<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-35457
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
RANDALL'S FOOD MARKETS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
TEXAS 5411 74-213-4840
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
3663 Briarpark
Houston, Texas 77042
(713)268-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
R. Randall Onstead
President and Chief Executive Officer
3663 Briarpark
Houston, Texas 77042
(713)268-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
ARTHUR D. ROBINSON, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
RANDALL'S FOOD MARKETS, INC.
[LOGO]
OFFER TO EXCHANGE UP TO $150,000,000 OF ITS
[LOGO]
9 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING
9 3/8% SENIOR SUBORDINATED NOTES DUE 2007
------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY 10,
1998, UNLESS EXTENDED.
------------------------------
Randall's Food Markets, Inc. (the "Company" or "Randall's"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange an aggregate of up to $150,000,000 principal amount of
9 3/8% Series B Senior Subordinated Notes due 2007 (the "Exchange Notes") of the
Company for an identical face amount of the issued and outstanding 9 3/8% Senior
Subordinated Notes due 2007 (the "Old Notes", and together with the Exchange
Notes, the "Notes") of the Company from the Holders thereof. As of the date of
this Prospectus, there is $150,000,000 aggregate principal amount of the Old
Notes outstanding. The terms of the Exchange Notes are identical in all material
respects to the Old Notes, except that the Exchange Notes have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), and
therefore will not bear legends restricting their transfer and will not contain
certain provisions providing for an increase in the interest rate on the Old
Notes under certain circumstances described in the Registration Rights
Agreement, which provisions will terminate as to all of the Notes upon the
consummation of the Exchange Offer.
Interest on the Exchange Notes will be payable semi-annually on January 1
and July 1 of each year, commencing on January 1, 1998. The Exchange Notes will
mature on July 1, 2007.
Except as described below, the Company may not redeem the Exchange Notes
prior to July 1, 2002. On or after such date, the Company may redeem the
Exchange Notes, in whole or in part, at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to July 1, 2000, the Company may, subject to
certain requirements, redeem up to 40% of the original aggregate principal
amount of the Exchange Notes with the net proceeds of one or more Equity
Offerings, at a price equal to 109.375% of the aggregate principal amount to be
redeemed, together with accrued and unpaid interest, if any, to the date of
redemption; provided that at least 60% of the original aggregate principal
amount of the Exchange Notes remains outstanding immediately after each such
redemption. The Exchange Notes will not be subject to any sinking fund
requirements. Upon the occurrence of a Change of Control or certain transfer
events, the Company will have the option, at any time prior to July 1, 2002, to
redeem the Exchange Notes, in whole but not in part, at a redemption price equal
to 100% of the principal amount thereof plus the Applicable Premium, together
with accrued and unpaid interest, if any, to the date of redemption. Upon the
occurrence of a Change of Control, if the Company does not so redeem such
Exchange Notes at a price of 100% of the principal amount thereof plus the
Applicable Premium in accordance with the immediately preceding sentence or if a
Change of Control occurs after July 1, 2002, the Company will be required to
make an offer to purchase the Exchange Notes at a price equal to 101% of the
original aggregate principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See "Description of the Exchange
Notes."
The Exchange Notes will be unsecured, will be subordinated in right of
payment to all existing and future Senior Indebtedness of the Company and will
be effectively subordinated to all obligations of the subsidiaries of the
Company. The Exchange Notes will rank PARI PASSU with any future senior
subordinated indebtedness of the Company and will rank senior to all other
Subordinated Indebtedness of the Company. The Indenture permits the Company to
incur additional indebtedness, including up to $450.0 million of Senior
Indebtedness under the Credit Facilities, subject to certain limitations. See
"Description of the Exchange Notes." As of October 18, 1997, the aggregate
amount of the Company's outstanding Senior Indebtedness was approximately $125.0
million (excluding unused commitments) and the Company would have had no senior
subordinated indebtedness outstanding other than the Old Notes. As of October
18, 1997, the Company's subsidiaries had total liabilities of $382.5 million,
excluding guarantees of $125.0 million of indebtedness under the Credit
Facilities. See "Selected Historical Consolidated Condensed Financial and Other
Data" and "Risk Factors--Adverse Consequences of Holding Company Structure" and
"--Subordination."
