repurchase Price, as the case may be, as provided in Section 8,
with respect to the termination of outstanding Options held by the Purchaser.
(e) The completion of the purchases pursuant to the foregoing
shall take place at the principal office of the Company on the tenth business
day after the giving of notice of the exercise of the option to purchase.
The Section 5 Repurchase Price, the Section 6(a) Repurchase Price and the
Section 6(b) Repurchase Price, as the case may be, and any payment with
respect to the Options as described above shall be paid by delivery to the
applicable seller of a certified bank check or checks in the appropriate
amount payable to the order of such seller against delivery of certificates
or other instruments representing the Stock so purchased and appropriate
documents cancelling the Options so terminated, appropriately endorsed or
executed by the Purchaser, the Purchaser's Estate, the Purchaser's Trust or
his, her or its authorized representatives.
(f) Notwithstanding any other provision of this Section 6 to the
contrary and subject to Section 11, if there exists and is continuing any
Blocking Event, the Company shall delay the repurchase of any of the Stock or
the Options (pursuant to a Call Notice timely given in accordance with
Section 6(a), 6(b) or 6(c) hereof) from the Purchaser, the Purchaser's Estate
or the Purchaser's Trust, as the case may be, until the Repurchase
Eligibility Date; provided, however, that (i) the number of shares of Stock
subject to repurchase under this Section 6 at the time of the delivery of the
Call Notice shall be that number of shares of Stock subject to repurchase
after the termination of all Blocking Events and (ii) the number of
Exercisable Option Shares for purposes of calculating the Option Excess Price
payable after the termination of all Blocking Events shall be the number of
Exercisable Option Shares held by the Purchaser, the Purchaser's Estate or a
Purchaser's Trust, as the case may be, at the time of delivery of a Call
Notice in accordance with Sections 6(a), 6(b) or 6(c) hereof; provided,
further, that the Repurchase Calculation Date shall be determined in
accordance with Section 7 based on the Repurchase Eligibility Date (unless
the applicable Repurchase Price would be greater if the Repurchase
Calculation Date had been determined as if no Blocking Event had occurred, in
which case, solely for purposes of this proviso, the Repurchase Calculation
Date shall be determined as if no Blocking Event had occurred). All Options
exercisable as of the date of a Call Notice shall continue to be exercisable
until the repurchase pursuant to such Call Notice.
<PAGE>
11
(g) For purposes of this Agreement the following definitions shall
apply: "Cause" shall mean (i) the Purchaser's willful and continued failure
to perform Purchaser's duties with respect to the Company or its subsidiaries
which continues beyond ten days after a written demand for substantial
performance is delivered to Purchaser by the Company or (ii) misconduct by
Purchaser involving (x) dishonesty or breach of trust in connection with
Purchaser's employment or (y) conduct which would be a reasonable basis for
an indictment of Purchaser for a felony or for a misdemeanor involving moral
turpitude and "Good Reason" shall mean (i) a reduction in Purchaser's base
salary or (ii) a substantial reduction in Purchaser's duties and
responsibilities other than as reasonably approved by the Chief Executive
Officer of the Company.
7. Determination of Repurchase Price.
(a) The Section 5 Repurchase Price, the Section 6(a) Repurchase
Price and the Section 6(b) Repurchase Price are hereinafter collectively
referred to as the "Repurchase Price." The Repurchase Price shall be
calculated on the basis of the unaudited financial statements of the Company
or the Market Price Per Share (as defined in Section 7(h)) as of the last day
of the month preceding the later of (i) the month in which the event giving
rise to the repurchase occurs and (ii) the month in which the Repurchase
Eligibility Date occurs (hereinafter called the "Repurchase Calculation
Date"). The event giving rise to the repurchase shall be the death,
permanent disability or termination of employment, as the case may be, of the
Purchaser, not the giving of any notice required pursuant to Section 5 or 6.
(b) The Section 5 Repurchase Price shall be a per share Repurchase
Price equal to (i) prior to a Public Offering (as defined below), $12.11 plus
the increase, if any, in Book Value Per Share (as defined in Section 7(f))
from the Purchase Date through the Repurchase Calculation Date or (ii) after
a Public Offering, $12.11 plus the amount, if any, by which the Market Price
Per Share as of the Repurchase Calculation Date exceeds $12.11.
(c) The Section 6(a) Repurchase Price shall be a per share
Repurchase Price equal to (i) prior to a Public Offering, the lesser of (x)
Book Value Per Share and (y) $12.11 plus the product of (A) the Unrestricted
Percentage (as defined below) and (B) the increase in the Book Value Per
Share from the Purchase Date through the Repurchase Calculation Date, if such
Book Value Per Share has increased or (ii) after a Public Offering, the
lesser of (x) the Market Price Per Share and (y) $12.11 plus the product of
(A) the Unrestricted Percentage and (B) the amount, if any, by which the
Market Price Per Share as of the Repurchase Calculation Date exceeds $12.11.
<PAGE>
12
(d) The Section 6(b) Repurchase Price shall be a per share
Repurchase Price equal to (x) prior to a Public Offering, Book Value Per
Share or (y) after a Public Offering, the Market Price Per Share.
(e) For purposes of this Agreement the "Unrestricted Percentage"
shall be determined as follows:
<TABLE>
<S> <C>
Repurchase Calculation Date Percentage
- --------------------------- ----------
Purchase Date through and including the
first anniversary of the Purchase Date 0%
After the first anniversary of the Purchase
Date through and including the second
anniversary of the Purchase Date 20%
After the second anniversary of the Purchase
Date through and including the third
anniversary of the Purchase Date 40%
After the third anniversary of the Purchase
Date through and including the fourth
anniversary of the Purchase Date 60%
After the fourth anniversary of the Purchase
Date through and including the fifth
anniversary of the Purchase Date 80%
After the fifth anniversary of the Purchase
Date 100%
</TABLE>
(f) For purposes of this Agreement, "Book Value Per Share" shall be
the quotient of (a)(i) $359,839,700 million plus (ii) the aggregate net
income of the Company from and after June 29, 1997 (as decreased by any net
losses from and after June 29, 1997 plus (iii) the aggregate dollar amount
contributed to the Company after June 29, 1997 as equity by the shareholders
of the Company (including consideration to be received upon exercise of the
Options and other stock equivalents), (iv) plus, to the extent reflected as
deductions to Book Value Per Share in clause (ii) above, or minus, to the
extent reflected as additions to Book Value Per Share in clause (ii) above,
unusual noncash items recognized by the Company, if and to the extent
determined in the sole discretion of the Compensation Committee of the Board
of Directors of the Company, minus (v) the aggregate dollar amount of any
dividends paid by the Company on and after June 29, 1997 divided by (b) the
sum of the number of shares of Common Stock then outstanding and the number
of shares of Common Stock issuable upon the exercise of all outstanding stock
options and other rights to acquire Common Stock and the conversion of all
securities convertible into shares of Common Stock. The calculations set
forth in clauses (a)(ii), (a)(iii), (a)(iv) and (a)(v) of the immediately
preceding sentence shall be determined in accordance with generally accepted
accounting principles
<PAGE>
13
applied on a basis consistent with any prior periods as reflected in the
consolidated financial statements of the Company.
(g) As used herein the term "Public Offering" shall mean the sale
of shares of Common Stock to the public subsequent to the date hereof
pursuant to a registration statement under the Act which has been declared
effective by the SEC (other than a registration statement on Form S-8 or any
other similar form) which results in an active trading market in the Common
Stock. A "Qualified Public Offering" shall mean a Public Offering pursuant
to an effective registration statement relating to the sale of shares of
Common Stock held by any of the KKR Entities (as defined below); provided,
however, that a "Qualified Public Offering" shall be deemed to have occurred
if there has been a Public Offering and there exists an active trading market
in 40% or more of the Common Stock.
(h) As used herein the term "Market Price Per Share" shall mean the
price per share equal to the average of the last sale price of the Common
Stock on the Repurchase Calculation Date on each exchange on which the Common
Stock may at the time be listed or, if there shall have been no sales on any
of such exchanges on the Repurchase Calculation Date, the average of the
closing bid and asked prices on each such exchange at the end of the
Repurchase Calculation Date or if there is no such bid and asked price on the
Repurchase Calculation Date on the next preceding date when such bid and
asked price occurred or, if the Common Stock shall not be so listed, the
average of the closing sales prices as reported by NASDAQ at the end of the
Repurchase Calculation Date in the over-the-counter market. If the Common
Stock is not so listed or reported by NASDAQ, then the Market Price Per Share
shall be the Book Value Per Share.
(i) In determining the Repurchase Price, appropriate adjustments
shall be made for any future issuances of rights to acquire and securities
convertible into Common Stock and any stock dividends, splits, combinations,
recapitalizations or any other adjustment in the number of outstanding shares
of Common Stock.
8. Stock Issued to Purchaser Upon Exercise of Stock Options;
Termination of Options.
(a) The Company may from time to time grant to the Purchaser, in
addition to the Options, options under the Option Plan to purchase shares of
Common Stock at the Per Share Purchase Price or at a different option
exercise price.
(b) All outstanding Options granted to the Purchaser under the
Option Plan or otherwise, whether or not then exercisable, will be
automatically terminated upon the payment by the Company to the Purchaser,
pursuant to the provisions of Sections 5 or 6 of this Agreement, of an amount
equal to the
<PAGE>
14
Option Excess Price. If the Option Excess Price is zero or a negative
number, all outstanding stock options granted to the Purchaser under the
Option Plan or otherwise, whether or not then exercisable, shall be
automatically terminated upon the repurchase of Stock as provided in Sections
5 or 6. The Option Excess Price is the excess, if any, of the Section 5
Repurchase Price, the Section 6(a) Repurchase Price or the Section 6(b)
Repurchase Price, depending on which Repurchase Price is being used to
repurchase the remainder of the Stock, over the Option Price (as defined in
the Option Plan) multiplied by the number of Exercisable Option Shares. For
purposes hereof, "Exercisable Option Shares" shall mean the shares of Common
Stock which, at the time of determination of the Option Excess Price, could
be purchased by the Purchaser upon exercise of his outstanding options.
9. The Company's Representations and Warranties.
(a) The Company represents and warrants to the Purchaser that (i)
this Agreement has been duly authorized, executed and delivered by the
Company and (ii) the Stock, when issued and delivered in accordance with the
terms hereof, will be duly and validly issued, fully paid and nonassessable.
(b) If the Company shall have engaged in a Public Offering, (i) the
Company shall use reasonable efforts to register the Options and the Stock to
be acquired on exercise thereof on a Form S-8 Registration Statement or any
successor to Form S-8 to the extent that such registration is then available
with respect to such Options and Stock and (ii) the Company will file the
reports required to be filed by it under the Act and the Exchange Act and the
rules and regulations adopted by the SEC thereunder, to the extent required
from time to time to enable the Purchaser to sell shares of Stock without
registration under the Act within the limitations of the exemptions provided
by (A) Rule 144 under the Act, as such Rule may be amended from time to time,
or (B) any similar rule or regulation hereafter adopted by the SEC.
Notwithstanding anything contained in this Section 9(b), the Company may
deregister under Sections 12 or 15 of the Exchange Act if it is then
permitted to do so pursuant to the Exchange Act and the rules and regulations
thereunder. Nothing in this Section 9(b) shall be deemed to limit in any
manner the restrictions on sales of Stock contained in this Agreement.
