<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
------------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO __________
Commission File number 333-35457
-----------------------------------------------------------------
RANDALL'S FOOD MARKETS, INC.
(Exact name of registrant as specified in its charter)
-----------------------------------------------------------------
Texas 74-2134840
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3663 Briarpark, Houston, Texas 77042
-----------------------------------------------------------
Address of principal executive offices (including zip code)
(713) 268-3500
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's common stock,
par value $0.25 per share, as of April 4, 1998 was 30,352,227 shares
<PAGE>
RANDALL'S FOOD MARKETS, INC.
INDEX
<TABLE>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at April 4, 1998 and
June 28, 1997 2
Condensed Consolidated Statements of Operations for the
Forty (40) and Twelve (12) Week Periods Ended April 4,
1998 and April 5, 1997 3
Condensed Consolidated Statements of Cash Flows for the
Forty (40) Week Periods Ended April 4, 1998 and
April 5, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits 15
SIGNATURES 16
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RANDALL'S FOOD MARKETS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 4, 1998 AND JUNE 28, 1997
(In Thousands)
(Unaudited)
<TABLE>
APRIL 4, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 47,317 $ 23,115
Receivables, net 35,866 44,664
Merchandise inventories 171,977 164,174
Prepaid expenses and other 11,031 9,703
Deferred tax assets 15,029 21,109
-------- --------
Total current assets 281,220 262,765
Property and equipment, net 330,224 336,548
Goodwill, net 219,441 224,350
Other assets, net 38,328 38,711
-------- --------
$869,213 $862,374
-------- --------
-------- --------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and capitalized lease obligations $ 4,830 $ 4,940
Accounts payable 123,637 112,026
Accrued expenses and other 135,443 134,370
-------- --------
Total current liabilities 263,910 251,336
Long-term debt, net of current maturities 276,445 279,729
Obligations under capital leases, net of current maturities 62,051 77,479
Deferred income tax liability 6,837 11,067
Other liabilities 24,503 24,400
-------- --------
Total liabilities 633,746 644,011
-------- --------
COMMITMENTS & CONTINGENCIES (See Note 4)
REDEEMABLE COMMON STOCK, $12.60 and $12.11 redemption value,
394,151 and 413,022 shares issued and outstanding, respectively 4,966 5,002
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value 29,953,940 and 29,301,239 shares issued and
outstanding, repectively 7,490 7,326
Additional paid-in capital 177,229 169,823
Stockholders' notes receivable (5,811) -
Retained earnings 52,492 36,212
Restricted common stock (681) -
Treasury stock (218) -
-------- --------
Total stockholders' equity 230,501 213,361
-------- --------
$869,213 $862,374
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
RANDALL'S FOOD MARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 4, 1998 AND APRIL 5, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
40 WEEKS ENDED 12 WEEKS ENDED
----------------------------- ------------------------------
APRIL 4, 1998 APRIL 5, 1997 APRIL 4, 1998 APRIL 5, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 1,851,817 $ 1,804,586 $ 552,524 $ 545,540
COSTS OF SALES 1,345,145 1,316,567 399,500 395,924
------------ ------------ ---------- ----------
GROSS PROFIT 506,672 488,019 153,024 149,616
OPERATING EXPENSES:
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 412,698 417,520 124,760 134,487
DEPRECIATION AND AMORTIZATION 37,969 35,288 11,660 11,406
LITIGATION AND SEVERANCE/BENEFITS - 12,500 - 12,500
------------ ------------ ---------- ----------
TOTAL OPERATING EXPENSES 450,667 465,308 136,420 158,393
------------ ------------ ---------- ----------
OPERATING INCOME (LOSS) 56,005 22,711 16,604 (8,777)
INTEREST EXPENSE, net 25,612 28,325 7,599 8,474
------------ ------------ ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 30,393 (5,614) 9,005 (17,251)
PROVISION (BENEFIT) FOR INCOME TAXES 13,942 (199) 4,143 (6,078)
------------ ------------ ---------- ----------
NET INCOME (LOSS) $ 16,451 $ (5,415) $ 4,862 $ (11,173)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
RANDALL'S FOOD MARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEK PERIODS ENDED
APRIL 4, 1998 AND APRIL 5, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
40 WEEKS ENDED
-----------------------------
APRIL 4, 1998 APRIL 5, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16,451 $ (5,415)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 37,969 35,288
Amortization of debt issuance costs 1,597 466
LIFO reserve 1,700 3,000
Deferred tax benefit (provision) 1,850 (10,578)
Other (777) 13,625
Change in assets and liabilities, net 17,689 10,000
--------- ---------
Net cash provided by operating activities 76,479 46,386
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (70,995) (66,182)
Proceeds from sale of assets 22,946 32,159
Other 1,278 79
--------- ---------
Net cash (used) in investing activities (46,771) (33,944)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of debt (3,269) (15,862)
Additions to (reductions in) obligations under capital lease (2,933) 6,075
Other 696 (2,641)
--------- ---------
Net cash (used) in financing activities (5,506) (12,428)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,202 14
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 23,115 31,686
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,317 $ 31,700
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
RANDALL'S FOOD MARKETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 4, 1998 AND APRIL 5, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Randall's Food
Markets, Inc. and subsidiaries (the "Company") at June 28, 1997 has been derived
from the Company's audited financial statements at that date. The condensed
consolidated balance sheet at April 4, 1998, the condensed consolidated
statements of operations for the forty and twelve week periods ended April 4,
1998 and April 5, 1997 and the condensed consolidated statements of cash flows
for the forty week periods ended April 4, 1998 and April 5, 1997 are unaudited.
In the opinion of management, such condensed consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the consolidated financial position and
results of operations of the Company for the interim periods. Operating results
for the forty and twelve week periods ended April 4, 1998 are not necessarily
indicative of the operating results that may be expected for a full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements presented in accordance with generally accepted accounting
principles have been omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Registration
Statement on Form S-4 as declared effective by the Securities and Exchange
Commission on January 12, 1998 (Registration No. 333-35457).
2. STORE CLOSING COSTS
During the fiscal year ended June 28, 1997 ("Fiscal Year 1997"), the
Company recorded a charge of approximately $32.8 million in connection with the
closure, replacement or sale of certain of its stores. Such charge included
estimated inventory losses of approximately $3.0 million (included in cost of
sales during Fiscal Year 1997), estimated lease termination costs of
approximately $11.7 million and asset write-offs of approximately $18.1 million
(included in operating expenses during Fiscal Year 1997). Approximately $3.7
million of such charge related to stores that were closed or sold in Fiscal Year
1997 and approximately $29.1 million related to stores the Company planned to
close, replace or sell during the fiscal years ending June 27, 1998 and June 26,
1999. During the forty weeks ended April 4, 1998, the Company closed eight
stores and charged approximately $4.6 million of related closure costs against
the accrual recorded in connection with the charge in Fiscal Year 1997.
3. STOCK PURCHASE AND OPTION PLAN
During the forty weeks ended April 4, 1998, the Company adopted the 1997
Stock Purchase and Option Plan for Key Employees of Randall's Food Markets, Inc.
and Subsidiaries (the "1997 Plan"). The 1997 Plan authorizes grants of stock
and stock options covering 2.4 million shares of the Company's common stock.
Grants or awards under the 1997 Plan may take the form of purchased stock,
restricted stock, incentive or
5
<PAGE>
non-qualified stock options, or other types of rights specified in the 1997
Plan and are typically issued at prices greater than or equal to the fair
market value of the Company's common stock at the time of such grants and
awards.
During the forty weeks ended April 4, 1998, the Company sold approximately
548,000 shares of common stock under the 1997 Plan to key executives and certain
members of management at a price of $12.11 per share. As consideration, the
Company accepted payment of cash or a combination of cash and notes receivable
from the purchasers. The notes receivable bear interest at rates ranging from
5.7% to 6.1% per annum. At April 4, 1998, the Company held notes receivable
from management stockholders in the aggregate amount of approximately $5.8
million. These notes receivable are shown as a reduction of stockholders'
equity in the accompanying condensed consolidated balance sheet.