The Old Notes were issued and sold on June 27, 1997 in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act. The
Exchange Notes are being offered hereby in order to satisfy certain obligations
of the Company contained in the Registration Rights Agreement. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, PROVIDED that such Exchange Notes are acquired
in the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes and
neither such holder nor any such other person is engaging in or intends to
engage in a distribution of such Exchange Notes. However, the Company has not
sought, and does not intend to seek, its own no-action letter, and there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for such Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). A
broker-dealer may not participate in the Exchange Offer with respect to Old
Notes acquired other than as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 90 days after
the date of this Prospectus, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the Exchange Notes. The Company currently does
not intend to list the Exchange Notes on any securities exchange or to seek
approval for quotation of the Exchange Notes through any automated quotation
system. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the fourth business day
following the Expiration Date. Old Notes tendered pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date. The Company will not
receive any proceeds from the Exchange Offer. The Company will pay all of the
expenses incident to the Exchange Offer. The Exchange Offer will expire 5:00
p.m., New York City Time, on February 9, 1998 (the "Expiration Date"). The
Company does not currently intend to extend the Expiration Date.
------------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 13, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE EXCHANGE NOTES.
--------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 9, 1998
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. The Company is not currently subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon completion of the Exchange Offer, the Company will be subject to the
information requirements of the Exchange Act and, in accordance therewith, will
file periodic reports and other information with the Commission. The
Registration Statement, such reports and other information can be inspected and
copied at the Public Reference Section of the Commission located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at regional
public reference facilities maintained by the Commission located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material, including copies of all or any portion of the Registration Statement,
can be obtained from the Public Reference Section of the Commission at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet (http://www.sec.gov). In addition,
pursuant to the Indenture covering Old Notes and the Exchange Notes, the Company
has agreed to file with the Commission and provide to the Holders the annual
reports and the information, documents and other reports otherwise required
pursuant to Section 13 of the Exchange Act. Such requirements may be satisfied
through the filing and provision of such documents and reports which would
otherwise be required pursuant to Section 13 in respect of the Company.
UNTIL APRIL 9, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
press release and in oral statements made by authorized officers of the Company.
When used in this Prospectus, the words "estimate," "project," "anticipate,"
"expect," "intend," "believe" and similar expressions are intended to identify
forward-looking statements. All of these forward-looking statements are based on
estimates and assumptions made by management of the Company, which, although
believed to be reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed upon such estimates and statements. No assurance can be
given that any of such statements or estimates will be realized and actual
results will differ from those contemplated by such forward-looking statements.
The Prospectus includes certain economic and demographic data relating to
the historic performance of the United States and Texas economies based on
information from the U.S. Census Bureau. In addition, the Prospectus includes
the Company's beliefs regarding the projected performance of the United States
and Texas economies which are based on information from an independent economic
forecasting firm.
RANDALLS, TOM THUMB, REMARKABLE, THE NEW GENERATION STORE and RANDALLS
FLAGSHIP are registered trademarks of the Company.
i
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE
"COMPANY" SHALL MEAN RANDALL'S FOOD MARKETS, INC. AND ITS CONSOLIDATED
SUBSIDIARIES. ALL REFERENCES TO FISCAL YEAR IN THIS PROSPECTUS REFER TO THE
FISCAL YEAR ENDING ON THE LAST SATURDAY OF JUNE. ALL REFERENCES TO MARKET SHARE
AND DEMOGRAPHIC DATA IN THIS PROSPECTUS ARE BASED ON INDUSTRY AND GOVERNMENT
PUBLICATIONS AND COMPANY DATA, AND UNLESS OTHERWISE INDICATED, REFERENCES TO
YEARS DENOTE CALENDAR, RATHER THAN FISCAL, YEARS. THE COMPANY'S MOST RECENT
FISCAL QUARTER ENDED ON OCTOBER 18, 1997 AND ALL FINANCIAL AND STATISTICAL DATA
PRESENTED HEREIN RELATING TO THE COMPANY'S OPERATIONS, UNLESS OTHERWISE
INDICATED, IS CALCULATED AS OF OCTOBER 18, 1997. MARKET SHARE DATA PRESENTED
HEREIN IS BASED ON SALES REPORTED IN JULY 1997 WITH RESPECT TO HOUSTON, DALLAS
AND FORT WORTH AND JUNE 1997 WITH RESPECT TO AUSTIN. AN INDEX OF DEFINED TERMS
IS INCLUDED ON PAGE I-1 OF THIS PROSPECTUS.
THE COMPANY
GENERAL
The Company is the second largest supermarket operator in its principal
markets, with 117 stores located in Houston (52 stores), Dallas/Fort Worth (52
stores), and Austin (13 stores). With over 30 years of operations in Houston and
49 years of operations in Dallas/Fort Worth, the Company has developed a loyal
customer base and a portfolio of large, attractive stores in prime locations.