10. "Piggyback" Registration Rights.
(a) Effective upon the purchase of Common Stock pursuant to this
Agreement, until the Unrestricted Date, the Purchaser (i) hereby agrees to be
bound by all of the terms, conditions and obligations of the Registration
Rights Agreement dated as of June 27, 1997 (the "Registration Rights
Agreement"), among the Company and one or more Affiliates of KKR (such
Affiliates referred to collectively as the "KKR Entities"; and individually,
a "KKR Entity") and (ii) subject to the limitations
<PAGE>
15
set forth in this Section 10, shall have the right under the Registration
Rights Agreement to participate in offerings that would result in a Public
Offering ratably with the KKR Entities (except that the Purchaser will not
have demand registration rights, but shall have the right to participate
ratably with the KKR Entities parties thereto in any demand registration by
the KKR Entities); provided, however, that the Purchaser shall not be bound
by any amendments to the Registration Rights Agreement unless Purchaser
consents thereto. Notwithstanding anything to the contrary contained in the
Registration Rights Agreement, the Purchaser's rights and obligations under
the Registration Rights Agreement shall be subject to the limitations and
additional obligations set forth in this Section 10. All shares of Stock
shall be deemed to be Registrable Securities as defined in the Registration
Rights Agreement.
(b) The Company will promptly notify the Purchaser in writing (a
"Notice") of any proposed registration (a "Proposed Registration"). If
within 15 days of the receipt by the Purchaser of such Notice, the Company
receives from the Purchaser, the Purchaser's Trust or the Purchaser's Estate
a written request (a "Request") to register shares of Stock held by the
Purchaser, the Purchaser's Estate or the Purchaser's Trust (which Request
will be irrevocable unless otherwise mutually agreed to in writing by the
Purchaser and the Company), shares of Stock will be so registered as provided
in this Section 10; provided, however, that for each such registration
statement only one Request, which shall be executed by the Purchaser, the
Purchaser's Trust or the Purchaser's Estate, as the case may be, may be
submitted for all Registrable Securities held by the Purchaser, the
Purchaser's Estate and the Purchaser's Trust.
(c) The maximum number of shares of Stock which will be registered
pursuant to a Request will be the lowest of (i) the number of shares of Stock
then held by the Purchaser (which for purposes of this subparagraph (c) shall
include shares held by the Purchaser's Estate or a Purchaser's Trust),
including all shares of Stock which the Purchaser is then entitled to acquire
under an unexercised Option to the extent then exercisable or (ii) the
maximum number of shares of Stock which the Company can register in the
Proposed Registration without adverse effect on the offering in the view of
the managing underwriters (reduced pro rata with all Other Purchasers) as
more fully described in subsection (d) of this Section 10 or (iii) the
maximum number of shares which the Purchaser (pro rata based upon the
aggregate number of shares of Common Stock the Purchaser and all Other
Purchasers have requested be registered) and all Other Purchasers are
permitted to register under the Registration Rights Agreement. With respect
to any Request, each Purchaser, Purchaser's Estate or Purchaser's Trust shall
be bound by the provisions of Section 3.06 of the Registration Rights
Agreement and shall be deemed a "Holder" for such purpose.
<PAGE>
16
(d) Upon delivering a Request the Purchaser, the Purchaser's Estate
or Purchaser's Trust (or his or their authorized representative) will, if
requested by the Company, execute and deliver a custody agreement and power
of attorney in form and substance satisfactory to the Company with respect to
the shares of Stock to be registered pursuant to this Section 10 (a "Custody
Agreement and Power of Attorney"). The Custody Agreement and Power of
Attorney will provide, among other things, that the Purchaser, the
Purchaser's Estate or Purchaser's Trust (or his or their authorized
representative) will deliver to and deposit in custody with the custodian and
attorney-in-fact named therein a certificate or certificates representing
such shares of Stock (duly endorsed in blank by the registered owner or
owners thereof or accompanied by duly executed stock powers in blank) and
irrevocably appoint said custodian and attorney-in-fact as the Purchaser's,
Purchaser's Estate's or Purchaser's Trust's agent and attorney-in-fact with
full power and authority to act under the Custody Agreement and Power of
Attorney on its behalf with respect to the matters specified therein.
(e) The Purchaser agrees that he will execute such other agreements
as the Company may reasonably request to further evidence the provision of
this Section 10.
(f) Notwithstanding anything to the contrary in the foregoing, the
Purchaser shall have no registration rights under this Section 10 unless he
is an Affiliate of the Company.
11. Pro Rata Repurchases.
Notwithstanding anything to the contrary contained in Sections 5 or
6, if at any time consummation of all purchases and payments to be made by
the Company pursuant to this Agreement and the Other Purchasers' Agreements
would result in a Blocking Event, then the Company shall make purchases from,
and payments to, the Purchaser and the Other Purchasers (on the basis of the
proportion of the number of shares of Stock and the number of Options each
such Purchaser and all Other Purchasers have elected or are required to sell
to the Company) for the maximum number of shares of Stock and shall pay the
Option Excess Price for the maximum number of Options permitted without
resulting in a Blocking Event. The maximum number of shares of Stock and the
maximum number of Options permitted to be purchased or paid for by the
Company at any time without resulting in a Blocking Event shall be referred
to herein as the "Maximum Repurchase Amount". The provisions of Section 5(b)
and 6(f) shall apply in their entirety to payments and repurchases with
respect to Options and shares of Stock which may not be made due to the
limits imposed by the Maximum Repurchase Amount under this Section 11. Until
all of such Stock and Options are purchased and paid for by the Company, the
Purchaser and the Other Purchasers whose Stock and Options are not purchased
in accordance with this Section 11 shall have priority, on the basis set
forth in this Section 11,
<PAGE>
17
over other purchases of Common Stock and Options by the Company pursuant to
this Agreement and the Other Purchasers' Agreements.
12. Rights to Negotiate Repurchase Price.
Nothing in this Agreement shall be deemed to restrict or prohibit
the Company from purchasing shares of Stock or Options from the Purchaser, at
any time, upon such terms and conditions, and for such price, as may be
mutually agreed upon between the Parties, whether or not at the time of such
purchase circumstances exist which specifically grant the Company the right
to purchase, or the Purchaser the right to sell, shares of Stock or the
Company has the right to pay, or the Purchaser has the right to receive, the
Option Excess Price under the terms of this Agreement.
13. Covenant Regarding 83(b) Election.
Except as the Company may otherwise agree in writing, the Purchaser
hereby covenants and agrees that he will make an election provided pursuant
to Treasury Regulation 1.83-2 with respect to the Stock, including without
limitation, the Stock to be acquired pursuant to Section 1 and the Stock to
be acquired upon each exercise of the Purchaser's Options; and Purchaser
further covenants and agrees that he will furnish the Company with copies of
the forms of election the Purchaser files within 30 days after the date
hereof, and within 30 days after each exercise of Purchaser's Non-Qualified
Options and with evidence that each such election has been filed in a timely
manner.
14. Notice of Change of Beneficiary.
Immediately prior to any transfer of Stock to a Purchaser's Trust,
the Purchaser shall provide the Company with a copy of the instruments
creating the Purchaser's Trust and with the identity of the beneficiaries of
the Purchaser's Trust. The Purchaser shall notify the Company immediately
prior to any change in the identity of any beneficiary of the Purchaser's
Trust.
15. Expiration of Certain Provisions.
The provisions contained in Sections 4, 5 and 6 of this Agreement
and the portion of any other provision of this Agreement which incorporates
the provisions of Sections 4, 5 and 6, shall terminate and be of no further
force or effect with respect to any shares of Stock sold by the Purchaser (i)
pursuant to an effective registration statement filed by the Company pursuant
to Section 10 hereof or (ii) pursuant to the terms of the Sale Participation
Agreement of even date herewith, among the Purchaser, KKR Partners II, L.P.
and RFM Acquisition.
The rights and obligations of the parties hereto under Sections 3,
4, 5, 6 and 13 hereof shall all terminate if a Change
<PAGE>
18
in Control occurs. A "Change of Control" means (i) a sale of all or
substantially all of the assets of the Company (other than in connection with
financing transactions, sale and leaseback transactions or other similar
transactions) to a Person who is not a KKR Entity, (ii) a sale by KKR or any
of its Affiliates resulting in more than 50% of the voting stock of the
Company (on a fully diluted basis, including, without limitation, after
giving effect to the exercise of the option to purchase 3,606,881 shares of
Common Stock granted to RFM Acquisition LLC by the Company) being held by a
person or group that does not include a KKR Entity or one or members of the
Management Group (as defined in the Non-Qualified Stock Option Agreement) or
(iii) a merger or consolidation of the Company into another person which is
not a KKR Entity; if and only if such event results in (a) the inability of
the KKR Entities to elect a majority of the Board of Directors of the Company
(or the resulting entity) and (b) the sale of a majority of the shares held
by the KKR Entities as of the Purchase Date.
16. Recapitalizations, etc.
The provisions of this Agreement shall apply, to the full extent set
forth herein with respect to the Stock or the Options, to any and all shares
of capital stock of the Company or any capital stock, partnership units or
any other security evidencing ownership interests in any successor or assign
of the Company (whether by merger, consolidation, sale of assets or
otherwise) which may be issued in respect of, in exchange for, or
substitution of the Stock or the Options, by reason of any stock dividend,
split, reverse split, combination, recapitalization, liquidation,
reclassification, merger, consolidation or otherwise.
17. Purchaser's Employment by the Company.
Nothing contained in this Agreement or in any other agreement
entered into by the Company and the Purchaser contemporaneously with the
execution of this Agreement (i) obligates the Company or any subsidiary of
the Company to employ the Purchaser in any capacity whatsoever or (ii)
prohibits or restricts the Company (or any such subsidiary) from terminating
the employment, if any, of the Purchaser at any time or for any reason
whatsoever, with or without cause, and the Purchaser hereby acknowledges and
agrees that neither the Company nor any other person has made any
representations or promises whatsoever to the Purchaser concerning the
Purchaser's employment or continued employment by the Company.
18. State Securities Laws.
The Company hereby agrees to use its best efforts to comply with all
state securities or "blue sky" laws which might be applicable to the sale of
the Stock and the issuance of the Options to the Purchaser.
<PAGE>
19
19. Binding Effect.
The provisions of this Agreement shall be binding upon and accrue to
the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns. In the case of a transferee
permitted under Section 2(a) hereof, such transferee shall be deemed the
Purchaser hereunder; provided, however, that no transferee (including without
limitation, transferees referred to in Section 2(a) hereof) shall derive any
rights under this Agreement unless and until such transferee has delivered to
the Company a valid undertaking and becomes bound by the terms of this
Agreement.
20. Amendment.
This Agreement may be amended only by a written instrument signed by
the Parties hereto.
21. Closing.
Except as otherwise provided herein, the closing of each purchase
and sale of shares of Stock and the payment of the Option Excess Price, if
any, pursuant to this Agreement shall take place at the principal office of
the Company on the tenth business day following delivery of the notice by
either Party to the other of its exercise of the right to purchase or sell
such Stock hereunder or to cause the payment of the Option Excess Price, if
any.