4. CONTINGENCIES
Following the Company's acquisition of Cullum Companies, Inc. ("Cullum") in
August 1992, the Company terminated Cullum's Management Security Plan for Cullum
Companies, Inc. ("the MSP"). In respect of such termination, the Company paid
MSP participants the greater of (i) the amount of such participant's deferral or
(ii) the net present value of the participant's 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 persons). On May 7, 1997, the
plaintiffs filed an amended 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. A pre-trial order in the MSP litigation, which was submitted to
the court on October 22, 1997, states that an expert for the plaintiffs,
assuming class certification, may testify that the damages allegedly sustained
by the plaintiff class may range from approximately $18.0 million to $37.2
million and, assuming that a court were to award additional damages based on a
rate of return achieved by an equity index over the relevant period, such
damages may range from approximately $37.4 million to $70.6 million. On
December 30, 1997, the court issued an order denying the plaintiffs' summary
judgment motion on the plaintiffs' claim that the MSP was not an exempt "top hat
plan" (a plan which is unfunded and maintained by an employer primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees). The order also granted the Company's summary
judgment motions on two of the plaintiffs' ancillary claims, but did not address
the plaintiffs' request for certification as a class action. The judge
scheduled a pre-trial conference with the parties for January 22, 1998 which was
subsequently rescheduled to May 28, 1998. The Company currently expects the
trial to commence in calendar year 1998. Based upon current facts, the Company
is unable to estimate any meaningful range of possible loss that could result
from an unfavorable outcome of the MSP litigation. It is possible that the
Company's results of operations or cash flows in a particular quarterly or
annual period or its financial position could be materially affected by an
ultimate unfavorable outcome of the MSP litigation. However, the Company
intends to vigorously contest the MSP claim and, although there can be no
assurance, management currently does not anticipate an unfavorable outcome based
on management's independent analysis of the facts relating to such litigation.
On July 30, 1997, the Company initiated an arbitration proceeding against
Fleming Companies, Inc. ("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,
6
<PAGE>
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 $2.4
billion in products from Fleming. In the arbitration, the Company seeks
termination of the contract, that would otherwise remain in effect until June
30, 2001, and monetary damages for past overcharges. Fleming has filed an
answer denying each allegation and a counterclaim for $1.1 million, alleging
that the Company failed to purchase the quantities required by the supply
agreement and refused to pay increased prices for products. An evidentiary
hearing before three arbitrators began on April 6, 1998, and concluded on
April 29, 1998. The current schedule provides that post-hearing briefing
will conclude on May 27, 1998, and that the arbitrators will deliver a
decision by early July 1998.
The Company is involved in other various claims and disputes arising in the
normal course of business. Management is not currently able to estimate the
range of possible loss, if any, that may result from such matters. However,
management believes that the Company has meritorious defenses and/or insurance
coverage against such matters and does not believe that the outcome of any such
proceedings will have a material effect on the Company's results of operations,
financial condition or cash flow.
5. RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement on Financial Accounting Standard ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME", which requires the reporting and display of comprehensive
income and its components in an entity's financial statements. SFAS No. 130 is
not expected to materially impact the Company's financial statements. In June
1997 the FASB also issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION", which specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information required to be disclosed. Management believes that the
implementation of SFAS No. 131 will not have a significant impact on the
Company's financial statements. The Company is required to adopt SFAS No. 130
and SFAS No. 131 in its fiscal year ending June 26, 1999.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the results of operations of the
Company covers certain periods before completion of certain financings and
related transactions whereby RFM Acquisition LLC ("RFM Acquisition"), a Delaware
limited liability company organized at the direction of Kohlberg Kravis Roberts
& Co., L.P., invested $225.0 million in the Company, as consideration for the
Company's issuance to RFM Acquisition of 18,579,686 shares of the Company's
common stock, par value $0.25 per share (the "Common Stock") and a 25-year
option to purchase 3,606,881 shares of Common Stock at $12.11 per share, subject
to adjustments, including the related financings and related transactions, (the
"Recapitalization"). Accordingly, the discussion and analysis of periods for
the 40 weeks ended April 5, 1997 and the 12 weeks ended April 5, 1997 do not
reflect the significant impact that the Recapitalization has had and will
continue to have on the Company. However, since the Recapitalization occurred
prior to the close of the fiscal year ended June 28, 1997 ("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.
See the discussion below under "Liquidity and Capital Resources" for further
discussion relating to the impact that the Recapitalization had and may in the
future have on the Company.
The Company operates a chain of 114 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 each June. Same store sales is defined as net sales for
stores in operation in each of the current fiscal periods and the comparable
periods 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 recorded a charge of $32.8 million relating to stores to be
closed, replaced or sold. During the forty weeks ended April 4, 1998, the
Company closed or sold eight stores.
Presented below is a table showing the percentage of net sales represented by
certain items in the Company's consolidated condensed statements of operations
(dollars in thousands):
<TABLE>
40 WEEKS ENDED 40 WEEKS ENDED 12 WEEKS ENDED 12 WEEKS ENDED
APRIL 4, 1998 APRIL 5, 1997 APRIL 4, 1998 APRIL 5, 1997
-------------------- -------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 1,851,817 100.0% $ 1,804,586 100.0% $ 552,524 100.0% $ 545,540 100.0%
Cost of sales 1,345,145 72.6% 1,316,567 73.0% 399,500 72.3% 395,924 72.6%
----------- ----------- --------- ----------
Gross profit 506,672 27.4% 488,019 27.0% 153,024 27.7% 149,616 27.4%
Selling, general and administrative
expenses 412,698 22.3% 417,520 23.1% 124,760 22.6% 134,487 24.7%
Litigation and severance/benefits - - 12,500 0.7% - - 12,500 2.3%
EBITDA 93,974 5.1% 57,999 3.2% 28,264 5.1% 2,629 0.5%
Depreciation and amortization 37,969 2.1% 35,288 2.0% 11,660 2.1% 11,406 2.1%
Operating income (loss) 56,005 3.0% 22,711 1.3% 16,604 3.0% (8,777) (1.6)%
Interest expense, net 25,612 1.4% 28,325 1.6% 7,599 1.4% 8,474 1.6 %
Provision (benefit) for income taxes 13,942 0.8% (199) 0.0% 4,143 0.7% (6,078) (1.1)%
Net income (loss) $ 16,451 0.9% $ (5,415) (0.3)% $ 4,862 0.9% $ (11,173) (2.0)%
</TABLE>
FISCAL YEAR TO DATE 1998 COMPARED TO FISCAL YEAR TO DATE 1997
NET SALES - Net sales for the forty weeks ended April 4, 1998 ("Fiscal Year to
Date 1998") increased by $47.2 million (2.6%) compared to the forty weeks ended
April 5, 1997 ("Fiscal Year to Date 1997"). Such increase is partially
attributable to additional sales of $72.3 million generated from the opening of
one new store during Fiscal Year to Date 1998 and the operation during such
period of six stores (excluding four replacement stores) opened during the
fiscal year ended June 28, 1997 which were not
8
<PAGE>
in operation during the entire comparable period of the prior year. In
addition, the Company experienced an increase in same store sales of
approximately $43.0 million in Fiscal Year to Date 1998 as compared to Fiscal
Year to Date 1997. These increases were offset by a decline of approximately
$69.0 million resulting from the closure of nine stores (one temporarily)
during Fiscal Year to Date 1998 and five stores (excluding four replacement
stores) in Fiscal Year 1997 which were operating during Fiscal Year to Date
1997.
Net sales during the 12 weeks ended April 4, 1998 ("Third Quarter 1998")
increased by $7.0 million, (1.3%) as compared to the 12 weeks ended April 5,
1997 ("Third Quarter 1997"). Such increase is partially attributable to
additional sales of approximately $14.9 million generated from the opening of
one new store during Fiscal Year to Date 1998 and the operation during Third
Quarter 1998 of two stores (excluding four replacement stores) opened during
Fiscal Year 1997 which were not in operation during the entire comparable period
of the prior year. In addition, the Company experienced an increase in same
store sales of approximately $19.9 million during Third Quarter 1998 as compared
to Third Quarter 1997. Such increase was offset by a decline of $28.7 million
resulting from the closing of nine stores (one temporarily) during Fiscal Year
to Date 1998 and one store (excluding four replacement stores) in Fiscal Year
1997 which was operating during Third Quarter 1997.