The Company offers customers an expanded selection of high quality products,
exceptional customer service and a variety of specialty departments. These
strengths, together with the Company's position as a Texas-based supermarket
operator, have enabled it to maintain a number two market share in Houston,
Dallas and Austin, the Company's principal markets. For the fiscal year ended
June 28, 1997 ("fiscal year 1997"), the Houston, Dallas, Fort Worth and Austin
markets represented approximately 47%, 35%, 7% and 11% of the Company's net
sales, respectively. For fiscal year 1997, the Company generated net sales of
approximately $2.34 billion and EBITDA of $29.8 million. For the sixteen weeks
ended October 18, 1997 ("first quarter 1998"), the Houston, Dallas, Fort Worth
and Austin markets represented approximately 46%, 36%, 8% and 10% of the
Company's net sales, respectively. For first quarter 1998, the Company generated
net sales of approximately $719.4 million and EBITDA of $33.2 million.
The Company operates combination food and drug stores which emphasize high
quality products, exceptional customer service and expanded selections of
quality meat, seafood, produce and other perishables. This format appeals to a
broad customer base by offering shoppers an extensive variety of products and
services, including large produce and perishables departments, in-store
bakeries, delicatessens, full-service meat and seafood departments, banks,
pharmacies, full-service floral departments, expanded cosmetic departments,
video rental departments and film processing counters. The Company operates 79
traditional combination food and drug stores under the RANDALLS banner in
Houston and Austin and the TOM THUMB banner in Dallas/Fort Worth averaging
approximately 50,200 square feet. For fiscal year 1997, these stores generated
sales of approximately $1.59 billion, or 68% of net sales, and average weekly
sales per store of approximately $356,000. For first quarter 1998, these stores
generated sales of approximately $461.4 million, or 64% of net sales, and
average weekly sales per store of approximately $345,000.
The Company's NEW GENERATION and FLAGSHIP STORES are each variations of the
Company's traditional combination food and drug stores, offering an even wider
selection of premium products and services:
NEW GENERATION STORES emphasize expanded perishable food departments and
open product preparation in order to create a farmer's market atmosphere and
highlight product freshness to customers. The Company's 21 New Generation
Stores operate under the RANDALLS banner in Houston and Austin and the TOM
THUMB banner in Dallas, and average approximately 68,400 square feet. For
fiscal year 1997, New Generation Stores generated sales of approximately
$450.0 million, or 19% of net sales, and average weekly sales per store of
approximately $493,000. For first quarter 1998, New Generation Stores
generated sales of approximately $161.3 million, or 23% of net sales, and
average weekly sales per store of approximately $483,000.
1
<PAGE>
FLAGSHIP STORES target customers seeking an expanded array of premium
services and a wider variety of top quality gourmet and specialty
selections. Flagship Stores feature additional "one-stop" shopping
conveniences and many higher margin specialty products and services,
including in-store gourmet coffee bars and eating areas, expanded bakery
departments staffed with French pastry chefs, a wide range of freshly
prepared foods (including made-to-order pizza, pastas and barbecued meats),
home delivery and catering. The Company operates seven Flagship Stores under
the RANDALLS FLAGSHIP banner in Houston averaging approximately 57,500
square feet and one store of approximately 34,500 square feet under the
SIMON DAVID banner in Dallas. For fiscal year 1997, Flagship Stores
generated sales of approximately $221.8 million, or 10% of net sales, and
average weekly sales per store of approximately $578,000. For first quarter
1998, Flagship Stores generated sales of approximately $72.4 million, or 10%
of net sales, and average weekly sales per store of approximately $565,000.
The Company also operates 9 conventional stores which offer a similar variety of
food products and specialty departments as its traditional combination food and
drug stores, but do not include pharmacies. Conventional stores average
approximately 20,600 square feet. For fiscal year 1997, conventional stores
generated sales of approximately $80.0 million, or 3% of net sales, and average
weekly sales per store of approximately $171,000. For first quarter 1998,
conventional stores generated sales of approximately $23.4 million, or 3% of net
sales, and average weekly sales per store of approximately $162,000.
COMPANY STRENGTHS
STRONG FRANCHISE AND DISTINCTIVE IMAGE. Over its history, the Company has
established a reputation for providing high quality products and exceptional
service to customers. The Company's stores are known for their broad selection
of high quality meat, seafood, produce and other perishables, which are
complemented by a variety of specialty departments to create a differentiated,
"one-stop" shopping experience. In a series of paid telephone surveys of Houston
and Dallas residents, the Company has consistently received the highest ratings
for specialty categories, such as fresh meat, produce, bakery and floral, and
service categories, such as customer assistance, quick checkout, cleanliness,
product variety and selection. In addition, the Company's long-standing practice
of reinvesting in the community by partnering with customers in charitable
giving programs, such as the "Good Neighbor" program, further enhances customer
loyalty and provides the Company with an additional competitive advantage.