22. Applicable Law.
The laws of the State of Texas (or if the Company reincorporates in
another state, of that state) shall govern the interpretation, validity and
performance of the terms of this Agreement, regardless of the law that might
be applied under principles of conflicts of law. Any suit, action or
proceeding against the Purchaser, with respect to this Agreement, or any
judgment entered by any court in respect of any thereof, may be brought in
any court of competent jurisdiction in the State of Texas (or if the Company
reincorporates in another state, in that state), and the Purchaser hereby
submits to the non-exclusive jurisdiction of such courts for the purpose of
any such suit, action, proceeding or judgment. Nothing herein shall in any
way be deemed to limit the ability of the Company to serve any such writs,
process or summonses in any other manner permitted by applicable law or to
obtain jurisdiction over the Purchaser, in such other jurisdictions and in
such manner, as may be permitted by applicable law. The Purchaser hereby
irrevocably waives any objections which he may now or hereafter have to the
laying of the venue of any suit, action or proceeding arising out of or
relating to this Agreement brought in any court of competent jurisdiction in
the State of Texas (or if the Company reincorporates in another state, in
that state), and hereby further irrevocably waives any claim that any such
suit, action
<PAGE>
20
or proceeding brought in any such court has been brought in any inconvenient
forum. No suit, action or proceeding against the Company with respect to
this Agreement may be brought in any court, domestic or foreign, or before
any similar domestic or foreign authority other than in a court of competent
jurisdiction in the State of Texas (or if the Company reincorporates in
another state, in that state) or New York, and the Purchaser hereby
irrevocably waives any right which he may otherwise have had to bring such an
action in any other court, domestic or foreign, or before any similar
domestic or foreign authority. The Company hereby submits to the
jurisdiction of such courts for the purpose of any such suit, action or
proceeding.
23. Assignability of Certain Rights by the Company.
The Company shall have the right to assign any or all of its rights
or obligations to purchase shares of Stock pursuant to Sections 4, 5 and 6
hereof; provided, however, that the Company shall remain obligated to perform
its obligations notwithstanding such assignment in the event that such
assignee fails to perform the obligations so assigned to it.
24. Miscellaneous.
In this Agreement (i) all references to "dollars" or "$" are to
United States dollars and (ii) the word "or" is not exclusive. If any
provision of this Agreement shall be declared illegal, void or unenforceable
by any court of competent jurisdiction, the other provisions shall not be
affected, but shall remain in full force and effect.
25. Notices.
All notices and other communications provided for herein shall be in
writing and shall be deemed to have been duly given if delivered by hand
(whether by overnight courier or otherwise) or sent by registered or
certified mail, return receipt requested, postage prepaid, to the Party to
whom it is directed:
(a) If to the Company, to it at the following address:
<PAGE>
21
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Attn: Lee E. Straus
with copies to:
Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Attn: Nils P. Brous
and
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Attn: David J. Sorkin, Esq.
(b) If to the Purchaser, to him at the address set forth below under
his signature;
or at such other address as either party shall have specified by
notice in writing to the other.
<PAGE>
22
26. Covenant Not to Compete; Confidential Information.
(a) In consideration of the Company entering into this Agreement
with the Purchaser, the Purchaser hereby agrees effective as of the Purchase
Date, until the Applicable Anniversary (as defined) of the date the Purchaser
shall cease to be employed by the Company (the "Non-Compete Period"), the
Purchaser shall not, directly or indirectly, own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected in any manner with (including as a consultant), any business which
shall be engaged in the retail selling of food, beverages or other products
under the names "Randall's", "Tom Thumb" or "Simon David", or under any other
name which uses any of the foregoing names as a component or which is (or
includes a component which is) confusingly similar to any such names (the
"Trade Names"), in the United States. In addition to the foregoing, the
Purchaser hereby agrees that during the Non-Compete Period, the Purchaser
shall not, directly or indirectly, own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected in any manner with (including as a consultant), any business which
shall be engaged in the retail selling of food, beverages or other related
products under any name, including the Trade Names, in Texas, provided, that
[(i) unless such business shall own, lease or operate a Supercenter (as defined
below), the retail selling of food, beverages or other related products shall
be the primary business of such business and (ii)] this sentence shall not be
applicable to restaurant or catering businesses. For purposes hereof,
"Supercenter" shall mean any store of at least 50,000 square feet at which
general merchandise as well as groceries are sold at retail. For
illustrative purposes only, Wal-Mart Supercenters and Super Kmart Centers
are examples of Supercenters. "Applicable Anniversary" means with respect to
(i) senior vice presidents and executives of higher standing in the Company,
a two-year period, (ii) vice presidents, a one-year period and (iii) directors,
a six-month period.
(b) Except as required by law or judicial process, the Purchaser
will not disclose or use at any time, any Confidential Information (as
defined below) of which the Purchaser is or becomes aware, whether or not
such information is developed by him, except to the extent that such
disclosure or use is directly related to and required by the Purchaser's
performance of duties, if any, assigned to the Purchaser by the Company. As
used in this Agreement, the term "Confidential Information" means information
that is not known to the public and that is used, developed or obtained by
the Company or its subsidiaries in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) computer software, including operating
systems, applications and program listings, (v) flow charts, manuals and
documentation, (vi) data bases, (vii) accounting and business methods, (viii)
inventions, devices, new developments,
<PAGE>
23
methods and processes, whether patentable or unpatentable and whether or not
reduced to practice, (ix) customers and clients and customer or client lists,
(x) other copyrightable works, (xi) all technology and trade secrets and
(xii) all similar and related information in whatever form. Confidential
Information will not include any information that has been published in a
form available to the public prior to the date the Purchaser proposes to
disclose or use such information. The Purchaser acknowledges and agrees that
all copyrights, works, inventions, innovations, improvements, developments,
patents, trademarks and all similar or related information which relate to
the actual or anticipated business of the Company and its subsidiaries
(including its predecessors) and conceived, developed or made by the
Purchaser while employed by the Company or its subsidiaries belong to the
Company. The Purchaser will perform all actions reasonably requested by the
Company (whether during or after the Noncompete Period) to establish and
confirm such ownership at the Company's expense (including without limitation
assignments, consents, powers of attorney and other instruments).
(c) Notwithstanding the foregoing paragraphs (a) and (b) above, if
at any time a court holds that the restrictions stated in such foregoing
paragraphs (a) and (b) are unreasonable or otherwise unenforceable under
circumstances then existing, the parties hereto agree that the maximum
period, scope or geographic area of such restrictions determined to be
reasonable under such circumstances by such court will be substituted for the
stated period, scope or area of such restrictions. Because the Purchaser's
services are unique and because the Purchaser has had access to Confidential
Information, the parties hereto agree that money damages will be an
inadequate remedy for any breach of this Agreement. In the event of a breach
or threatened breach of this Agreement, the Company or its successors or
assigns may, in addition to other rights and remedies existing in their
favor, apply to any court of competent jurisdiction for specific performance
and/or injunctive relief in order to enforce, or prevent any violations of,
the provisions hereof (without the posting of a bond or other security).
(d) Notwithstanding the foregoing paragraphs (a), (b) and (c), (i)
the provisions of any employment agreement in effect on the date hereof
between the Company and Purchaser which contains covenants relating to
confidentiality and competition shall supersede and replace the provisions of
paragraphs (a) and (b) hereof and shall be deemed incorporated by reference
in this Agreement in their entirety and (ii) if the Purchaser is a party to
the Shareholders Agreement, the provisions of Section 6.02 of the
Shareholders Agreement shall supersede and replace the provisions of
paragraph (a) hereof and shall be deemed incorporated by reference in this
Agreement in their entirety.
<PAGE>
24
27. Governing Agreements
With respect to signatories to this Agreement who are signatories to
the Shareholders Agreement, the provisions of this Agreement shall supersede and
replace the inconsistent provisions of the Shareholders Agreement in their
entirety, except as expressly set forth herein in Sections 2(h) and 26(d).
<PAGE>
25
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
RANDALL'S FOOD MARKETS, INC.
By
---------------------------------
Name:
Title:
-----------------------------------
[PURCHASER]
-----------------------------------
-----------------------------------
Address of Purchaser
<PAGE>
Exhibit 10.17
FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of ________________, 1997 is made by and
between Randall's Food Markets, Inc., a Texas corporation (hereinafter referred
to as the "Company"), and __________________, an employee of the Company or a
Subsidiary (as defined below) or Affiliate (as defined below) of the Company,
hereinafter referred to as "Optionee".
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its common stock, par value $.25 per share (the "Common
Stock");
WHEREAS, the Company wishes to carry out the Plan (as hereinafter
defined), the terms of which are hereby incorporated by reference and made a
part of this Agreement; and
WHEREAS, the Committee (as hereinafter defined), appointed to
administer the Plan, has determined that it would be to the advantage and best
interest of the Company and its shareholders to grant the Non-Qualified Options
provided for herein to the Optionee as an incentive for increased efforts during
his term of office with the Company or its Subsidiaries or Affiliates, and has
advised the Company thereof and instructed the undersigned officers to issue
said Options;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall
have the meaning specified in the Plan or below unless the context clearly
indicates to the contrary.
Section 1.1 - Affiliate
"Affiliate" shall mean, with respect to the Company, any corporation
directly or indirectly controlling, controlled by, or under common control with,
the Company or any other entity designated by the Board of Directors of the
Company in which the Company or an Affiliate has an interest.
<PAGE>
2
Section 1.2 - Cause
"Cause" shall mean (i) Optionee's willful and continued failure to
perform Optionee's duties with respect to the Company or its subsidiaries which
continues beyond ten days after a written demand for substantial performance is
delivered to Optionee by the Company or (ii) misconduct by Optionee involving
(x) dishonesty or breach of trust in connection with Optionee's employment or
(y) conduct which would be a reasonable basis for an indictment of Optionee for
a felony or for a misdemeanor involving moral turpitude.
Section 1.3 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.4 - Committee
"Committee" shall mean the Compensation Committee of the Company.
Section 1.5 - Grant Date
"Grant Date" shall mean the date on which the Options provided for in
this Agreement were granted.
Section 1.6 - Management Group
"Management Group" shall mean the group consisting of all or certain
Officers of the Company on the date hereof, whether or not such person remains
in that capacity.
Section 1.7 - Management Stockholder's Agreement
"Management Stockholder's Agreement" shall mean that certain
Management Stockholder's Agreement dated as of , 1997 between the
Optionee and the Company.
Section 1.8 - Officer
"Officer" shall mean the Chairman of the Board, the President, any
Executive Vice President, Senior Vice President or Vice President, the Treasurer
or the Secretary of the Company.
Section 1.9 - Options
"Options" shall mean the non-qualified options, which may include a
Time Option and/or a Performance Option, to purchase Common Stock granted under
this Agreement.
Section 1.10 - Performance Option
<PAGE>
3
"Performance Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.1(c) hereof.
Section 1.11 - Permanent Disability
The Optionee shall be deemed to have a "Permanent Disability" when the
majority of the Board of Directors of the Company shall, in good faith, so
determine.
Section 1.12 - Plan
"Plan" shall mean the 1997 Stock Purchase and Option Plan for Key
Employees of Randall's Food Markets, Inc. and Subsidiaries.
Section 1.13 - Pronouns
The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates.
Section 1.14 - Purchase Date
"Purchase Date" shall mean the date hereof.