The Company's trend in same store sales has improved. Same store sales
during Fiscal Year to Date 1998 increased approximately 2.5% compared to a
decrease of approximately 1.8% during the corresponding period of the prior
fiscal year. Same store sales during Third Quarter 1998 increased 3.9% compared
to an increase of approximately 0.1% during the corresponding quarter of the
prior year. Such improvement has resulted primarily from increased sales at
newly remodeled stores, the contribution of four replacement stores and the
success of other operational and marketing initiatives.
The Company cannot predict whether the improvement in the trend in same
store sales that has occurred in Fiscal Year to Date 1998 will continue in
future periods, and as a result, there can be no assurance that such trend will
continue or will not be reversed in future periods.
GROSS PROFIT - Gross profit for Fiscal Year to Date 1998 and Third Quarter 1998
increased by $18.7 million (3.8%) and $3.4 million (2.3%), respectively,
compared to the corresponding periods of the prior year. The dollar increase in
gross profit is primarily attributable to the increased sales volume during the
Fiscal Year 1998 periods. Gross profit as a percentage of net sales increased
to 27.4% for Fiscal Year to Date 1998 from 27.0% for Fiscal Year to Date 1997
and increased to 27.7% for Third Quarter 1998 from 27.4% for Third Quarter 1997.
Such increases are primarily due to more effective promotional efforts and
higher gross margins at new and replacement stores. Such higher gross margins
at new and replacement stores are due primarily to the more expansive specialty
departments and broader range of products and services offered by such stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses decreased $4.8 million (1.2%) during Fiscal Year to Date
1998 and decreased $9.7 million (7.2%) during Third Quarter 1998 compared to the
same periods of the prior year. Selling, general and administrative expenses as
a percentage of net sales decreased to 22.3% for Fiscal Year to Date 1998 from
23.1% for Fiscal Year to Date 1997 and decreased to 22.6% for Third Quarter 1998
from 24.7% for Third Quarter 1997. Such decreases as a percentage of net sales
are due primarily to the Company's expense management efforts and $6.7 million
pre-tax charges incurred in the prior year. Such pre-tax charges in the prior
year included accruals for sales taxes, payroll taxes, rent and other payables,
an inventory charge and costs associated with the implementation of the frequent
shopper program.
EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION EXPENSES)
AND OPERATING INCOME (LOSS) - EBITDA for Fiscal Year to Date 1998 and Third
Quarter 1998 increased by $36.0 million (62.0%)
9
<PAGE>
and $25.6 million (975.1%), respectively, compared to the same periods of the
prior year. EBITDA as a percentage of net sales increased to 5.1% for Fiscal
Year to Date 1998 from 3.2% for Fiscal Year to Date 1997 and increased to
5.1% for Third Fiscal Quarter 1998 from 0.5% for Third Fiscal Quarter 1997.
Operating income for Fiscal Year to Date 1998 and Third Quarter 1998
increased by $33.3 million (146.6%) and $25.3 million (289.2%), respectively,
compared to the corresponding periods of the prior year. Such increases are
primarily attributable to the increases in gross profit and decreases in
selling, general and administrative expenses, as described above, and
approximately $12.5 million of litigation and severance charges incurred in
the prior year.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense for Fiscal
Year to Date 1998 and Third Quarter 1998 increased by $2.7 million (7.6%) and
$0.3 million (2.2%) respectively. Such increases are primarily due to new store
openings and the remodeling of certain existing stores in Fiscal Year 1997 and
Fiscal Year to Date 1998.
INTEREST EXPENSE, NET - Net interest expense for Fiscal Year to Date 1998 and
Third Quarter 1998 declined by $2.7 million (9.6%) and $0.9 million (10.3%),
respectively, compared to the same periods of the prior year, due primarily to a
net reduction of debt.
PROVISION FOR INCOME TAXES - The provision for income taxes for Fiscal Year to
Date 1998 and Third Quarter 1998 was $13.9 million and $4.1 million,
respectively, compared to a benefit of $0.2 million and a benefit of $6.1
million, respectively, for the corresponding periods of the prior year. Such
increases are primarily due to the Company's increased pre-tax income.
NET INCOME (LOSS) - Net income for Fiscal Year to Date 1998 and Third Quarter
1998 increased $21.9 million (403.8%) and $16.0 million (143.5%), respectively,
compared to the corresponding periods of the prior year due primarily to the
combined impact of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES - The Company is a holding company, and as a
result, its operating cash flow and its ability to service its indebtedness,
including the Company's $150.0 million aggregate principal amount outstanding of
9-3/8% Series B Senior Subordinated Notes due 2007, are 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 $225.0 million revolving credit facility
("Revolver") available under the Company's current bank credit agreement and
proceeds from the sale and leaseback of real estate properties. As of April 4,
1998, the Company had approximately $224.0 million available (net of
approximately $1.0 million of outstanding letters of credit) to be borrowed
under the Revolver. 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 Revolver will
adequately provide for its working capital and debt service needs and will be
sufficient to fund the Company's expected capital expenditures.
During Fiscal Year to Date 1998 and Fiscal Year to Date 1997, operating
activities provided net cash of approximately $76.5 million and $46.4 million,
respectively. Financing activities utilized approximately $5.5 million during
Fiscal Year to Date 1998, primarily for the reduction of debt and capital lease
obligations. During Fiscal Year to Date 1997, financing activities utilized
approximately $12.4 million, primarily due to debt reduction.
10
<PAGE>
Net cash used in investing activities during Fiscal Year to Date 1998 were
$46.8 million, consisting primarily of capital expenditures of approximately
$71.0 million, which were partially offset by proceeds from the sale of assets
in the amount of approximately $22.9 million. Capital expenditures primarily
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 capitalized maintenance, as well as expenditures relating to
warehousing and distribution equipment 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 and leaseback transactions, the proceeds of
which were applied to reduce debt incurred to construct the stores. During
Fiscal Year to Date 1998 and Fiscal Year to Date 1997, capital expenditures were
approximately $71.0 million and $66.2 million, respectively. Proceeds from
asset sales were approximately $22.9 million during Fiscal Year to Date 1998
compared to $32.2 million during Fiscal Year to Date 1997.
During Fiscal Year to Date 1998, the Company has embarked upon a program to
accelerate its store development and remodeling and to optimize its distribution
system. This program is expected to result in a level of capital expenditures
significantly in excess of historical levels. During Fiscal Year to Date 1998,
the Company has completed construction on one new store, commenced construction
on ten new stores, and purchased land for two new stores. During the remainder
of the fiscal year ending June 27, 1998, the Company expects to make
approximately $27.0 million in additional expenditures to continue or complete
construction of the ten new stores referenced above, commence construction on
two additional new stores, and purchase land for two additional new stores.
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. The Company has also
completed the remodeling or renovation of twenty existing stores during Fiscal
Year to Date 1998 and expects to make approximately $14.0 million in additional
expenditures to complete or commence the remodeling of an additional fifteen
stores prior to fiscal year-end. During Third Quarter 1998, the Company also
commenced expansion of its distribution system. Such expansion is expected to
be completed during the fiscal year ending June 26, 1999 and is currently
expected to cost approximately $25.5 million. The Company currently expects to
incur approximately $5.0 million of such costs during the remainder of Fiscal
Year 1998. As of April 4, 1998, the Company had approximately $66.0 million in
commitments to make capital expenditures. The Company anticipates funding its
future capital expenditures with cash flow from operations, borrowings under the
Revolver and proceeds from lease financing.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement on Financial Accounting Standard ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME", which requires the reporting and display of comprehensive
income and its components in an entity's financial statements. SFAS No. 130 is
not expected to materially impact the Company's financial statements. In June
1997 the FASB also issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION", which specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information required to be disclosed. Management believes that the
implementation of SFAS No. 131 will not have a significant impact on the
Company's financial statements. The Company is required to adopt SFAS No. 130
and SFAS No. 131 in its fiscal year ending June 26, 1999.