ATTRACTIVE STORES IN PRIME LOCATIONS. The Company has developed a portfolio
of large, attractive stores in prime locations which provides flexibility in
store layout and merchandising. Since 1992, the Company has increased average
store size from approximately 46,400 square feet to approximately 51,500 square
feet by pursuing a strategy of store expansion in selected markets. The Company
attempts to optimize operating results by selecting the variation of its
combination food and drug store that is best suited to each store site's
demographics, local preferences and competition.
LEADING MARKET SHARES. The Company believes that its strong franchise and
distinctive image have enabled it to establish a number two market share in
Houston, Dallas and Austin, its principal markets. The Company's market shares
in Houston, Dallas and Austin are approximately 22%, 19% and 19%, respectively.
The Company's history as a local supermarket operator and the recent
introduction of its frequent shopper program have helped the Company to maintain
its strong market position despite aggressive store opening and remodeling
programs by competitors in recent years. Management believes that the Company's
competitive position will be strengthened by store remodels and new store
construction. In addition, management believes that its frequent shopper program
will continue to enhance its competitive position.
GROWING MARKETS. Over the past several years, Texas has been one of the
fastest growing states in terms of population, income and employment, and
economists project growth in excess of the national average to continue in the
near future. Since 1990, the Houston, Dallas, Fort Worth and Austin markets have
experienced compound annual employment growth of 1.9%, 2.6%, 2.2% and 5.5%,
respectively, all exceeding the national average of 1.5%. In 1996, grocery sales
in Texas increased 5.2% versus 3.3% for the
2
<PAGE>
country as a whole. The Houston, Dallas/Fort Worth and Austin markets accounted
for total grocery sales of approximately $14.8 billion, or 48.9% of total
grocery sales in Texas.
EXPERIENCED MANAGEMENT TEAM. The Company's executive officers have spent
the majority of their careers in the supermarket business and have an average of
15 years of experience in the food retailing industry. In addition, the Company
believes opportunities exist to enhance the existing management team with
additional experienced industry executives. Management's expertise and in-depth
knowledge of the Company's markets are further complemented by the financial
expertise of Kohlberg Kravis Roberts & Co., L.P. ("KKR").
CUSTOMER SERVICE-ORIENTED WORKFORCE. The Company emphasizes friendly,
efficient and knowledgeable customer service. All employees are trained to
actively address the needs of customers. These employees reinforce the Company's
distinctive service-oriented image and differentiate it from its competitors.
The Company is dedicated to promoting from within its organization and believes
that it possesses considerable management depth among its workforce, with store
directors having an average of over 15 years of experience with the Company.
BUSINESS STRATEGY
ACCELERATE NEW STORE DEVELOPMENT AND REMODELING PROGRAM. The Company
believes that it will be able to capitalize on the continued growth in its
markets by accelerating its new store development and remodeling program. In
recent years, the Company has not had the financial resources to aggressively
remodel its existing store base or construct new stores. Since the beginning of
fiscal year 1995, the Company has opened only 16 stores and remodeled 10 stores
(while closing 22 stores), compared to management's estimate that its
competitors have opened approximately 115 stores and remodeled approximately 100
stores in the Company's markets over the same period. The Recapitalization and
the Financings will provide the Company with increased financial flexibility,
enabling it to undertake significant remodeling in the Houston area, new store
construction and remodeling in Dallas/Fort Worth and selected store expansion in
the Austin market. For the fiscal year ended June 27, 1998 ("fiscal year 1998"),
the Company expects to make approximately $70.0 million of capital expenditures
to open five new stores, commence construction on seven new stores and purchase
land for five new stores, and make approximately $55.0 million of capital
expenditures to renovate or remodel 35 stores. As of the date of this
Prospectus, the Company has no estimate of the size of its capital expenditure
budget for fiscal years subsequent to fiscal year 1998 as such budgets are
established on an annual basis by the Board of Directors of the Company.
REDUCE OPERATING COSTS. The Company has identified a number of initiatives
designed to improve operating results by lowering operating costs. Specific
initiatives include: (i) applying the Company's successful labor scheduling
guidelines throughout all operational areas; (ii) implementing performance
measurement standards to further improve operating efficiency; (iii) enhancing
category management to improve store-level merchandising efforts and to increase
promotional buying opportunities; (iv) improving shelf pricing procedures to
decrease the frequency of price changes and inaccurate labeling; and (v)
introducing production planning in the perishables departments. The breadth of
these initiatives reflects the significant opportunities available to the
Company.