Section 1.15 - Retirement
"Retirement" shall mean retirement (i) at age 65 or over (or such
other age as may be approved by the Board of Directors of the Company) after
having been employed by the Company or a Subsidiary for at least three years or
(ii) at age 55 or over (or such other age as may be approved by the Board of
Directors of the Company) after having been employed by the Company or a
Subsidiary for at least 10 years.
Section 1.16 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.17 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations, or group of
commonly controlled corporations, other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
Section 1.18 - Time Option
<PAGE>
4
"Time Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.1(a) hereof.
Section 1.19 - Trigger Date
"Trigger Date" shall mean the date hereof; provided that with respect
to Optionees who enter into this Agreement on [insert date], the Trigger Date
shall mean June 29, 1997.
ARTICLE II
GRANT OF OPTIONS
Section 2.1 - Grant of Options
For good and valuable consideration, on and as of the date hereof the
Company irrevocably grants to the Optionee a Time Option and/or a Performance
Option to purchase any part or all of an aggregate of the number of shares set
forth with respect to each such Option on the signature page hereof of its
Common Stock upon the terms and conditions set forth in this Agreement.
Section 2.2 - Exercise Price
Subject to Section 2.4, the exercise price of the shares of stock
covered by the Options shall be $12.11 per share without commission or other
charge.
Section 2.3 - Consideration to the Company
In consideration of the granting of these Options by the Company, the
Optionee agrees to render faithful and efficient services to the Company or a
Subsidiary or Affiliate, with such duties and responsibilities as the Company
shall from time to time prescribe. Nothing in this Agreement or in the Plan
shall confer upon the Optionee any right to continue in the employ of the
Company or any Subsidiary or Affiliate or shall interfere with or restrict in
any way the rights of the Company and its Subsidiaries or Affiliates, which are
hereby expressly reserved, to terminate the employment of the Optionee at any
time for any reason whatsoever, with or without cause.
Section 2.4 - Adjustments in Options
Subject to Section 9 of the Plan, in the event that the outstanding
shares of the stock subject to an Option are, from time to time, changed into or
exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of a merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares, or otherwise, the Committee shall make an appropriate and
<PAGE>
5
equitable adjustment in the number and kind of shares or other consideration
as to which such Option, or portions thereof then unexercised, shall be
exercisable. Any such adjustment made by the Committee shall be final and
binding upon the Optionee, the Company and all other interested persons.
ARTICLE III
PERIOD OF EXERCISABILITY
Section 3.1 - Commencement of Exercisability
(a) Time Options shall become exercisable as follows:
Percentage of Time Option
Date Time Option Shares Granted As to Which
Becomes Exercisable Time Option Is Exercisable
After the first anniversary
of the Trigger Date 20%
After the second anniversary
of the Trigger Date 40%
After the third anniversary
of the Trigger Date 60%
After the fourth anniversary
of the Trigger Date 80%
After the fifth anniversary
of the Trigger Date 100%
Notwithstanding the foregoing, the Time Option shall become
immediately exercisable as to 100% of the shares of Common Stock subject to such
Option immediately prior to a Change of Control (but only to the extent such
Option has not otherwise terminated or become exercisable). A "Change of
Control" means (i) a sale of all or substantially all of the assets of the
Company to a Person who is not an Affiliate of Kohlberg Kravis Roberts & Co.,
L.P. ("KKR"), (ii) a sale by KKR or any of its Affiliates resulting in more than
50% of the voting stock of the Company (on a fully diluted basis, including,
without limitation, after giving effect to the exercise of the option to
purchase 3,606,881 shares of Common Stock granted to RFM Acquisition LLC by the
Company) being held by a Person or Group that does not include KKR or any of its
Affiliates or the Management Group or (iii) a merger or consolidation of the
Company into another Person which is not an Affiliate of KKR. "Person" means an
individual, partnership, corporation, business trust, joint stock company,
trust, unincorporated association, joint venture,
<PAGE>
6
governmental authority or other entity of whatever nature. "Group" means two
or more Persons acting together as a partnership, limited partnership,
syndicate or other group for the purpose of acquiring, holding or disposing
of securities of the Company.
(c) The Performance Option shall become exercisable with respect to
20% of the shares of Common Stock subject to such Option on each Vesting Date
following a Determination Date that the Company's Cumulative EBITDA equals or
exceeds the Cumulative EBITDA Target as of such Determination Date and the
actual EBITDA for that year equals or exceeds the EBITDA Target for that year.
If the Company's EBITDA for a Plan Year is less than 100% of the EBITDA Target
for such Plan Year (a "Missed Year"), no such Performance Option shall become
exercisable with respect to any additional shares of Common Stock on the Vesting
Date for such Plan Year. If, for any Plan Year subsequent to a Missed Year,
EBITDA exceeds the EBITDA Target and Cumulative EBITDA exceeds the Cumulative
EBITDA Targets, then any prior percentage of Performance Options in respect of
prior Missed Years shall become exercisable (but only to the extent such Option
has not otherwise terminated or become exercisable).
Notwithstanding the foregoing, the Performance Option shall become
exercisable as to 100% of the shares of Common Stock subject to such Option
after seven years and 11 months after the Trigger Date (but only to the extent
such Option has not otherwise terminated or become exercisable).
(d) For purposes of Section 3.1(c):
(i) "Cumulative EBITDA" means with respect to any Performance Option,
the sum of the EBITDA for the Company and its consolidated subsidiaries
during the period commencing on June 29, 1997 and ending on the last day of
the Plan Year preceding the Determination Date.
(ii) "Cumulative EBITDA Targets" means with respect to any
Performance Option, the sum of the EBITDA Targets for the period commencing
on June 29, 1997 and ending on the last day of the Plan Year preceding the
Determination Date.
(iii) "Determination Date" with respect to each Plan Year means the
September 30 following such Plan Year.
(iv) "EBITDA" shall mean, with respect to the Company and its
consolidated subsidiaries, net income before net interest expense, income
taxes, depreciation and amortization, writedown of property and securities,
extraordinary loss on extinguishment of debt, loss on disposal of
discontinued operations and loss from operation of discontinued operations.
<PAGE>
7
(v) "EBITDA Target" shall have the meaning ascribed to
such term in Schedule I hereto for Plan Years 1998 through 2002 and such
other targets as are established by the Committee with respect to
subsequent Plan Years; provided, that to the extent that the Company or any
of its subsidiaries disposes or acquires assets out of the ordinary course
of business the Committee will decrease or increase, as the case may be,
the EBITDA Target for such dispositions or acquisitions.
(vi) "Plan Year" means (i) the period from June 29, 1997 to June 28,
1998 with respect to Plan Year 1998 and (ii) thereafter, the period
commencing on the day immediately succeeding the close of the prior Plan
Year until the Saturday closest to each June 30.
(vi) "Vesting Date" means three calendar days after the relevant
Determination Date.
(e) Notwithstanding the foregoing, no Option shall become
exercisable as to any additional shares of Common Stock following the
termination of employment of the Optionee for any reason other than a
termination of employment because of death, Permanent Disability or
Retirement of the Optionee (if such Optionee has been employed by the Company
or any subsidiary of the Company for at least three years after the Purchase
Date) and any Option (other than an as provided in the next succeeding
sentence) which is non-exercisable as of the Optionee's termination of
employment shall be immediately cancelled. In the event of a termination of
employment because of such death, Permanent Disability or Retirement, the
Time Options (but not the Performance Options) shall immediately become
exercisable as to all shares of Common Stock subject thereto.
(f) In the event the Company elects to change its fiscal year, the
definitions of EBITDA Target and Plan Year shall be amended by the Committee
in good faith and in a manner consistent with such definitions included in
this Agreement on the date hereof.
Section 3.2 - Expiration of Options
Except as otherwise provided in Section 5 or 6 of the Management
Stockholder's Agreement, the Options may not be exercised to any extent by
Optionee after the first to occur of the following events:
(a) The tenth anniversary of the Grant Date; or
(b) The first anniversary of the date of the Optionee's termination of
employment by reason of death, Permanent Disability or Retirement; or
<PAGE>
8
(c) The first business day which is fifteen calendar days after the
earlier of (i) 75 days after termination of employment of the Optionee for
any reason other than for Cause, death, Permanent Disability or Retirement
or (ii) the delivery of notice by the Company that it does not intend to
exercise its call right under Section 6 of the Management Stockholder's
Agreement; provided, however, that in any event the Options shall remain
exercisable under this subsection 3.2(c) until at least 45 days after
termination of employment of the Optionee for any reason other than for
death, Permanent Disability or Retirement; or
(d) The date the Option is terminated pursuant to Section 5, 6 or 8(b)
of the Management Stockholder's Agreement;
(e) The date of an Optionee's termination of employment by the Company
for Cause (without regard to Sections 5 or 6 of the Management
Stockholder's Agreement); or
(f) If the Committee so determines pursuant to Section 9 of the Plan,
the effective date of either the merger or consolidation of the Company
into another Person, or the exchange or acquisition by another Person of
all or substantially all of the Company's assets or 80% or more of its then
outstanding voting stock, or the recapitalization, reclassification,
liquidation or dissolution of the Company. At least ten (10) days prior to
the effective date of such merger, consolidation, exchange, acquisition,
recapitalization, reclassification, liquidation or dissolution, the
Committee shall give the Optionee notice of such event if the Option has
then neither been fully exercised nor become unexercisable under this
Section 3.2.
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
Except as otherwise provided in the Management Stockholder's
Agreement, during the lifetime of the Optionee, only he may exercise an Option
or any portion thereof. After the death of the Optionee, any exercisable
portion of an Option may, prior to the time when an Option becomes unexercisable
under Section 3.2, be exercised by his personal representative or by any person
empowered to do so under the Optionee's will or under the then applicable laws
of descent and distribution.
Section 4.2 - Partial Exercise
<PAGE>
9
Any exercisable portion of an Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time prior to
the time when the Option or portion thereof becomes unexercisable under Section
3.2; provided, however, that any partial exercise shall be for whole shares of
Common Stock only.
Section 4.3 - Manner of Exercise
An Option, or any exercisable portion thereof, may be exercised solely
by delivering to the Secretary or his office all of the following prior to the
time when the Option or such portion becomes unexercisable under Section 3.2:
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the Option
or portion thereof is thereby exercised, such notice complying with all
applicable rules established by the Committee;
(b) Full payment (in cash, by check or by a combination thereof) for
the shares with respect to which such Option or portion thereof is
exercised;
(c) A bona fide written representation and agreement, in a form
satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the
shares of stock are being acquired for his own account, for investment and
without any present intention of distributing or reselling said shares or
any of them except as may be permitted under the Securities Act of 1933, as
amended (the "Act"), and then applicable rules and regulations thereunder,
and that the Optionee or other person then entitled to exercise such Option
or portion thereof will indemnify the Company against and hold it free and
harmless from any loss, damage, expense or liability resulting to the
Company if any sale or distribution of the shares by such person is
contrary to the representation and agreement referred to above; provided,
however, that the Committee may, in its absolute discretion, take whatever
additional actions it deems appropriate to ensure the observance and
performance of such representation and agreement and to effect compliance
with the Act and any other federal or state securities laws or regulations;
(d) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the Option;
and
(e) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
option.