11
<PAGE>
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 below, among
others, could cause actual results to differ materially from those contained in
forward-looking statements made in this report, including, without limitation,
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," in the Company's related press release and in oral statements made
by authorized officers of the Company. When used in this report, any press
release or oral statements, 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.
Accordingly, the Company hereby identifies the following important factors which
could cause the Company's financial results to differ materially from any such
results which might be projected, forecast, estimated or budgeted by the Company
in forward-looking statements: heightened competition, including specifically
the intensification of price competition and the expansion, renovation and
opening of new stores by competitors; failure to obtain new customers or retain
existing customers; inability to carry out strategies to accelerate new store
development and remodeling programs, reduce operating costs, differentiate
products and services, leverage frequent shopper program and increase private
label sales; insufficiency of financial resources to renovate and expand store
base; outcome of the MSP litigation; prolonged dispute with labor; economic
downturn in the State of Texas; loss or retirement of key executives; higher
selling, general and administrative expenses occasioned by the need for
additional advertising, marketing, administrative, or management information
systems expenditures; adverse publicity and news coverage.
The foregoing review of the factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to
this filing.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following the Company's acquisition of Cullum Companies, Inc. ("Cullum") in
August 1992, the Company terminated Cullum's Management Security Plan for Cullum
Companies, Inc. ("the MSP"). In respect of such termination, the Company paid
MSP participants the greater of (i) the amount of such participant's deferral or
(ii) the net present value of the participant's 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 persons). On May 7, 1997, the
plaintiffs filed an amended 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. A pre-trial order in the MSP litigation, which was submitted to
the court on October 22, 1997, states that an expert for the plaintiffs,
assuming class certification, may testify that the damages allegedly sustained
by the plaintiff class may range from approximately $18.0 million to $37.2
million and, assuming that a court were to award additional damages
12
<PAGE>
based on a rate of return achieved by an equity index over the relevant
period, such damages may range from approximately $37.4 million to $70.6
million. On December 30, 1997, the court issued an order denying the
plaintiffs' summary judgment motion on the plaintiffs' claim that the MSP was
not an exempt "top hat plan" (a plan which is unfunded and maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees). The order also
granted the Company's summary judgment motions on two of the plaintiffs'
ancillary claims, but did not address the plaintiffs' request for
certification as a class action. The judge scheduled a pre-trial conference
with the parties for January 22, 1998 which was subsequently rescheduled to
May 28, 1998. The Company currently expects the trial to commence in calendar
year 1998. Based upon current facts, the Company is unable to estimate any
meaningful range of possible loss that could result from an unfavorable
outcome of the MSP litigation. It is possible that the Company's results of
operations or cash flows in a particular quarterly or annual period or its
financial position could be materially affected by an ultimate unfavorable
outcome of the MSP litigation. However, the Company intends to vigorously
contest the MSP claim and, although there can be no assurance, management
currently does not anticipate an unfavorable outcome based on management's
independent analysis of the facts relating to such litigation.
On July 30, 1997, the Company initiated an arbitration proceeding against
Fleming Companies, Inc. ("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 $2.4
billion in products from Fleming. In the arbitration, the Company seeks
termination of the contract, that would otherwise remain in effect until June
30, 2001, and monetary damages for past overcharges. Fleming has filed an
answer denying each allegation and a counterclaim for $1.1 million alleging that
the Company failed to purchase the quantities required by the supply agreement
and refused to pay increased prices for products. An evidentiary hearing before
three arbitrators began on April 6, 1998, and concluded on April 29, 1998. The
current schedule provides that post-hearing briefing will conclude on May 27,
1998, and that the arbitrators will deliver a decision by early July 1998.
The Company is involved in other various claims and disputes arising in the
normal course of business. Management is not currently able to estimate the
range of possible loss, if any, that may result from such matters. However,
management believes that the Company has meritorious defenses and/or insurance
coverage against such matters and does not believe that the outcome of any such
proceedings will have a material effect on the Company's results of operations,
financial condition or cash flow.
13
<PAGE>
ITEM 2. CHANGES IN SECURITIES
During the forty and twelve week periods ended April 4, 1998, the Company
issued approximately 548,000 and 238,000 shares, respectively of the Company's
common stock, par value $0.25 per share ("Common Stock") to certain members of
the Company's management for aggregate consideration of approximately $6.6
million and $2.9 million, respectively. During such periods, the Company also
issued options to purchase approximately 1,240,000 and 282,000 shares of Common
Stock, respectively, to such members of its management. The exercise price of
such options granted was $12.11 per share. None of these securities were
registered under the Securities Act.
Such issuances of Common Stock and options to purchase Common Stock were made
pursuant to the 1997 Stock Purchase and Option Plan for Key Employees of
Randall's Food Markets, Inc. and Subsidiaries. In each of the above instances,
exemption from registration under the Securities Act was based upon the grounds
that the issuance of such securities did not involve a public offering within
the meaning of Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on November 11, 1997
at which time the following matters were brought before and voted upon by the
shareholders:
(a) To ratify and approve board resolutions related to adoption of the 1997
Stock Purchase and Option Plan for Key Employees of Randall's Food
Markets, Inc. and Subsidiaries and the issuance from time to time of
options to key employees pursuant to such plan.
<TABLE>
For Against Abstain
---------- ------- -------
<S> <C> <C>
28,214,015 - -
</TABLE>
(a) The re-election of the following to the Board of Directors to serve until
the 1998 Annual Meeting of Shareholders or until their respective
successors are duly elected or appointed and qualified:
<TABLE>
For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
Robert R. Onstead 28,214,015 - -
R. Randall Onstead, Jr. 28,214,015 - -
Henry R. Kravis 28,214,015 - -
George R. Roberts 28,214,015 - -
Paul E. Raether 28,214,015 - -
James H. Greene, Jr. 28,214,015 - -
Nils P. Brous 28,214,015 - -
A. Benton Cocanougher 28,214,015 - -
</TABLE>
14
<PAGE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit
Number Description of Document
10.1 Stockholder's Agreement, dated February 3, 1998, among RFM Acquisition
LLC, Randall's Food Markets, Inc., and A. Benton Cocanougher.
10.2 Non-qualified Stock Option Agreement, dated February 24, 1998, by and
between Randall's Food Markets, Inc. and A. Benton Cocanougher.
10.3 Non-qualified Stock Option Agreement, dated February 2, 1998, by and
between Randall's Food Markets, Inc. and Michael M. Calbert.
B. Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RANDALL'S FOOD MARKETS, INC.
(Registrant)
Date: May 19, 1998 /s/ R. RANDALL ONSTEAD JR.
---------------------------------------
R. Randall Onstead, Jr.,
President and Chief Executive Officer
Date: May 19, 1998 /s/ MICHAEL M. CALBERT
---------------------------------------
Michael M. Calbert,
Chief Financial Officer and Senior
Vice President
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONDENSED CONSOLIDATED BALANCE SHEET, CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW FOR
RANDALLS FOOD MARKETS, INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JAN-11-1998
<PERIOD-END> APR-04-1998
<CASH> 47,317
<SECURITIES> 0
<RECEIVABLES> 35,866
<ALLOWANCES> 0
<INVENTORY> 171,977
<CURRENT-ASSETS> 281,220
<PP&E> 330,224
<DEPRECIATION> 0
<TOTAL-ASSETS> 869,213
<CURRENT-LIABILITIES> 263,910
<BONDS> 338,496
0
0
<COMMON> 12,456
<OTHER-SE> 223,011
<TOTAL-LIABILITY-AND-EQUITY> 869,213
<SALES> 552,524
<TOTAL-REVENUES> 552,524
<CGS> 399,500
<TOTAL-COSTS> 136,420
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,599
<INCOME-PRETAX> 9,005
<INCOME-TAX> 4,143
<INCOME-CONTINUING> 4,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,862
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<PAGE>
STOCKHOLDER'S AGREEMENT
This Stockholder's Agreement (this "AGREEMENT") is entered into as of
February 3, 1998 among RFM Acquisition LLC, a Delaware limited liability company
("RFM"), RANDALL'S FOOD MARKETS, INC., a Texas corporation (the "COMPANY"), and
A. Benton Cocanougher ("SHAREHOLDER") (RFM, the Company and Shareholder being
hereinafter collectively referred to as the "PARTIES").