DIFFERENTIATE BASED ON HIGH QUALITY PRODUCTS AND SERVICES AT A COMPETITIVE
PRICE. Throughout its history, the Company has developed a reputation for
operating large, attractive stores with an extensive variety of specialty
departments staffed by well-trained, service-oriented employees. The Company
offers an expanded selection of high quality products at competitive prices to
create a differentiated "one-stop" shopping experience. In addition, the Company
is committed to being the "first to market" in providing solutions to its
customers' changing lifestyle needs, as is evidenced by the recent launches of
its frequent shopper program and the PEAPOD on-line grocery ordering and home
delivery program.
LEVERAGE FREQUENT SHOPPER PROGRAM. The Company believes that significant
opportunities exist to increase revenue and focus its marketing efforts by
leveraging its frequent shopper program. Data
3
<PAGE>
collected from customers participating in the frequent shopper program enables
the Company to track sales trends, demographic patterns and customer
preferences, and utilize that data to allocate shelf space, target marketing
activities and increase customer loyalty.
INCREASE PRIVATE LABEL SALES. Relative to national brands, private label
products provide comparable quality at lower prices to shoppers and higher gross
margins to the Company. The Company currently offers a three-tiered private
label program, including PRESIDENT'S CHOICE premium private label products, its
own REMARKABLE private label products and VALUE TIME private label products
catering to value-conscious consumers. In recent years, the Company's private
label sales have been lower than the national average. The Company is currently
expanding its private label offerings across all tiers, with particular emphasis
on increasing REMARKABLE label offerings.
THE RECAPITALIZATION AND THE FINANCINGS
RFM Acquisition LLC ("RFM Acquisition"), a Delaware limited liability
company organized at the direction of KKR, the Company and Robert R. Onstead
entered into a Subscription Agreement dated as of April 1, 1997 pursuant to
which RFM Acquisition acquired control of approximately 63% of the Company's
common stock, par value $.25 per share (the "Common Stock"). The consummation of
the transactions contemplated by the Subscription Agreement are collectively
referred to as the "Recapitalization." Pursuant to the Subscription Agreement,
RFM Acquisition paid a total of $225.0 million to the Company (the "Equity
Investment"), including $210.0 million as consideration for the Company's
issuance to RFM Acquisition of 18,579,686 shares of Common Stock and $15.0
million as consideration for a 25-year option to purchase 3,606,881 shares of
Common Stock at $12.11 per share, subject to adjustments (the "RFM Option"). The
Company applied the proceeds from the Equity Investment, together with
approximately $278.0 million of aggregate proceeds from certain financings
described below (collectively, the "Financings"), on June 27, 1997 (the
"Closing") to (i) redeem 5,585,186 shares of Common Stock at $16.00 per share
pursuant to a tender offer (the "Tender Offer") for aggregate consideration of
$89.4 million, (ii) redeem, collectively, 8,250 shares of the Company's Class A
Preferred Stock, par value $10.00 per share (the "Class A Preferred Stock"), and
278,201 shares of the Company's 8% convertible preferred stock (the "Convertible
Preferred Stock") for an aggregate redemption price of $28.7 million, including
accrued dividends of $0.1 million (the "Preferred Stock Redemption"), (iii)
repay or redeem Old Indebtedness (as defined) of approximately $336.0 million,
including accrued interest of $1.0 million (the "Debt Prepayment"), (iv) pay an
estimated make-whole premium (including accrued interest of $0.9 million) of
approximately $14.9 million (the "Make-Whole Premium") as required by the terms
of the optional redemption provisions of the Company's Senior Notes and (v) pay
an estimated $33.8 million in expenses and transaction fees. As of October 18,
1997, RFM Acquisition owned approximately 62% of the issued and outstanding
Common Stock. In the fourth quarter of fiscal year 1997, the Company recorded a
charge of $4.5 million to reflect (i) $0.9 million of severance to Ron W.
Barclay, (ii) $0.9 million of severance to Bob L. Gowens, (iii) $0.9 million of
lifetime medical, life insurance, retirement payments and office facilities for
Robert R. Onstead, (iv) $0.3 million primarily to reflect the transfer of the
cash value of split dollar life insurance policies in certain events to R.
Randall Onstead, (v) $0.2 million of severance to Thomas K. Arledge, (vi) $0.1
million of severance to Cindy Garbs, (vii) $0.2 million of severance to Harold
Gaubert, (viii) $0.4 million of severance to Terry P. Poyner, and (ix) $0.6
million of severance to approximately 75 non-executive employees.
The Financings included (i) an aggregate of approximately $128.0 million of
bank borrowings by the Company, including $125.0 million of borrowings under a
senior secured term loan facility (the "Term Loan Facility") and $3.0 million of
borrowings under a $225.0 million senior secured revolving credit facility (the
"Revolving Credit Facility", and together with the Term Loan Facility, the
"Credit Facilities"), (ii) $150.0 million aggregate principal amount of Old
Notes (generating gross proceeds of $149.8 million) and (iii) the Equity
Investment. The Revolving Credit Facility will provide for the Company's working
capital requirements and the implementation of the Company's strategy to expand
and enhance its store base.