<PAGE>
10
Without limiting the generality of the foregoing, the Committee may require
an opinion of counsel acceptable to it to the effect that any subsequent
transfer of shares acquired on exercise of an Option does not violate the
Act, and may issue stop-transfer orders covering such shares. Share
certificates evidencing stock issued on exercise of this Option shall bear an
appropriate legend referring to the provisions of subsection (c) above and
the agreements herein. The written representation and agreement referred to
in subsection (c) above shall, however, not be required if the shares to be
issued pursuant to such exercise have been registered under the Act, and such
registration is then effective in respect of such shares.
Section 4.4 - Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of an Option, or
any portion thereof, may be either previously authorized but unissued shares
or issued shares which have then been reacquired by the Company. Such shares
shall be fully paid and nonassessable. The Company shall not be required to
issue or deliver any certificate or certificates for shares of stock
purchased upon the exercise of an Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The obtaining of approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(b) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may from time to time establish for reasons
of administrative convenience.
Section 4.5 - Rights as Stockholder
The holder of an Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any shares purchasable
upon the exercise of the Option or any portion thereof unless and until
certificates representing such shares shall have been issued by the Company to
such holder.
ARTICLE V
MISCELLANEOUS
Section 5.1 - Administration
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules.
<PAGE>
11
All actions taken and all interpretations and determinations made by the
Committee shall be final and binding upon the Optionee, the Company and all
other interested persons. No member of the Committee shall be personally
liable for any action, determination or interpretation made in good faith
with respect to the Plan or the Options. In its absolute discretion, the
Board of Directors may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan and this Agreement.
Section 5.2 - Options Not Transferable
Except as provided in the Management Stockholder's Agreement,
neither the Options nor any interest or right therein or part thereof shall
be liable for the debts, contracts or engagements of the Optionee or his
successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law
by judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof
shall be null and void and of no effect; provided, however, that this Section
5.2 shall not prevent transfers by will or by the applicable laws of descent
and distribution.
Section 5.3 - Shares to Be Reserved
The Company shall at all times during the term of the Options reserve
and keep available such number of shares of stock as will be sufficient to
satisfy the requirements of this Agreement.
Section 5.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall,
if the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall
have been deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
Section 5.5 - Titles
<PAGE>
12
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 5.6 - Applicability
of Plan and Management Stockholder's Agreement
The Options and the shares of Common Stock issued to the Optionee
upon exercise of the Options shall be subject to all of the terms and
provisions of the Plan and the Management Stockholder's Agreement, to the
extent applicable to the Options and such shares. In the event of any
conflict between this Agreement and the Plan, the terms of the Plan shall
control. In the event of any conflict between this Agreement or the Plan and
the Management Stockholder's Agreement, the terms of the Management
Stockholder's Agreement shall control.
Section 5.7 - Amendment
This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
Section 5.8 - Governing Law
The laws of the State of Texas (or if the Company reincorporates in
another state, the law of that state) shall govern the interpretation,
validity and performance of the terms of this Agreement regardless of the law
that might be applied under principles of conflicts of laws.
Section 5.9 - Jurisdiction
Any suit, action or proceeding against the Optionee with respect to
this Agreement, or any judgment entered by any court in respect of any
thereof, may be brought in any court of competent jurisdiction in the State
of Texas (or if the Company reincorporates, in that state) or New York, as
the Company may elect in its sole discretion, and the Optionee hereby submits
to the non-exclusive jurisdiction of such courts for the purpose of any such
suit, action, proceeding or judgment. The Optionee hereby irrevocably waives
any objections which he may now or hereafter have to the laying of the venue
of any suit, action or proceeding arising out of or relating to this
Agreement brought in any court of competent jurisdiction in the State of
Texas (or if the Company reincorporates, in that state) or New York, and
hereby further irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in any inconvenient
forum. No suit, action or proceeding against the Company with respect to
this Agreement may be brought in any court, domestic or foreign, or before
any similar domestic or foreign authority other than in a court of competent
jurisdiction in the State of Texas (or if the Company reincorporates, in that
<PAGE>
13
state) or New York, and the Optionee hereby irrevocably waives any right
which he may otherwise have had to bring such an action in any other court,
domestic or foreign, or before any similar domestic or foreign authority.
The Company hereby submits to the jurisdiction of such courts for the purpose
of any such suit, action or proceeding.
<PAGE>
14
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto.
RANDALL'S FOOD MARKETS, INC.
By
____________________________
Its Chief Executive Officer
____________________________ Aggregate number of shares
____________ of Common Stock for which
Optionee the Time Option granted
hereunder is exercisable (50% of total
number of shares):
Aggregate number of shares
of Common Stock for which
the Performance Option granted
________________________________ hereunder is exercisable (50% of total
number of shares):
________________________________ ______________________
Address
Optionee's Taxpayer
Identification Number:
_________________________
<PAGE>
Schedule I
Plan Year EBITDA Target
1998 $
1999 $
2000 $
2001 $
2002 $
<PAGE>
Exhibit 10.18
FORM OF SALE PARTICIPATION AGREEMENT
__________ __, 1997
[NAME OF EMPLOYEE]
[TITLE]
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Dear [NAME OF EMPLOYEE]:
You have entered into a Management Stockholder's Agreement, dated as
of __________ __, 199_ between Randall's Food Market, Inc., a Texas corporation
("the Company"), and you (the "Stockholder's Agreement") relating to the
purchase from the Company of shares of the common stock, par value $.25 per
share, of the Company (the "Common Stock"). The undersigned, KKR Partners II,
L.P., a Delaware limited partnership ("KKR Partners"), and RFM Acquisition LLC,
a Delaware limited liability company ("RFM Acquisition"), also have purchased
shares of Common Stock and hereby agree with you as follows, effective upon such
purchase of Common Stock by you:
1. In the event that at any time KKR Partners, or RFM Acquisition, as
the case may be (each, a "KKR Stockholder" and collectively, the "KKR
Stockholders"), proposes to sell for cash or any other consideration any shares
of Common Stock owned by it, in any transaction other than a Public Offering (as
defined in the Stockholder's Agreement) or a sale to an affiliate of KKR
Partners or RFM Acquisition, as the case may be, the KKR Stockholders will
notify you or your Purchaser's Estate or Purchaser's Trust (as such terms are
defined in Section 2 of the Stockholder's Agreement), as the case may be, in
writing (a "Notice") of such proposed sale (a "Proposed Sale") and the material
terms of the Proposed Sale as of the date of the Notice (the "Material Terms")
promptly, and in any event not less than 15 days prior to the consummation of
the Proposed Sale and not more than 5 days after the execution of the definitive
agreement relating to the Proposed Sale, if any (the "Sale Agreement"). If
within 10 days of your or your Purchaser's Estate's or Purchaser's Trust's, as
the case may be, receipt of such Notice the KKR Stockholder receives from you or
your Purchaser's Estate or Purchaser's Trust, as the case may be, a written
request (a "Request") to include Common Stock held by you or your Purchaser's
Estate or Purchaser's Trust, as the case may be, in
<PAGE>
2
the Proposed Sale (which Request shall be irrevocable unless (a) there shall be
a material adverse change in the Material Terms or (b) if otherwise mutually
agreed to in writing by you or your Purchaser's Estate or Purchaser's Trust, as
the case may be, and the KKR Stockholder), the Common Stock held by you will be
so included as provided herein; provided that only one Request, which shall be
executed by you or your Purchaser's Estate or Purchaser's Trust, as the case may
be, may be delivered with respect to any Proposed Sale for all Common Stock held
by you or your Purchaser's Estate or Purchaser's Trust. Promptly after the
consummation of the transactions contemplated thereby, the KKR Stockholder will
furnish you, your Purchaser's Trust or your Purchaser's Estate with a copy of
the Sale Agreement, if any. In the event that both KKR Partners and RFM
Acquisition propose to sell shares of Common Stock in the Proposed Sale, the
term "KKR Stockholder" shall refer only to RFM Acquisition and not to KKR
Partners.
2. The number of shares of Common Stock which you or your Purchaser's
Estate or Purchaser's Trust, as the case may be, will be permitted to include in
a Proposed Sale pursuant to a Request will be the lesser of (a) the sum of the
number of shares of Common Stock then owned by you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, plus all shares of Common Stock which you
are then entitled to acquire under an unexercised option to purchase shares of
Common Stock, to the extent such option is then vested or would become vested as
a result of the consummation of the Proposed Sale and (b) the sum of the shares
of Common Stock then owned by you or your Purchaser's Estate or Purchaser's
Trust, as the case may be, plus all shares of Common Stock which you are
entitled to acquire under an unexercised option to purchase shares of Common
Stock, whether or not fully vested, multiplied by a percentage calculated by
dividing the aggregate number of shares of Common Stock which KKR Partners and
RFM Acquisition propose to sell in the Proposed Sale by the total number of
shares of Common Stock owned by the KKR Stockholder or, in the case both KKR
Partners and RFM Acquisition propose to sell in the Proposed Sale, KKR Partners
and RFM Acquisition. If one or more holders of shares of Common Stock who have
been granted the same rights granted to you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, hereunder elect not to include the
maximum number of shares of Common Stock which such holders would have been
permitted to include in a Proposed Sale (the "Eligible Shares"), KKR Partners or
RFM Acquisition, or such remaining holders of shares of Common Stock, or any of
them, may sell in the Proposed Sale a number of additional shares of Common
Stock owned by any of them equal to their pro rata portion of the number of
Eligible Shares not included in the Proposed Sale, based on the relative number
of shares of Common Stock then held by each such holder, and such additional
shares of Common Stock which any such holder or holders propose to sell shall
not be included in any calculation made pursuant to the first sentence of this
Paragraph 2 for the purpose of determining the number of shares of Common Stock
which you or your Purchaser's Estate or
<PAGE>
3
Purchaser's Trust, as the case may be, will be permitted to include in a
Proposed Sale. KKR Partners and RFM Acquisition, or any of them, may sell in
the Proposed Sale additional shares of Common Stock owned by any of them equal
to any remaining Eligible Shares which will not be included in the Proposed Sale
pursuant to the foregoing.
3. Except as may otherwise be provided herein, shares of Common Stock
subject to a Request will be included in a Proposed Sale pursuant hereto and in
any agreements with purchasers relating thereto on the same terms and subject to
the same conditions applicable to the shares of Common Stock which the KKR
Stockholder proposes to sell in the Proposed Sale. Such terms and conditions
shall include, without limitation: the sale price; the payment of fees,
commissions and expenses; the provision of, and representation and warranty as
to, information requested by the KKR Stockholder; and the provision of requisite
indemnifications; provided that any indemnification provided by you, your
Purchaser's Estate or your Purchaser's Trust shall be pro rata in proportion
with the number of shares of Common Stock to be sold.
4. Upon delivering a Request, you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, will, if requested by the KKR
Stockholder, execute and deliver a custody agreement and power of attorney in
form and substance satisfactory to the KKR Stockholder with respect to the
shares of Common Stock which are to be sold by you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, pursuant hereto (a "Custody Agreement and
Power of Attorney"). The Custody Agreement and Power of Attorney will provide,
among other things, that you or your Purchaser's Estate or Purchaser's Trust, as
the case may be, will deliver to and deposit in custody with the custodian and
attorney-in-fact named therein a certificate or certificates representing such
shares of Common Stock (duly endorsed in blank by the registered owner or owners
thereof) and irrevocably appoint said custodian and attorney-in-fact as your or
your Purchaser's Estate's or Purchaser's Trust's, as the case may be, agent and
attorney-in-fact with full power and authority to act under the Custody
Agreement and Power of Attorney on your or your Purchaser's Estate's or
Purchaser's Trust's, as the case may be, behalf with respect to the matters
specified therein.