To implement the foregoing and in consideration of the mutual
agreements contained herein, the Parties agree as follows:
1. PURCHASE OF STOCK.
(a) Subject to the terms and conditions hereinafter set forth,
Shareholder hereby subscribes for and shall purchase, and the Company shall sell
to Shareholder, 4,129 shares of the Company's common stock, par value $.01 per
share (the "COMMON STOCK"), at a price of $12.11 per share (the "PER SHARE
PURCHASE PRICE", and such shares of Common Stock the "PURCHASE STOCK") on
February 3, 1998 (the "PURCHASE DATE"). The Company shall have no obligation to
sell any Purchase Stock to any person who 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.
(b) The aggregate price for the Purchase Stock shall be $50,002.19
(such amount hereinafter sometimes referred to as the "PURCHASE PRICE"). On the
Purchase Date, in consideration of receipt of the Purchase Price, the Company
will deliver to Shareholder a certificate, registered in Shareholder's name, for
the Purchase Stock, which shall be subject to the terms and conditions
hereinafter set forth.
2. SHAREHOLDER'S REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) Shareholder hereby represents and warrants that he is acquiring
the Purchase Stock (collectively, and, together with any other shares of Common
Stock beneficially owned by
<PAGE>
2
Shareholder 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. Shareholder 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 such offer, transfer, sale, assignment, pledge, hypothecation or other
disposition complies with this Agreement, including Section 3 hereof.
(b) The certificate (or certificates) representing the Stock shall
bear the following legend:
"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 STOCKHOLDER'S
AGREEMENT DATED AS OF February 3, 1998, BETWEEN RANDALL'S FOOD
MARKETS, INC. (THE "COMPANY") AND THE SHAREHOLDER 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
<PAGE>
3
COUNTRY."
(c) Shareholder acknowledges that he has been advised that (i) the
Stock has not been registered under the Securities Act of 1933, as amended (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 Shareholder is an Affiliate (as such term is defined in Rule 501(b)
of the Act), Shareholder also acknowledges that (1) the Stock must be held
indefinitely and Shareholder 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 and (2) it is not anticipated that
there will be any public market for the Stock.
(d) Shareholder 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), Shareholder 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.
(e) Shareholder represents and warrants that he has been given the
opportunity to obtain any 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, and he has relied solely on such
information.
(f) Shareholder 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
<PAGE>
4
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, and (v) his knowledge and experience in financial
and business matters are such that he is capable of evaluating the merits and
risks of his purchase of the Stock as contemplated by this Agreement.
3. TRANSFERS OF STOCK.
(a) RESTRICTIONS. From and after the Purchase Date, Shareholder
hereby agrees not to sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, assignment, pledge,
hypothecation, encumbrance or other disposition of, any of or any interest in
the Stock during the term of this Agreement, except for (i) a transfer made
pursuant to this Agreement, (ii) a transfer upon the death or permanent
disability of Shareholder to Shareholder's executors, administrators,
testamentary trustees, legatees or beneficiaries, (iii) a transfer by
Shareholder made in compliance with the federal securities laws to a trust or
custodianship the beneficiaries of which may include only Shareholder, his or
her spouse or lineal descendants; (iv) a bona fide pledge or pledges to a
financial institution of, in the aggregate, not more than 25% of the Stock, (v)
a transfer upon the death of Shareholder by Shareholder's executors,
administrators or testamentary trustees ("SHAREHOLDER'S REPRESENTATIVES") to pay
estate and similar taxes and costs; PROVIDED, that prior to any transfer
described in clause (v) above, the Shareholder's Representatives shall have
offered the Company the right of first refusal described in Section 3(c); and
PROVIDED, FURTHER, in no event shall any transfer under any clause of this
Section 3 be made to any Person who has a right to require the transferred
Shares to be repurchased by the Company, either immediately or upon the
happening of any contingency; and PROVIDED, FURTHER, that prior to any transfer
or pledge described in clause (ii), (iii), (iv) or (v) above, the applicable
transferee or pledgee shall have agreed in writing to be bound by the terms of
this Agreement as if such transferee were a "Shareholder" hereunder and shall
have acknowledged in writing that such transferee or pledgee is not a Person who
has any rights described in the immediately preceding proviso. No transfer of
any shares of Stock in violation hereof
<PAGE>
5
shall be made or recorded on the books of the Company and any such transfer
shall be void and of no effect.
(b) PERMANENT DISABILITY. For purposes of this Agreement,
Shareholder shall be deemed to have a "PERMANENT DISABILITY" if Shareholder is
unable to engage in the activities required by Shareholder's job by reason of
any medically determined physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a continuous
period of not less than 12 months.
(c) RIGHT OF FIRST REFUSAL. Prior to effecting any transaction
described in clause (v) of Section 3(a), the Shareholder's Representatives
shall cause any bona fide offer to purchase any or all of the shares of Stock
held by the Shareholder's Representatives (an "OFFER") received by the
Shareholder's Representatives and which the Shareholder's Representatives wish
to accept to be reduced to writing, and the Shareholder's Representatives shall
notify the Company in writing that the Shareholder's Representatives wish to
accept the Offer. The notice shall contain an irrevocable offer to sell such
shares of Stock to the Company or its designee (in the manner set forth below)
at a purchase price 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 third party who has made the Offer (the "OFFEROR")).
At any time within 30 days after the date of the receipt by the Company of such
notice, the Company shall have the right and option to purchase, or to arrange
for a third party to purchase, all of the shares of Stock covered by the Offer
either (i) at the same price and on the same terms and conditions as the Offer
or (ii) if the Offer includes any consideration other than cash, then at the
sole option of the Company, at the equivalent all cash price, determined in good
faith by a duly authorized compensation committee of the Board of Directors of
the Company, by delivering a certified or bank check in the appropriate amount
to the Shareholder's Representatives against delivery of certificates
representing the shares of Stock so purchased, appropriately endorsed by the
Shareholder's Representatives. If at the end of such 30 day period, the Company
or such third party has not tendered the purchase price for such shares of Stock
in the manner set forth above, the Shareholder's Representatives may during the
succeeding 30 day period sell not less than all of the shares of Stock covered
by the Offer to the Offeror at a price
<PAGE>
6
and on terms no less favorable to such Shareholder's Representatives than
those contained in the Offer. Promptly after such sale, such Shareholder's
Representatives 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 such shares of Stock, such Shareholder's
Representatives have not completed the sale of such shares of Stock as
aforesaid, all the restrictions on sale, transfer or assignment contained in
this Agreement shall again be in effect with respect to such shares of Stock.
(d) OTHER SALES TO THE COMPANY. Notwithstanding anything to the
contrary contained in Section 3(c) and notwithstanding the absence of an Offer,
the parties hereto acknowledge that any Shareholder's Representatives may
approach the Company at any time regarding the sale of shares of Stock held by
such Shareholder's Representatives to the Company or its designee, PROVIDED that
the Company shall have no obligation to purchase such shares of Stock.
4. "TAG-ALONG RIGHTS" AND "DRAG-ALONG" RIGHTS.