4
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is offering to exchange pursuant to the
Exchange Offer up to $150,000,000 aggregate principal
amount of its Exchange Notes for a like aggregate
principal amount of its Old Notes. The terms of the
Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity)
to the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except that
the Exchange Notes are freely transferrable by Holders
thereof (other than as provided herein), and are not
subject to any covenant regarding registration under the
Securities Act. See "The Exchange Offer."
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered
for exchange.
Expiration Date; Withdrawal of
Tender.......................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on February 9, 1998, unless the Exchange
Offer is extended, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended. The Company does not
currently intend to extend the Expiration Date. Tenders
may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal Rights."
Exchange Date..................... The date of acceptance for exchange of the Old Notes
will be the fourth business day following the Expiration
Date.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
See "The Exchange Offer--Certain Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any such
condition.
Procedures for Tendering
Old Notes....................... Each Holder wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile,
together with the Old Notes and any other required
documentation to the Exchange Agent at the address set
forth therein. See "The Exchange Offer--Procedures for
Tendering Old Notes" and "Plan of Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Federal Income Tax Consequences... The exchange of Notes pursuant to the Exchange Offer
will not be a taxable event for federal income tax
purposes. See "Certain U.S. Federal Income Tax
Consequences."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes according to
the guaranteed delivery procedures set forth in "The
Exchange Offer--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes...... The Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Acceptance
of Old Notes for Exchange; Delivery of Exchange Notes."
Effect on Holders of Old Notes.... As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Notes pursuant to
the terms of this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration
Rights Agreement (the "Registration Rights Agreement")
dated as of June 27, 1997 among the Company and BT
Securities Corporation, Chase Securities Inc., Goldman,
Sachs & Co., and Paine Webber Incorporated. (the
"Initial Purchasers") and, accordingly, there will be no
increase in the interest rate on the Old Notes pursuant
to the terms of the Registration Rights Agreement, and
the holders of the Old Notes will have no further
registration or other rights under the Registration
Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be entitled to
all the rights and limitations applicable thereto under
the Indenture dated as of June 27, 1997 between the
Company and Marine Midland Bank relating to the Old
Notes and the Exchange Notes (the "Indenture"), except
for any such rights under the Registration Rights
Agreement that by their terms terminate or cease to have
further effectiveness as a result of the making of, and
the acceptance for
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
exchange of all validly tendered Old Notes pursuant to,
the Exchange Offer. All untendered Old Notes will
continue to be subject to the restrictions on transfer
provided for in the Old Notes and in the Indenture. To
the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered
Old Notes could be adversely affected.
Consequence of Failure to
Exchange........................ Holders of Old Notes who do not exchange their Old Notes
for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer
of such Old Notes as set forth in the legend thereon. In
general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Old Notes under the
Securities Act.
Exchange Agent.................... Marine Midland Bank is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
See "The Exchange Offer--Exchange Agent."
</TABLE>
TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
Securities Offered................ $150,000,000 principal amount of 9 3/8% Series B Senior
Subordinated Notes due 2007.
Maturity Date..................... July 1, 2007.
Interest Payment Dates............ Interest on the Exchange Notes will be payable in cash
semi-annually in arrears on each January 1 and July 1,
commencing January 1, 1998.
Optional Redemption............... On or after July 1, 2002, the Exchange Notes will be
redeemable, in whole or in part, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to July 1, 2000, the
Company may redeem up to $60 million of the aggregate
principal amount of the Exchange Notes with the net
proceeds of one or more Equity Offerings, at a
redemption price equal to 109.375% of the aggregate
principal amount to be redeemed, together with accrued
and unpaid interest, if any, to the date of redemption;
PROVIDED that at least $90 million of the aggregate
principal amount of the Exchange Notes remains
outstanding immediately after each such redemption. See
"Description of the Exchange Notes--Optional
Redemption."
Change of Control and Certain
Transfer Events................. Upon the occurrence of a Change of Control or certain
transfer events, the Company will have the option, at
any time prior to July 1, 2002, to redeem the Exchange
Notes, in whole but not in part, at a redemption price
equal to 100% of the aggregate principal amount thereof
plus the Applicable Premium, together with accrued and
unpaid interest, if any, to the date of redemption. Upon
the occurrence of a Change of Control, if the Company
does not so redeem the Exchange Notes at a price of
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
100% of the principal amount thereof plus the Applicable
Premium in accordance with the immediately preceding
sentence or if a Change of Control occurs after July 1,
2002, the Company will be required to make an offer to
purchase the Exchange Notes at a price equal to 101% of
the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase. See
"Description of the Exchange Notes--Repurchase at the
Option of Holders-- Change of Control."