5. Your or your Purchaser's Estate's or Purchaser's Trust's, as the
case may be, right pursuant hereto to participate in a Proposed Sale shall be
contingent on your or your Purchaser's Estate's or Purchaser's Trust's, as the
case may be, strict compliance with each of the provisions hereof and your or
your Purchaser's Estate's or Purchaser's Trust's or, as the case may be,
willingness to execute such documents in connection therewith as may be
reasonably requested by the KKR Stockholder.
6. In the event of a Proposed Sale pursuant to Section 1 hereof, the
KKR Stockholders may elect, by so specifying in the
<PAGE>
4
Notice, to require you or your Purchaser's Estate or Purchaser's Trust, as the
case may be, to, and you or your Purchaser's Estate or Purchaser's Trust, as the
case may be, will, participate in such Proposed Sale in accordance with the
terms and provisions of Section 2, 3 and 4 hereof.
7. The obligations of KKR Partners and RFM Acquisition hereunder shall
extend only to you or your Purchaser's Estate or Purchaser's Trust, as the case
may be, and no other of your or your Purchaser's Estate's or Purchaser's
Trust's, as the case may be, successors or assigns shall have any rights
pursuant hereto.
8. This Agreement shall terminate and be of no further force and
effect on the fifth anniversary of the first occurrence of a Public Offering (as
defined in the Stockholder's Agreement).
9. All notices and other communications provided for herein shall be
in writing and shall be deemed to have been duly given when delivered to the
party to whom it is directed:
(a) If to KKR Partners or RFM Acquisition, to it at the following
address:
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Attn: Nils P. Brous
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: David J. Sorkin, Esq.
(b) If to you, to you at the address first set forth above
herein;
(c) If to your Purchaser's Estate or Purchaser's Trust, at
the address provided to such partnerships by such
entity;
or at such other address as any of the above shall have specified by
notice in writing delivered to the others by certified mail.
10. The laws of the State of Texas (or if the Company
reincorporates in another state, of that state) shall govern the
interpretation, validity and performance of the terms of this
Agreement. No suit, action or proceeding with respect to this
Agreement may be brought in any court or before any similar authority
other than in a court of competent jurisdiction in the State of Texas
(or if the Company reincorporates in another state, of that state), as
the KKR
<PAGE>
5
Stockholders may elect in their sole discretion, and you hereby submit
to the non-exclusive jurisdiction of such courts for the purpose of
such suit, proceeding or judgment. You hereby irrevocably waive any
right which you may have had to bring such an action in any other
court, domestic or foreign, or before any similar domestic or foreign
authority.
11. If KKR Partners or RFM Acquisition transfers its
interest in the Company to an affiliate of KKR Partners or RFM
Acquisition, as the case may be, such affiliate shall assume the
obligations hereunder of KKR Partners or RFM Acquisition, as the case
may be.
<PAGE>
6
It is the understanding of the undersigned that you are
aware that no Proposed Sale presently is contemplated and that such a
sale may never occur.
If the foregoing accurately sets forth our agreement, please
acknowledge your acceptance thereof in the space provided below for
that purpose.
Very truly yours,
KKR PARTNERS II, L.P.
By: KKR Associates L.P.,
General Partner
By: ___________________________
General Partner
RFM ACQUISITION LLC
By: KKR 1996 GP FUND L.P.,
Member
By: KKR ASSOCIATES 1996 L.P.,
General Partner
By: KKR 1996 GP L.L.C.,
General Partner
By: ___________________________
Member
Accepted and agreed to:
By: __________________________
[NAME OF EMPLOYEE]
<PAGE>
Exhibit 10.19
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of ___________ __, 1997, made by
_________________ (the "Executive") in favor of Randall's Food Markets, a
Texas corporation (the "Company").
W I T N E S S E T H:
WHEREAS, in connection with the Management Stockholder's Agreement dated
as of _________ __, 1997 by and between the Company and the Executive (as
amended, supplemented or otherwise modified from time to time, the
"Stockholder's Agreement"), the Company has agreed to make a loan (the
"Loan") to the Executive for the acquisition of Purchase Stock (as defined in
the Stockholder's Agreement), to be evidenced by a note substantially in the
form of Exhibit A hereto (the "Note");
WHEREAS, the Executive will be the legal and beneficial owner of the
shares of Pledged Stock (as hereinafter defined) issued by the Company; and
WHEREAS, it is a condition precedent to the obligation of the Company to
make the Loan to the Executive that the Executive shall have executed and
delivered this Pledge Agreement to the Company.
NOW, THEREFORE, in consideration of the premises and to induce the
Company to make the Loan, the Executive hereby agrees with the Company, as
follows:
1. Defined Terms. (a) Unless otherwise defined herein, terms defined
in the Stockholder's Agreement or the Note, as the case may be, and used
herein shall have the meanings assigned to them in the Stockholder's
Agreement and the Note, respectively.
(a) The following terms shall have the following meanings:
"Agreement": this Pledge Agreement, as the same may be amended, modified
or otherwise supplemented from time to time.
"Code": the Uniform Commercial Code from time to time in effect in the
State of New York.
"Collateral": the Pledged Stock and all Proceeds.
"Collateral Account": any account established to hold money Proceeds,
maintained under the sole dominion and control of the Company.
<PAGE>
"Default": any event that is or with the passage of time or the giving of
notice or both would be an Event of Default under the Note.
"Obligations": the collective reference to the unpaid principal of and
interest on the Note and all other obligations and liabilities of the
Executive to the Company (including, without limitation, interest accruing at
the then applicable rate provided in the Note after the maturity of the Loan
and interest accruing at the then applicable rate provided in the Note after
the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, relating to the Executive,
whether or not a claim for post-filing or post-petition interest is allowed
in such proceeding), whether direct or indirect, absolute or contingent, due
or to become due, or now existing or hereafter incurred, which may arise
under, out of, or in connection with the Note and this Agreement or any other
document made, delivered or given in connection therewith, in each case
whether on account of principal, interest, costs, expenses or otherwise.
"Person": any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other
entity.
"Pledged Stock": the shares of capital stock listed on Schedule 1
hereto, together with all stock certificates received upon exercise of any
such options or rights of any nature whatsoever that may be issued or granted
by the Company to the Executive while this Agreement is in effect.
"Proceeds": all "proceeds" as such term is defined in Section 9-306(1)
of the Uniform Commercial Code in effect in the State of New York on the date
hereof and, in any event, shall include, without limitation, all dividends or
other income from the Pledged Stock, collections thereon or distributions
with respect thereto.
"Securities Act": the Securities Act of 1933, as amended.
(b) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement, and section and
paragraph references are to this Agreement unless otherwise specified.
(c) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2. Pledge; Grant of Security Interest. The Executive hereby delivers to
the Company all the Pledged Stock and hereby grants to the Company a first
security interest in the Collateral, as collateral security for the prompt
and complete
2
<PAGE>
payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations.
3. Stock Powers. Concurrently with the delivery to the Company of each
certificate representing one or more shares of Pledged Stock to the Company,
the Executive shall deliver an undated stock power covering such certificate,
duly executed in blank by the Executive with, if the Company so requests,
signature guaranteed.
4. Covenants. The Executive covenants and agrees with the Company that,
from and after the date of this Agreement until this Agreement is terminated
and the security interests created hereby are released:
(a) If the Executive shall (i) as a result of its ownership of the
Pledged Stock, become entitled to receive or shall receive any stock
certificate (including, without limitation, any certificate representing a
stock dividend or a distribution in connection with any reclassification,
increase or reduction of capital or any certificate issued in connection with
any reorganization), option or rights, whether in addition to, in
substitution of, as a conversion of, or in exchange for any shares of the
Pledged Stock, or otherwise in respect thereof or (ii) acquire ownership of
shares of Common Stock upon the exercise of stock options, the Executive
shall accept the same as the agent of the Company, hold the same in trust
for the Company, and deliver the same forthwith to the Company in the exact
form received, duly indorsed by the Executive to the Company, if required,
together with an undated stock power covering such certificate duly executed
in blank by the Executive and with, if the Company so requests, signature
guaranteed, to be held by the Company, subject to the terms hereof, as
additional collateral security for the Obligations.
(b) Without the prior written consent of the Company, the Executive
will not (1) sell, assign, transfer, exchange, or otherwise dispose of, or
grant any option with respect to, the Collateral, (2) create, incur or permit
to exist any Lien or option in favor of, or any claim of any Person with
respect to, any of the Collateral, or any interest therein, except for the
security interests created by this Agreement or (3) enter into any agreement
or undertaking restricting the right or ability of the Executive or the
Company to sell, assign or transfer any of the Collateral.
(c) The Executive shall maintain the security interest created by this
Agreement as a first, perfected security interest and shall defend such
security interest against claims and demands of all Persons whomsoever. At
any time and from time to time, upon the written request of the Company, and
at the sole
3
<PAGE>
expense of the Executive, the Executive will promptly and duly execute and
deliver such further instruments and documents and take such further actions
as the Company may reasonably request for the purposes of obtaining or
preserving the full benefits of this Agreement and of the rights and powers
herein granted. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any promissory note, other
instrument or chattel paper, such note, instrument or chattel paper shall be
immediately delivered to the Company, duly endorsed in a manner satisfactory
to the Company, to be held as Collateral pursuant to this Agreement.
(d) The Executive shall pay, and save the Company harmless from, any
and all liabilities with respect to, or resulting from any delay in paying,
any and all stamp, excise, sales or other taxes which may be payable or
determined to be payable with respect to any of the Collateral or in
connection with any of the transactions contemplated by this Agreement.
5. Cash Dividends; Voting Rights. Unless an Event of Default shall have
occurred and be continuing and the Company shall have given notice to the
Executive of the Company's intent to exercise its corresponding rights
pursuant to Section 6 below, the Executive shall be permitted to receive all
cash dividends paid in respect of the Pledged Stock and to exercise all
voting and corporate rights with respect to the Pledged Stock.
6. Rights of the Company. If an Event of Default shall occur and be
continuing and the Company shall give notice of its intent to exercise such
rights to the Executive the Company shall have the right to receive any and
all cash dividends paid in respect of the Pledged Stock and make application
thereof to the Obligations in such order as the Company may determine.
7. Remedies. (a) If an Event of Default shall have occurred and be
continuing, at any time at the Company's election, the Company may apply all
or any part of Proceeds held in any Collateral Account in payment of the
Obligations in such order as the Company may elect.