(a) "TAG-ALONG" RIGHT WITH RESPECT TO PRIVATE SALES BY KKR
HOLDERS. (i) PRIVATE SALES OF SHARES BY KKR HOLDERS. Subject to the last
sentence of Section 4(c), with respect to any proposed Private Sale (as
defined in Section 5) of any Buyer Shares (as defined in Section 5) by RFM or
any of its Affiliates who beneficially own shares of Common Stock
(collectively, the "KKR HOLDERS", and each a "KKR HOLDER") during the term of
this Agreement to a Person (a "PROPOSED PURCHASER"), other than pursuant to
an Exempt Transaction (as defined in Section 5), each Shareholder shall have
the right and option, but not the obligation, to participate in such sale, on
the same terms and subject to the same conditions as the sale by the KKR
Holder (as defined in Section 5), for the number of shares of Stock owned by
Shareholder equalling the number derived by multiplying the total number of
Buyer Shares (as defined in Section 5) which the KKR Holder proposes to sell
(the "PROPOSED NUMBER OF SHARES") by a fraction, the numerator of which is
the total number of shares of Stock held by Shareholder and the denominator
of which is the sum of (A) the total number of shares of Stock held by
Shareholder, (B) the total number of Buyer Shares, and (C) the total number
of
<PAGE>
7
shares of Common Stock (determined on a fully diluted basis) owned by other
Persons entitled to the benefits of "tag-along" rights (including under this
Agreement) arising as a result of such sale.
(ii) NOTICES. The KKR Holder shall notify, or cause to be
notified, Shareholder in writing of each proposed Private Sale that is
subject to Section 4(a)(i) above. Such notice shall set forth: (1) the
Proposed Number of Shares, (2) the name and address of the Proposed
Purchaser, (3) the proposed amount of consideration, the material terms and
conditions of such sale (and if the proposed consideration is not cash, the
notice shall describe the terms of the proposed consideration) and the
proposed closing date of such sale, (4) the total number of Buyer Shares and
the total number of shares of Common Stock (determined on a fully diluted
basis) owned by Persons entitled to the benefits of any other "tag-along"
rights arising as a result of such sale and (5) an indication that the
Proposed Purchaser has been informed of the "tag-along" right provided for in
this Section 4(a) and has agreed to purchase shares of Stock held by
Shareholder in accordance with the terms hereof. The "tag-along" right may
be exercised by Shareholder by delivery of a written notice from such
Shareholder to the KKR Holder (the "TAG-ALONG NOTICE") within 10 days
following receipt of the notice specified in the preceding sentence. The
Tag-Along Notice shall state the number of shares of Stock that Shareholder
proposes to include in such Private Sale to the Proposed Purchaser. If
Shareholder delivers a Tag-Along Notice to the KKR Holder, Shareholder shall
(1) prior to the closing of any such sale, execute and deliver (or cause to
be executed and delivered) any purchase agreement or other documentation
required by the Proposed Purchaser to consummate the sale (including all
legal opinions, cross-receipts and certificates), which purchase agreement
and other documentation shall be on terms no less favorable in respect of any
material term to Shareholder than those executed by the KKR Holder and (2) at
the closing of any such sale, deliver to the Proposed Purchaser the
certificate or certificates representing the shares of Stock to be sold
pursuant to such sale by Shareholder, duly endorsed for transfer with
signatures guaranteed, against receipt of the purchase price thereof.
(iii) NUMBER OF SHARES TO BE SOLD. If a Tag-Along Notice is received
pursuant to Section 4(a)(ii), Shareholder shall be permitted to sell to the
Proposed Purchaser up to the
<PAGE>
8
number of Shares determined as set forth in Section 4(a)(i) above (the
"PROPOSED SHARES"), and the KKR Holder shall be permitted to sell to the
Proposed Purchaser up to a number of shares of Common Stock (the "PROPOSED
BUYER SHARES") equal to the Proposed Number of Shares less the aggregate
number of Proposed Shares and all other shares of Common Stock being sold to
such Proposed Purchaser in such transaction pursuant to tag-along rights
arising as a result of such sale; PROVIDED, that the KKR Holder shall have
the right to sell a number of additional shares of Common Stock up to the
excess of the Proposed Number of Shares over the number of Proposed Buyer
Shares, if the Proposed Purchaser wishes to purchase such additional shares.
If no Tag-Along Notice is received by the KKR Holder pursuant to Section
4(a)(ii), such KKR Holder shall have the right for a 120-day period to sell
to the Proposed Purchaser up to the Proposed Number of Shares on terms and
conditions no more favorable in any material respect to the KKR Holder than
those stated in the Tag-Along Notice.
(b) "TAG-ALONG" RIGHT WITH RESPECT TO PUBLIC SALES BY KKR HOLDERS.
(i) PUBLIC SALES OF SHARES BY KKR HOLDERS. Subject to the last sentence of
Section 4(c), with respect to any proposed sale of any Buyer Shares by a KKR
Holder during the term of this Agreement in a Public Offering, Shareholder
shall have the right and option, but not the obligation, to participate in
such Public Offering on the same terms and subject to the same conditions as
the sale by the KKR Holder, for the number of Shares owned by Shareholder as
determined pursuant to Section 4(b)(iii) below.
(ii) NOTICES. The KKR Holder shall notify, or cause to be
notified, Shareholder in writing of each proposed Public Offering that is
subject to Section 4(b)(i) above (a "PROPOSED REGISTRATION"). Such notice
may be given before the filing of such registration statement and need not
specify any price or other terms or conditions of such sale. If within 5
days of the delivery of such notice to Shareholder, the KKR Holder receives
from Shareholder a written request (a "REQUEST"), which Request shall be
irrevocable, to register Shares held by Shareholder, shares of Stock shall be
so registered as and to the extent provided in this Section 4(b) if Buyer
Shares are so registered. If Shareholder delivers a Request to the KKR
Holder, Shareholder shall participate in such Public Offering, if any, at the
same price and on the same terms and conditions as the KKR Holder,
<PAGE>
9
which price and other terms and conditions shall be determined on behalf of
the KKR Holder and Shareholder by the KKR Holder in its sole discretion.
Nothing in this Agreement shall create any obligation on the part of the KKR
Holder to cause a registration statement to become effective under the
Securities Act or to consummate a Public Offering.
(iii) NUMBER OF SHARES TO BE SOLD. The maximum number of Shares
which shall be registered pursuant to a Request shall equal the number derived
by multiplying the total number of Shares held by Shareholder by a fraction, the
numerator of which is the total number of Buyer Shares which the KKR Holder
proposes to sell in the Public Offering and the denominator of which is the
total number of Buyer Shares; PROVIDED, that in the event that the aggregate
number of shares of Common Stock to be sold in any Public Offering is increased
or decreased (including any decrease resulting from the advice of the managing
underwriter in an underwritten offering that, in its opinion, the number of
Buyer Shares which the KKR Holder proposes to sell in the Public Offering plus
the aggregate number of shares of Common Stock subject to requests by all other
shareholders of the Company would be likely to have an adverse effect on the
price, timing or distribution of the shares of Common Stock offered in such
Public Offering), then the number of shares of Stock which Shareholder shall
sell in such Public Offering shall be increased or decreased by the product of
(i) the number of shares of Common Stock by which the total number of shares of
Common Stock in such Public Offering is increased or decreased and (ii) a
fraction, the numerator of which equals the number of shares of Stock subject to
the Request and the denominator of which is the total number of shares of Common
Stock originally to be so registered.
(iv) Upon delivery of a Request, Shareholder will, if requested by
the KKR Holder, execute and deliver to the KKR Holder a custody agreement and
power of attorney in form and substance reasonably satisfactory to the KKR
Holder with respect to the Shares to be registered pursuant to this Section
4(b) (a "CUSTODY AGREEMENT AND POWER OF ATTORNEY"). The custodian and
attorney-in-fact under the Custody Agreement and Power of Attorney shall be
the KKR Holder or its designee. The Custody Agreement and Power of Attorney
shall provide, among other things, that Shareholder shall deliver to and
deposit in custody with the custodian and attorney-in-fact named therein a
certificate or certificates representing such shares of Stock
<PAGE>
10
(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 Shareholder's agent and
attorney-in-fact with full power and authority to act under the Custody
Agreement and Power of Attorney on Shareholder's behalf with respect to the
matters specified therein (including executing an underwriting agreement and
cross-receipts).
(v) Shareholder agrees that, if Shareholder shall make a Request,
Shareholder shall execute and deliver or cause to be executed and delivered such
other agreements and other documents (such as legal opinions, cross-receipts and
certificates) as the KKR Holder itself is delivering or as the KKR Holder may
otherwise reasonably request to implement the provision of this Section 4(b).