Ranking........................... The Exchange Notes will be unsecured, will be
subordinated in right of payment to all existing and
future Senior Indebtedness of the Company and will be
effectively subordinated to all obligations of the
subsidiaries of the Company. The Exchange Notes will
rank PARI PASSU with any future senior subordinated
indebtedness of the Company and will rank senior to all
other Subordinated Indebtedness of the Company. The
Indenture permits the Company to incur additional
indebtedness, including up to $450.0 million of Senior
Indebtedness under the Credit Facilities, subject to
certain limitations. As of October 18, 1997, the
aggregate amount of the Company's outstanding Senior
Indebtedness was approximately $125.0 million (excluding
unused commitments), the Company had no senior
subordinated indebtedness outstanding other than the Old
Notes, and the Company's subsidiaries had total
liabilities of $382.5 million, excluding guarantees of
$125.0 million of indebtedness under the Credit
Facilities. See "Selected Historical Consolidated
Condensed Financial and Other Data" and "Risk
Factors--Adverse Consequences of Holding Company
Structure and "--Subordination."
Limitations on Repurchase......... Under the Credit Facilities, unless the consent of the
lenders thereunder is obtained, the Company is
prohibited from repurchasing Exchange Notes in a Change
of Control Offer or Asset Sale Offer, except with the
proceeds of one or more equity offerings of subordinated
indebtedness, a portion of excess cash flow and other
amounts not applied to repay borrowings under the Term
Loan Facility less certain investments in acquisition
subsidiaries and minority investments. The Credit
Facilities also provide that events that would
constitute a change of control under the Credit
Facilities (which is defined under the Credit Facilities
to include all events that result in a Change of Control
under the Indenture) would constitute a default
thereunder. Any default under the Credit Facilities
would result in an Event of Default under the Indenture
if the lenders under the Credit Facilities accelerated
their loans. In the event a Change of Control Offer or
Asset Sale Offer is required at a time when the Company
is prohibited from purchasing the Exchange Notes, the
Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to
refinance the borrowings that contain such prohibition
(which, at the Closing, consisted solely of the Credit
Facilities). If the
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from
repurchasing the Exchange Notes. In such case, the
Company's failure to purchase tendered Exchange Notes
would constitute an Event of Default under the
Indenture, which would result in an event of default
under the Credit Facilities. In such circumstances, the
subordination provisions in the Indenture would restrict
payments to the holders of the Exchange Notes. There can
be no assurance that the Company will have the financial
resources to repurchase the Notes in a Change of Control
Offer or Asset Sale Offer or retire its obligations
under the Credit Facilities in the event of a Change of
Control. The provisions in the Indenture relating to a
Change of Control may be modified by Holders of at least
a majority in principal amount of the Notes and such
possible amendments include the deletion of the Holders'
right to require the Company to repurchase Notes upon a
Change of Control. See "Description of the Exchange
Notes--Events of Defaults and Remedies."
Certain Covenants................. The Indenture contains covenants that will, subject to
certain exceptions, limit, among other things, the
ability of the Company and/or its Restricted
Subsidiaries to (i) pay dividends or make certain other
restricted payments or investments; (ii) incur
additional indebtedness and issue disqualified stock and
preferred stock; (iii) create liens on assets; (iv)
merge, consolidate, or sell all or substantially all of
their assets; (v) enter into certain transactions with
affiliates; (vi) create restrictions on dividends or
other payments by Restricted Subsidiaries to the
Company; (vii) create guarantees of indebtedness by
Restricted Subsidiaries; and (viii) incur other senior
subordinated indebtedness. One of the exceptions to the
Indenture's limitation on making investments is the
right to make Investments in Unrestricted Subsidiaries
with the proceeds of capital contributions and the sale
of Capital Stock so designated by senior management of
the Company, so long as such funds are not included in
the calculation of funds generally available for
restricted payments. As a consequence of this provision,
the Company can raise monies from the sale of equity
and, regardless of results of operations, invest such
monies in Persons that are, for purposes of the
Indenture, excluded from the ratios and computations
that determine the ability of the Company to incur
indebtedness or make restricted payments. In addition,
the covenant relating to transactions with affiliates
permits transactions by the Company with customers,
clients, suppliers or purchasers or sellers of goods or
services which are entered into in the ordinary course
of business and are deemed fair by senior management.