(b) If an Event of Default shall have occurred and be continuing, the
Company may exercise, in addition to all other rights and remedies granted in
this Agreement and in any other instrument or agreement securing, evidencing
or relating to the Obligations, all rights and remedies of a secured party
under the Code. Without limiting the generality of the foregoing, the
Company, without demand of performance or other demand, presentment, protest,
advertisement or notice of any kind (except any notice required by law
referred to below) to or upon the Executive or any other Person (all and each
of which demands, defenses, advertisements and notices are hereby waived),
may in
4
<PAGE>
such circumstances forthwith collect, receive, appropriate and realize upon
the Collateral, or any part thereof, and/or may forthwith sell, assign, give
option or options to purchase or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in
one or more parcels at public or private sale or sales, in the
over-the-counter market, at any exchange, broker's board or office of the
Company or elsewhere upon such terms and conditions as it may deem advisable
and at such prices as it may deem best, for cash or on credit or for future
delivery without assumption of any credit risk. The Company shall have the
right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part
of the Collateral so sold, free of any right or equity of redemption in the
Executive, which right or equity is hereby waived or released. The Company
shall apply any Proceeds from time to time held by it and the net proceeds of
any such collection, recovery, receipt, appropriation, realization or sale,
after deducting all reasonable costs and expenses of every kind incurred in
respect thereof or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the
Company hereunder, including, without limitation, reasonable attorneys' fees
and disbursements of counsel to the Company, to the payment in whole or in
part of the Obligations, in such order as the Company may elect, and only
after such application and after the payment by the Company of any other
amount required by any provision of law, including, without limitation,
Section 9-504(1)(c) of the Code, need the Company account for the surplus, if
any, to the Executive. To the extent permitted by applicable law, the
Executive waives all claims, damages and demands he may acquire against the
Company arising out of the exercise by the Company or the Executive of any
rights hereunder. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least 10 days before such sale or other disposition.
The Executive shall remain liable for any deficiency if the proceeds of any
sale or other disposition of Collateral are insufficient to pay the
Obligations and the fees and disbursements of any attorneys employed by the
Company to collect such deficiency.
8. Execution of Financing Statements. Pursuant to Section 9-402 of the
Code, the Executive authorizes the Company to file financing statements with
respect to the Collateral without the signature of the Executive in such form
and in such filing offices as the Company reasonably determines appropriate
to perfect the security interests of the Company under this Agreement. A
carbon, photographic or other reproduction of this Agreement shall be
sufficient as a financing statement for filing in any jurisdiction.
5
<PAGE>
9. Notices. All notices, requests and demands to or upon the Company or
the Executive to be effective shall be in writing (or by telex, facsimile or
similar electronic transfer confirmed in writing) and shall be deemed to have
been duly given or made (1) when delivered by hand or (2) if given by mail,
when deposited in the mails by certified mail, return receipt requested, or
(3) if by telex, facsimile or similar electronic transfer, when sent and
receipt has been confirmed, addressed to the Company or the Executive at its
address or transmission number for notices provided in section 25(b) of the
Stockholder's Agreement. The Company and the Executive may change their
addresses and transmission numbers for notices by notice in the manner
provided in this Section.
10. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of
the terms or provisions of this Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
the Executive and the Company, provided that any provision of this Agreement
may be waived by the Company in a letter or agreement executed by the Company
or by telex or facsimile transmission from the Company.
(a) The Company shall not by any act (except by a written instrument
pursuant to paragraph 11 hereof), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in
any Default or Event of Default or in any breach of any of the terms and
conditions hereof. No failure to exercise, nor any delay in exercising, on
the part of the Company, any right, power or privilege hereunder shall
operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by
the Company of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Company would otherwise
have on any future occasion.
(b) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
12. Section Headings. The section headings used in this Agreement are
for convenience of reference only and are not to
6
<PAGE>
affect the construction hereof or be taken into consideration in the
interpretation hereof.
13. Successors and Assigns. This Agreement shall be binding upon the
successors and assigns of the Executive and shall inure to the benefit of the
Company and their successors and assigns.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly
executed and delivered as of the date first above written.
-----------------------------------
[NAME OF EXECUTIVE]
7
<PAGE>
SCHEDULE 1
TO PLEDGE AGREEMENT
DESCRIPTION OF PLEDGED STOCK
<PAGE>
Exhibit 10.20
MEMBERSHIP AND LICENSING AGREEMENT
----------------------------------
This agreement is entered into this lst day of December 1980, by and
between TOPCO ASSOCIATES, INC. (COOPERATIVE), a cooperative association
organized under the laws of the State of Wisconsin (hereinafter called
Association), and Randall's Food Markets, Inc., a corporation organized under
the laws of the State of Texas (hereinafter called Member).
It is mutually agreed as follows:
1. The terms and provisions of the Articles of Incorporation and
Bylaws of the Association are hereby incorporated in this agreement as if fully
set forth herein. Each amendment to said Articles of Incorporation and Bylaws
shall be treated as an amendment to this agreement.
2. The Association grants to the Member a license to sell and
distribute, from it warehouse in Houston, Texas (or, prior to the time that
Member owns its own warehouse, from the warehouse of The Fleming Companies, Inc.
in Houston, Texas) products bearing the trademarks or trade names owned by the
Association set forth in Exhibit A (as the same may from time to time be
amended by agreement of the parties).
3. Member shall provide to the Association a list of its stores serviced
by the warehouses described in paragraph 2 as of June 30 and December 31 of each
year.
4. Member has represented to the Association that within two years of the
date of this agreement it will be offering to its customers no fewer than 700
items bearing the trademarks owned by the Association set forth in Exhibit A.
It shall be a condition of Member's membership in the Association
<PAGE>
-2-
that this level of participation in the programs of the Association be achieved.
In the event that it is not achieved by December 31, 1982, the Board of
Directors of the Association may at any time within six months thereafter
terminate the membership of Member. The foregoing reason for termination shall
be in addition to those set forth in the Bylaws of the Association. In the
event of termination for such reason, the Member shall be entitled to service
and shall be responsible for paying service charges as set forth in the Bylaws
of the Association as though Member had resigned from the Association and the
date of termination of membership was less than two years after the date of its
admission to membership.
IN WITNESS WHEREOF, the parties hereto have signed this agreement.
TOPCO ASSOCIATES, INC.
By: /s/ Illegible
---------------------------------
Randall's Food Markets, Inc.
------------------------------------
By: /s/ Robert R. Onstead President
---------------------------------
<PAGE>
EXHIBIT A
---------
Membership and Licensing Agreement Original: Dated December 1, 1980
-----------------
Between Topco Associates, Inc. and Revision: Date May 15, 1985
-------------------
Randell's Food Markets, Inc. Revision No. 1
-----------------------
supersedes Exhibit dated:
December 1, 1980
----------------
Programs of the Association in which the Member is entitled to participate:
Frozen Dairy Grocery
Proc Meat, Fish & Poultry Equipment/Supplies Produce
HBA/General Merchandise SBM Fresh Meat
Trademarks and tradenames in the following Brand Groups as established by the
Membership and owned by the Association:
AM Brands Group
- ---------------
Beacon Top Crest Valu Time
Elna Top Fresh Valu Pro
Mega
TA Brands Group
- ---------------
Dog Club Gaylord Top Frost
Food Club Topco
Member Own Brand: Yes [ ] No [ X ]
<PAGE>
EXHIBIT 16
[LETTERHEAD OF ARTHUR ANDERSEN]
October 28, 1997
Mr. Curt McClellan
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Dear Mr. McClellan,
In connection with the Randall's Food Markets, Inc. (the Company) Amendment
No. 2 to Form S-4 Registration Statement filing under the Securities Act of
1933 relating to the offer to exchange up to $150,000,000 of its 9-3/8%
Series B Senior Subordinated Notes due 2007 (the Filing), we agree with the
language in the Filing under the "Experts" section. During the Company's two
fiscal years ended June 24, 1995 and June 29, 1996, and the subsequent interim
period through May 30, 1997, there were no disagreements between us and the
Company on any matter of accounting principles or practices, financial
statement disclosures or auditing scopes or procedures.
Very truly yours,
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 of Randall's Food Markets, Inc.
Registration Statement on Form S-4 (File No. 333-35457) of our report dated
August 15, 1997, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/__DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
October 28, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Amendment No. 2 to Form S-4 Registration Statement No. 333-35457 of our report
dated September 19, 1996, (except with respect to the matter discussed in the
eighth paragraph of Note 5, as to which the date is June 27, 1997), with respect
to the consolidated balance sheet of Randall's Food Markets, Inc. and
subsidiaries as of June 29, 1996; and the related consolidated statements of
operations, redeemable stock and stockholders' equity and cash flows for the
years ended June 29, 1996 and June 24, 1995, and to all references to our firm
included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
October 27, 1997
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
9 3/8% SENIOR SUBORDINATED NOTES
DUE 2007
OF
RANDALL'S FOOD MARKETS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997 (THE "EXPIRATION DATE") UNLESS EXTENDED BY RANDALL'S FOOD MARKETS, INC.
EXCHANGE AGENT:
MARINE MIDLAND BANK
<TABLE>
<S> <C>
BY HAND: BY MAIL:
Marine Midland Bank (INSURED OR REGISTERED RECOMMENDED)
140 Broadway, Level A Marine Midland Bank
New York, New York 10005-1180 140 Broadway, Level A
Attention: Paulette Shaw New York, New York 10005-1180
Attention: Paulette Shaw
BY OVERNIGHT EXPRESS:
Marine Midland Bank
140 Broadway, Level A
New York, New York 10005-1180
Attention: Paulette Shaw
</TABLE>
BY FACSIMILE:
(212) 658-2292
(For Eligible Institutions Only)
BY TELEPHONE:
(212) 658-5931
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated , 1997
(the "Prospectus") of Randall's Food Markets, Inc. (the "Company"), and this
Letter of Transmittal (the "Letter of Transmittal"), which together describe the
Company's offer (the "Exchange Offer") to exchange $1,000 in principal amount of
its new 9 3/8% Series B Senior Subordinated Notes due 2007 (the "Exchange
Notes") for each $1,000 in principal amount of outstanding 9 3/8% Senior
Subordinated Notes due 2007 (the "Old Notes"). The terms of the Exchange Notes
are identical in all material respects (including principal amount, interest
rate and maturity) to the terms of the Old Notes for which they may be exchanged
pursuant to the Exchange Offer, except that the Exchange Notes are freely
transferable by holders thereof (except as provided herein or in the Prospectus)
and are not subject to any covenant regarding registration under the Securities
Act of 1933, as amended (the "Securities Act").
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW
<PAGE>
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
AGGREGATE
NAME(S) AND ADDRESS(ES) OF PRINCIPAL AMOUNT PRINCIPAL
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED AMOUNT
(PLEASE FILL IN) NUMBER(S)* BY OLD NOTES* TENDERED**
<S> <C> <C> <C>
Total
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by such Old Notes. See
instruction 2.
This Letter of Transmittal is to be used either if certificates representing
Old Notes are to be forwarded herewith or if delivery of Old Notes is to be made
by book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company, pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Delivery of
documents to the book-entry transfer facility does not constitute delivery to
the Exchange Agent.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer-- Procedures for Tendering Old Notes."