(vi) Shareholder shall bear a proportionate amount of the expenses
(including filing fees, underwriting discounts and commissions and attorneys and
accountants fees) relating to such Public Offering (based on the relative number
of shares of Common Stock of Shareholder which are covered by the applicable
registration statement relative to the total number of shares covered by such
registration statement).
(vii) If a Proposed Registration involves an underwritten offering,
the investment banker(s), underwriter(s) and manager(s) for such Public Offering
shall be selected by the KKR Holder.
(c) "DRAG-ALONG" RIGHT WITH RESPECT TO THE SHARES OF STOCK.
(i) SALES BY KKR HOLDERS. In the event that the KKR Holder determines, during
the term of this Agreement, to transfer either (A) at least 35% of the shares of
Common Stock (including shares issuable upon exercise of a 25-year option held
by RFM (the "OPTION") in the event that the Option is to be transferred) then
outstanding on a fully diluted basis at the time of such transfer or (B) at
least 15% of the shares of Common Stock (including shares subject to the Option
in the event that the Option is to be transferred) then outstanding on a fully
diluted basis at the time of such transfer (provided that such percentage set
forth in this clause (B) equals 100% of the Buyer Shares at the time of such
transfer) to a Proposed Purchaser in a Private Sale, other
<PAGE>
11
than in an Exempt Transaction (a "DRAG-ALONG SALE"), then upon the request of
the KKR Holder, Shareholder shall transfer to such Proposed Purchaser, at the
same price and upon the same terms and conditions in respect of any material
term as such transfer by the KKR Holder, the percentage of shares of Common
Stock held by Shareholder that equals the percentage of shares of Common
Stock to be transferred by the KKR Holder (including shares subject to the
Option in the event that the Option is to be transferred) relative to the
number of Buyer Shares. In the event that both Sections 4(a) and 4(c) hereto
apply to a single transaction, the "drag-along" rights set forth in this
Section 4(c) shall have priority over the "tag-along" rights set forth in
Section 4(a) above, and the "tag-along" rights set forth in Section 4(a)
shall not become exercisable by Shareholder unless the KKR Holder shall have
determined not to exercise its rights under this Section 4(c).
(ii) NOTICE. Prior to making any Drag-Along Sale, the KKR Holder
shall, if it determines in its sole discretion that Shareholder should
participate in such transfer, provide Shareholder with written notice (the
"DRAG-ALONG NOTICE") not less than 5 Business Days prior to the proposed date of
the Drag-Along Sale (the "DRAG-ALONG SALE DATE"). The Drag-Along Notice shall
set forth: (A) the name and address of the Proposed Purchaser; (B) the proposed
amount and form of consideration to be paid per share of Common Stock and the
material terms and conditions of the transfer; (C) the Drag-Along Sale Date and
the date upon which Shareholder shall deliver to the KKR Holder the certificates
representing the shares of Common Stock held by such Shareholder, duly endorsed,
and the power of attorney referred to below; and (D) an indication that the
Proposed Purchaser has been informed of the Drag-Along Sale rights and has
agreed to acquire all of the shares of Common Stock held by Shareholder.
Shareholder shall (A) prior to the closing of any such transfer, execute any
purchase agreement or other documentation required by the Proposed Purchaser to
consummate the transfer, which purchase agreement and other documentation shall
be on terms no less favorable in respect of any material term to Shareholder
than those executed by the KKR Holder, and (B) at the closing of any such
transfer, deliver to the Proposed Purchaser the certificate or certificates
representing the shares of Common Stock held by Shareholder, duly endorsed for
transfer with signatures guaranteed, against receipt of the purchase price
thereof.
(iii) TRANSACTION AGREEMENTS. In the event that the
<PAGE>
12
KKR Holder owns at least 15% of the shares of Common Stock (including shares
subject to the Option) then outstanding on a fully diluted basis and has
signed an agreement, with respect to all such Buyer Shares, to vote in favor
of or tender in connection with a business combination transaction entered
into by the Company (a "TRANSACTION AGREEMENT"), then, upon the request of
the KKR Holder, Shareholder shall execute a Transaction Agreement with the
same terms and conditions in all material respects as the Transaction
Agreement signed by the KKR Holder. Prior to entering into a Transaction
Agreement, the KKR Holder shall, if it determines in its sole discretion that
Shareholder should execute a Transaction Agreement, provide Shareholder with
written notice (the "TRANSACTION AGREEMENT NOTICE") not less than 5 Business
Days prior to the proposed date of the execution of the Transaction Agreement
(the "TRANSACTION AGREEMENT DATE"). The Transaction Agreement Notice shall
set forth: (A) the name and address of the counter-parties to the
Transaction Agreement; (B) the proposed form of Transaction Agreement; and
(C) the material terms and conditions of the business combination with the
Company to which the Transaction Agreement relates. Shareholder shall, at the
signing and closing of such Transaction Agreement, execute and deliver all
other documentation required by such Transaction Agreement, which documents
shall be on terms no less favorable in respect of any material term to
Shareholder than those executed by the KKR Holder.
(iv) EFFECT OF DRAG-ALONG SALE. If Shareholder receives his
proportionate share of the purchase price from a Drag-Along Sale, but has failed
to deliver certificates representing his shares of Common Stock as described in
this Section 4(c), he shall for all purposes be deemed no longer to be a
shareholder of Common Stock, shall have no voting rights, shall not be entitled
to any dividends or other distributions with respect to the Common Stock held by
him, and shall have no other rights or privileges granted to shareholders under
law or this Agreement.
5. CERTAIN DEFINITIONS. For purposes of this Agreement, the term:
(a) "BUYER SHARES" shall mean the sum of the shares of Common Stock
beneficially owned by RFM and its Affiliates as of the date hereof.
<PAGE>
13
(b) "EXEMPT TRANSACTION" shall mean (i) sales by RFM to any Affiliate
of RFM, (ii) sales by any Affiliate of RFM to another Affiliate of RFM or to RFM
and (iii) transfers by RFM and its respective Affiliates to its partners or
members (and any subsequent sales by such partners or members) in the form of
dividends or distributions (whether upon liquidation or otherwise); PROVIDED,
that prior to any transfer described in clauses (i) and (ii) above, the
applicable transferee shall have agreed in writing to be bound by the terms of
this Agreement as if such transferee were "RFM" hereunder; and PROVIDED,
FURTHER, that prior to any transfer described in clause (iii) above, if the
transferee is an Affiliate of KKR, such transferee shall have agreed in writing
to be bound by the provisions of this Agreement as if such transferee were "RFM"
hereunder.
(c) "KKR" means Kohlberg Kravis Roberts & Co., L.P.
(d) "KKR HOLDER" shall mean Buyer and any Person to whom a KKR Holder
transfers shares of Common Stock which Person is required by this Agreement to
be bound by the provisions of this Agreement.
(e) "PRIVATE SALE" shall mean any sale of shares of Common Stock
other than a sale made in a Public Offering.
(f) "PUBLIC OFFERING" shall mean any sale of shares of Common Stock
made in a public distribution pursuant to an effective registration statement
under the Securities Act.
6. COVENANT REGARDING 83(b) ELECTION.
Except as the Company may otherwise agree in writing, Shareholder
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 Shareholder
further covenants and agrees that he will furnish the Company with copies of the
forms of election Shareholder files within 30 days after the date hereof, and
with evidence that each such election has been filed in a timely manner.
7. RECAPITALIZATIONS, ETC.
The provisions of this Agreement shall apply, to the
<PAGE>
14
full extent set forth herein with respect to the Stock, 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, by reason of any stock dividend, split, reverse
split, combination, recapitalization, liquidation, reclassification, merger,
consolidation or otherwise.
8. 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 to Shareholder.
9. 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 3 hereof, such transferee shall be deemed the Shareholder
hereunder; provided, however, that no transferee (including without limitation,
transferees referred to in Section 3 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.
10. AMENDMENT.
This Agreement may be amended only by a written instrument signed by
the Parties hereto.