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
/ / The Depository Trust Company
Account Number _____________________________________________________________
Transaction Code Number ____________________________________________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) _______________________________________________
Name of Eligible Institution that Guaranteed Delivery ______________________
Date of Execution of Notice of Guaranteed Delivery _________________________
<PAGE>
If Delivered by Book-Entry Transfer:
Account Number _____________________________________________________________
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO PERSON OTHER THAN PERSON
SIGNING THE LETTER OF TRANSMITTAL:
Name _________________________________________________________________________
(Please Print)
Address ______________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO ADDRESS DIFFERENT FROM
THAT LISTED ELSEWHERE IN THIS LETTER OF TRANSMITTAL:
Address ______________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THIS PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name _______________________________________________________________________
Address ____________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as result
of market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. A broker-dealer may not participate in the Exchange Offer
with respect to Old Notes acquired in connection with the initial placement of
the Old Notes. Any holder who is an "affiliate" of the Company or who has an
arrangement or understanding with respect to the distribution of the Exchange
Notes to be acquired pursuant to the Exchange Offer, or any broker-dealer who
purchased Old Notes from the Company to resell pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act must
comply with the registration and prospectus delivery requirements under the
Securities Act.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of the Old Notes indicated above. Subject to, and effective upon, the acceptance
for exchange of the Old Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Notes. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that said
Exchange Agent acts as the agent of the Company, in connection with the Exchange
Offer) to cause the Old Notes to be assigned, transferred and exchanged. The
undersigned represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire Exchange
Notes issuable upon the exchange of such tendered Old Notes, and that, when the
same are accepted for exchange, the Company will acquire good and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes or transfer ownership of such Old Notes on the account books maintained by
the book-entry transfer facility. The undersigned further agrees that acceptance
of any and all validly tendered Old Notes by the Company and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Company of its obligations under the Registration Rights Agreement (as defined
in the Prospectus) and that the Company shall have no further obligations or
liabilities thereunder except as provided in the first paragraph of Section 2 of
said agreement.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Certain Conditions to the
Exchange Offer." The undersigned recognizes that as a result of these conditions
(which may be waived, in whole or in part, by the Company), as more particularly
set forth in the Prospectus, the Company may not be required to exchange any of
the Old Notes tendered hereby and, in such event, the Old Notes not exchanged
will be returned to the undersigned at the address shown above. In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth under "The Exchange Offer--Certain Conditions to
the Exchange Offer" occur.
By tendering, each holder of Old Notes represents that the Exchange Notes
acquired in the exchange will be obtained in the ordinary course of such
holder's business, that such holder has no arrangement with any person to
participate in the distribution of such Exchange Notes, that such holder is not
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and that such holder is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes. Any holder of Old Notes using
the Exchange Offer to participate in a distribution of the Exchange Notes (i)
cannot rely on the position of the staff of the Securities and Exchange
Commission (the "Commission") enunciated in its interpretive letter with respect
to Exxon Capital Holdings Corporation (available April 13, 1989) or similar
letters and (ii) must comply with the registration and prospectus requirements
of the Securities Act in connection with a secondary resale transaction.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes, however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. A broker-dealer may not participate in the
Exchange Offer with respect to Old Notes acquired in connection with the initial
placement of the Old Notes.
<PAGE>
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Old Notes may be withdrawn at any time
prior to the Expiration Date in accordance with the terms of this Letter of
Transmittal. See Instruction 2.
Certificates for all Exchange Notes delivered in exchange for tendered Old
Notes and any Old Notes delivered herewith but not exchanged, and registered in
the name of the undersigned, shall be delivered to the undersigned at the
address shown below the signature of the undersigned.
TENDER HOLDER(S) SIGN HERE
(Complete accompanying substitute Form W-9)
________________________________________________________________________________
________________________________________________________________________________
Signature(s) of Holder(s)
Dated ___________________ Area Code and Telephone Number ___________________
(MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) FOR OLD NOTES. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR,
ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR OTHER
PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET FORTH THE
FULL TITLE OF SUCH PERSON.) SEE INSTRUCTION 3.
Name(s) ________________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
(Including Zip Code)
Area Code and Telephone No. ____________________________________________________
Taxpayer Identification No. ____________________________________________________
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTION 3)
Authorized Signature ___________________________________________________________
Name ___________________________________________________________________________
Title __________________________________________________________________________
Address ________________________________________________________________________
Name of Firm ___________________________________________________________________
Area Code and Telephone No. ____________________________________________________
Dated __________________________________________________________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
A holder of Old Notes may tender the same by (i) properly completing and
signing this Letter of Transmittal or a facsimile hereof (all references in the
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other document required by this Letter of Transmittal, to the Exchange
Agent at its address set forth above on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ANY
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT
AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO PERMIT TIMELY
DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended. If the Exchange Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Notes, the signature on the Letter of Transmittal
must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received on
or prior to the Expiration Date, a letter, telegram or facsimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) from an Eligible Institution setting forth the name and
address of the tendering holder, the names in which the Old Notes are registered
and, if possible, the certificate numbers of the Old Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within three
business days after the Expiration Date, the Old Notes in proper form for
transfer (or a confirmation of book-entry transfer of such Old Notes into the
Exchange Agent's account at the book-entry transfer facility), will be delivered
by such Eligible Institution together with a properly completed and duly
executed Letter of Transmittal (and any other required documents). Unless Old
Notes being tendered by the above-described method are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
the Company may, at its option, reject the tender. Copies of the notice of
guaranteed delivery ("Notice of Guaranteed Delivery") which may be used by
Eligible Institutions for the purposes described in this paragraph are available
from the Exchange Agent.
<PAGE>
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Old Notes evidenced by a
submitted certificate is tendered, the tendering holder should fill in the
principal amount tendered in the box entitled "Principal Amount Tendered." A
newly issued certificate for the principal amount of Old Notes submitted but not
tendered will be sent to such holder as soon as practicable after the Expiration
Date. All Old Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise clearly indicated.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Old Notes to be withdrawn, (iv) include a statement that such holder
is withdrawing his election to have such Old Notes exchanged, (v) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee under the Indenture
register the transfer of such Old Notes into the name of the person withdrawing
the tender and (vi) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. The Exchange Agent will
return the properly withdrawn Old Notes promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility to be credited with the
withdrawn Old Notes or othewise comply with the book-entry transfer facility
procedure. All questions as to the validity of notices of withdrawals, including
time of receipt, will be determined by the Company and such determination will
be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under the caption "Procedures for Tendering Old Notes" in
the Prospectus at any time on or prior to the Expiration Date.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it will
be necessary to complete, sign and submit as many separate copies of this Letter
of Transmittal as there are different registrations of Old Notes.
<PAGE>
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the Old Notes) of Old Notes listed and tendered hereby, no endorsements
of certificates or separate written instruments of transfer or exchange are
required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holder of the Old Notes listed, such Old Notes must be
endorsed or accompanied by separate written instruments of transfer or exchange
in form satisfactory to the Company and duly executed by the registered holder,
in either case signed exactly as the name or names of the registered holder or
holders appear(s) on the OldNotes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of such Old Notes, for the holder of such Old Notes; or (ii) for the
account of an Eligible Institution.
4. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the transfer
and exchange of Old Notes to it or its order pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exception therefrom
is not submitted herewith the amount of such transfer taxes will be billed
directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
5. WAIVER OF CONDITIONS.
The Company reserves the right to waive in its reasonable judgment, in whole
or in part, any of the conditions to the Exchange Offer set forth in the
Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed,
should contact the Exchange Agent at the address indicated above for further
instructions.
7. SUBSTITUTE FORM W-9.
Each holder of Old Notes whose Old Notes are accepted for exhange (or other
payee) is required to provide a correct taxpayer identification number ("TIN"),
generally the holder's Social Security or federal employer identification
number, and with certain other information, on Substitute Form W-9, which is
provided under "Important Tax Information" below, and to certify that the holder
(or other payee) is not subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the holder (or other payee)
to a $50 penalty imposed by the Internal Revenue Service and 31% federal income
tax backup withholding on payments made in connection with the Exchange Notes.
The box in Part 3 of the Substitute Form W-9 may be checked if the holder (or
other payee) has not been issued a TIN and has applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part 3 is checked and a TIN is
not provided by the time any payment is made in connection with the Exchange
Notes, 31% of all such payments will be withheld until a TIN is provided.
<PAGE>
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to Randall's Food Markets, Inc., 3663 Briarpark,
Houston, Texas 77042, attention: Secretary (telephone: 713-268-3500).
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
CERTIFICATES FOR OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER
REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
<PAGE>
IMPORTANT TAX INFORMATION
Under U.S. Federal income tax law, a holder of Old Notes whose Old Notes are
accepted for exchange may be subject to backup withholding unless the holder
provides Marine Midland Bank (as payor) (the "Paying Agent"), through the
Exchange Agent, with either (i) such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder of Old Notes is
awaiting a TIN) and that (A) the holder of Old Notes has not been notified by
the Internal Revenue Service that he or she is subject to backup withholding as
a result of a failure to report all interest or dividends or (B) the Internal
Revenue Service has notified the holder of Old Notes that he or she is no longer
subject to backup withholding; or (ii) an adequate basis for exemption from
backup withholding. If such holder of Old Notes is an individual, the TIN is
such holder's social security number. If the Paying Agent is not provided with
the correct taxpayer identification number, the holder of Old Notes may be
subject to certain penalties imposed by the Internal Revenue Service.
Certain holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Old Notes should indicate their exempt
status on Substitute Form W-9. In order for a foreign individual to qualify as
an exempt receipient, the holder must submit a Form W-8, signed under penalties
of perjury, attesting to that individual's exempt status. A Form W-8 can be
obtained from the Paying Agent. See the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for more instructions.
If backup withholding applies, the Paying Agent is required to withhold 31%
of any such payments made to the holder of Old Notes or other payee. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service.
The box in Part 3 of the Substitute Form W-9 may be checked if the
surrendering holder of Old Notes has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near futue. If the box in Part 3 is
checked, the holder of Old Notes or other payee must also complete the
Certificate of Awaiting Taxpayer Identification Number below in order to avoid
backup withholding . Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the Paying
Agent will withhold 31% of all payments made prior to the time a properly
certified TIN is provided to the Paying Agent.
The holder of Old Notes is required to give the Paying Agent the TIN (e.g.,
social security number or employer identification number) of the record owner of
the Old Notes. If the Old Notes are in more than one name or are not in the name
of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
<PAGE>
<TABLE>
<S> <C> <C>
PAYOR'S NAME: MARINE MIDLAND BANK, AS PAYING AGENT
SUBSTITUTE PART I--PLEASE PROVIDE YOUR TIN Social Security number(s) or
IN THE BOX AT RIGHT AND CERTIFY Employer Identification
BY SIGNING AND DATING BELOW. Number(s)
PART 2--CERTIFICATION--Under penalties of perjury, I certify
that:
(1) The number shown on this form is my correct taxpayer
identification number (or I am waiting for a number to be issued
for me), and
FORM W-9 (2) I am not subject to backup withholding because: (a) I am
DEPARTMENT OF THE TREASURY exempt form backup withholding, or (b) I have not been notified
INTERNAL REVENUE SERVICE by the Internal Revenue Service (IRS) that I am subject to
backup withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that
I am no longer subject to backup withholding.
PAYOR'S REQUEST FOR CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if
TAXPAYER IDENTIFICATION you have been notified by the IRS that you are currently subject
NUMBER ("TIN") to backup withholding because of underreporting interest or
dividends on your tax return.
Signature PART 3--Awaiting TIN / /
Date
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50 PENALTY
IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP WITHHOLDING OF 31% OF
ANY CASH PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered
an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security
Administration Office or (2) I intend to mail or deliver an application in
the near future. I understand that if I do not provide a taxpayer
identification number by the time of payment, 31% of all reportable cash
payments made to me thereafter will be withheld until I provide a taxpayer
identification number.
<TABLE>
<S> <C>
------------------------------------------------ --------------------------------
Signature Date
</TABLE>