11. CLOSING.
Except as otherwise provided herein, each closing of the purchase and
sale of shares of Stock pursuant to this Agreement shall take place at the
principal office of the Company in a manner and at a time determined by the
Company, in its sole discretion.
<PAGE>
15
12. 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 shareholder, 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 Shareholder 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 Shareholder, in such
other jurisdictions and in such manner, as may be permitted by applicable law.
Shareholder 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 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 Shareholder 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.
13. MISCELLANEOUS.
In this Agreement (i) all references to "dollars" or
<PAGE>
16
"$" 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.
14. 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:
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 Shareholder, 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>
17
15. COVENANT NOT TO COMPETE; CONFIDENTIAL INFORMATION.
(a) In consideration of the Company entering into this Agreement with
Shareholder, Shareholder hereby agrees effective as of the Purchase Date, until
the one-year anniversary of the date Shareholder shall cease to be a member of
the Board of Directors of the Company (the "NON-COMPETE PERIOD"), Shareholder
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, Shareholder hereby agrees that
during the Non-Compete Period, Shareholder 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.
(b) Except as required by law or judicial process, Shareholder will
not disclose or use at any time, any Confidential Information (as defined below)
of which Shareholder 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 Shareholder's performance of duties, if any, assigned
to Shareholder 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
<PAGE>
18
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, 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 Shareholder proposes to disclose or use such
information. Shareholder 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 Shareholder while employed by the Company or its
subsidiaries belong to the Company. Shareholder 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 Shareholder's services are unique and because Shareholder
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).
<PAGE>
19
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
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: /s/ J. H. Greene, Jr.
---------------------------
Member
RANDALL'S FOOD MARKETS, INC.
By /s/ Lee E.Straus
---------------------------
Name: Lee E. Straus
Title: Senior Vice President-
Finance, Secretary & Treasurer
/s/ A. Benton Cocanougher
---------------------------
A. Benton Cocanougher
4409 Nottingham
---------------------------
Bryan, TX 77802
---------------------------
Address of Shareholder
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of February 24, 1998 is made by and between
Randall's Food Markets, Inc., a Texas corporation (hereinafter referred to as
the "Company"), and A. Benton Cocanougher, a member of the Board of Directors 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.
<PAGE>
2
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.
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 - EMPLOYMENT
"employment", with respect to Optionee, shall refer to his serving as
a member of the Board of Directors of the Company.
SECTION 1.6 - GRANT DATE
"Grant Date" shall mean the date on which the Options provided for in
this Agreement were granted.
<PAGE>
3
SECTION 1.7 - 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 1.8 - 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
"Performance Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.1(b) 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.
<PAGE>
4
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 - STOCKHOLDER'S AGREEMENT
"Stockholder's Agreement" shall mean that certain Stockholder's
Agreement dated as of February 3, 1998 between the Optionee and the Company.
SECTION 1.18 - 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 1.19 - TIME OPTION
"Time Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.1(a) hereof.
SECTION 1.20 - TRIGGER DATE
"Trigger Date" shall mean June 29, 1997.
<PAGE>
5
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
equitable adjustment in the number and kind of shares or other
<PAGE>
6
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:
<TABLE>
<CAPTION>
Percentage of Time Option
Date Time Option Shares Granted As to Which
Becomes Exercisable Time Option Is Exercisable
- -------------------- --------------------------
<S> <C>
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%
</TABLE>
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
<PAGE>
7
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, 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.
(b) 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).
(c) For purposes of Section 3.1(b):
(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
<PAGE>
8
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.
(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.
(d) 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
<PAGE>
9
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.
(e) 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 the 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
(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 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 of an Optionee's termination of employment by the
Company for Cause; or
(e) 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,
<PAGE>
10
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 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
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
<PAGE>
11
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.
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
<PAGE>
12
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>
13
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 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
<PAGE>
14
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
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 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 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 Stockholder's Agreement, the terms of
the 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
<PAGE>
15
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 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>
16
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
RANDALL'S FOOD MARKETS, INC.
By /s/ R. Randall Onstead, Jr.
----------------------------
Its Chief Executive Officer
/s/ A. Benton Cocanougher Aggregate number of shares
- --------------------------- of Common Stock for which
Optionee the Time Option granted
hereunder is exercisable (50% of
total number of shares):
4,129
Aggregate number of shares
4409 Nottingham of Common Stock for which
- --------------------------- the Performance Option granted
hereunder is exercisable (50% of
Bryan, TX 77802 total number of shares):
- --------------------------- 4,129
Address
Optionee's Taxpayer
Identification Number:
- --------------------------
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Plan Year EBITDA Target
--------- -------------
<S> <C>
1998 $101.5 million
1999 $118.9 million
2000 $181.3 million
2001 $207.6 million
2002 $221.4 million
</TABLE>
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of February 2, 1998 is made by and
between Randall's Food Markets, Inc., a Texas corporation (hereinafter referred
to as the "Company"), and Michael M. Calbert, 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
<PAGE>
2
designated by the Board of Directors of the Company in which the Company or an
Affiliate has an interest.
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 February 2, 1998 between the
Optionee and the Company.
SECTION 1.8 - OFFICER
<PAGE>
3
"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
"Performance Option" shall mean an Option with respect to which
the commencement of exercisability is governed by Section 3.1(b) 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 - 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
<PAGE>
4
Directors of the Company) after having been employed by the Company or a
Subsidiary for at least 10 years.
SECTION 1.15 - SECRETARY
"Secretary" shall mean the Secretary of the Company.
SECTION 1.16 - 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 1.17 - TIME OPTION
"Time Option" shall mean an Option with respect to which the
commencement of exercisability is governed by Section 3.1(a) hereof.
SECTION 1.18 - TRIGGER DATE
"Trigger Date" shall mean the date hereof; provided that with
respect to Optionees who enter into this Agreement on February 2, 1998, 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.
<PAGE>
5
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 PURSUANT TO MERGER, CONSOLIDATION, ETC.
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 equitable
adjustment in the number and kind of shares and/or the amount of consideration
as to which or for which, as the case may be, 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
<PAGE>
6
(a) Time Options shall become exercisable as follows:
<TABLE>
<CAPTION>
Percentage of Time Option
Date Time Option Shares Granted As to Which
Becomes Exercisable Time Option Is Exercisable
- ------------------- --------------------------
<S> <C>
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%
</TABLE>
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, governmental authority or
other entity of whatever nature.
<PAGE>
7
"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.
(b) 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 Target, 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).
(c) For purposes of Section 3.1(b):
(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.
<PAGE>
8
(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.
(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.
(d) 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 Grant
Date) and any Option (other than 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.
<PAGE>
9
(e) 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 the
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
(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
<PAGE>
10
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 OPTIONS
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
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.:
<PAGE>
11
(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.
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
<PAGE>
12
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 and 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 than 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 STOCKHOLDERS
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.
<PAGE>
13
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. 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
judgement, 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.
<PAGE>
14
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
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.
<PAGE>
15
SECTION 5.8 - GOVERNING LAW
The laws of the State of Texas (or if the Company reincorporates
in another state, the laws 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 another state, 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 another state, 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 another state, in that
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>
16
IN WITNESS WHEREOF, this Agreement has been executed and delivered
by the parties hereto.
RANDALL'S FOOD MARKETS, INC.
By: /s/ R. Randall Onstead, Jr.
----------------------------
R. Randall Onstead, Jr.
President/C.E.O.
/s/ Michael M. Calbert Aggregate number of shares of
- ------------------------------ Common Stock for which the Time
Option granted hereunder is
Optionee exercisable (50% of total
number of shares): 8,258
Aggregate number of shares of
Michael M. Calbert Common Stock for which the
- ------------------------------ Performance Option granted
2103 Tradewinds Dr. hereunder is exercisable (50%
Missouri City, TX 77459 of total number of shares):
- ------------------------------ 8,257
Address
Optionee's Taxpayer
Identification Number:
###-##-####
- ------------------------------
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Plan Year EBITDA Target
--------- -------------
<S> <C>
1998 $101.5 million
1999 $118.9 million
2000 $181.3 million
2001 $207.6 million
2002 $221.4 million
</TABLE>