The effect of this exception is to permit transactions
on reasonable terms entered into in the ordinary course
of business with affiliates of the Company, which may
include other entities owned or controlled by KKR. See
"Description of the Exchange Notes."
Supplemental Indentures Without
Consent of Holders.............. The Company, Restricted Subsidiaries and the Trustee,
without
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
the consent of any Holder, may enter into a supplemental
indenture for the purpose of (i) effecting the
assumption by a Person formed by or surviving a merger
with the Company of the obligations of the Company under
the Indenture and (ii) confirming the Guarantee (as
defined) by a Restricted Subsidiary, if any such
Guarantee is in existence, in the event of a merger
described in clause (i).
Absence of Market................. The Exchange Notes are new securities for which there is
currently no established market. Accordingly, there can
be no assurance as to the development or liquidity of
any market for the Exchange Notes. The Company does not
intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation of the
Exchange Notes on any automated quotation system.
No Personal Liability of
Directors, Officers, Employees
and
Stockholders.................... No director, officer, employee, incorporator or
stockholder of the Company or any Guarantor shall have
any liability for any obligations of the Company or the
Guarantors under the Exchange Notes, the Guarantees or
the Indenture or any claim based on, in respect of, or
by reason of such obligation, or their creation. Such
waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
10
<PAGE>
SUMMARY CONSOLIDATED CONDENSED HISTORICAL FINANCIAL DATA
The following table sets forth certain summary consolidated condensed
historical financial data of the Company. The historical consolidated financial
data of the Company for the fiscal years ended June 24, 1995 ("fiscal year
1995"), June 29, 1996 ("fiscal year 1996") and fiscal year 1997 have been
derived from, and should be read in conjunction with, the audited consolidated
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus. The historical unaudited consolidated financial
data for the 16 weeks ended October 18, 1997 and October 19, 1996 have been
derived from, and should be read in conjunction with, the unaudited consolidated
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included in the unaudited
consolidated financial statements of the Company. Interim results for the 16
weeks ended October 18, 1997 are not necessarily indicative of results that can
be expected for the fiscal year ending June 27, 1998. See "Pro Forma
Consolidated Condensed Financial Statement," "Selected Historical Consolidated
Condensed Financial and Other Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
16 WEEKS ENDED
------------------------
OCTOBER 18, OCTOBER 19,
(DOLLARS IN THOUSANDS) 1997 1996
----------- ----------- FISCAL YEAR ENDED
-------------------------------------
JUNE 28, JUNE 29, JUNE 24,
1997 1996 1995
----------- ----------- -----------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................... $ 719,377 $ 683,705 $ 2,344,983 $ 2,368,645 $ 2,328,247
Gross profit................................ 197,140 182,781 634,638 630,658 599,549
Store operating, selling and administrative
expenses.................................. 163,979 154,908 558,065 507,894 501,634
Interest expense, net (1)................... 10,522 11,162 36,828 38,981 43,411
Litigation charge (2)....................... -- -- 9,500 1,000 --
Severance/benefits charge (3)............... -- -- 4,512 -- --
Estimated store closing costs............... -- -- 32,790(4) 1,215 --
Loss on extinguishment of debt (5).......... -- -- (9,798)
Net income (loss)........................... 3,742 1,209 (50,515) 19,438 37
Ratio of earnings to fixed
charges (6)............................... 1.48x 1.22x -- 1.67x 1.13x
OTHER DATA:
EBITDA (7)(8)............................... $ 33,161 $ 27,873 $ 29,771 $ 120,549 $ 97,915
Depreciation and amortization............... 15,117 13,314 48,875 45,814 47,447
Capital expenditures (9).................... 22,025 37,085 73,864 66,131 59,850
Stores open at end of period (10)........... 117 118 121 120 120
BALANCE SHEET DATA (END OF PERIOD):
Working capital............................. $ 25,534 $ 13,762 $ 11,429 $ 29,895 $ 30,186
Total assets................................ 879,057 848,669 862,374 823,265 816,790
Total debt and capital lease obligations.... 356,765 446,821 362,148 437,982 463,944
Redeemable Common Stock..................... 4,337 25,801 5,002 31,045 18,749
Stockholders' equity........................ 217,475 142,521 213,361 136,650 134,753
CASH FLOW DATA:
Cash flows from operating activities........ $ 32,579 $ 20,703 $ 18,392 $ 63,846 $ 53,508
Cash flows from investing activities........ (8,714) (28,100) (48,468) (33,782) (108)
Cash flows from financing activities........ (4,452) 8,239 21,505 (31,229) (54,331)
</TABLE>
See Notes to Summary Consolidated Condensed Historical Financial Data
11
<PAGE>
NOTES TO SUMMARY CONSOLIDATED CONDENSED HISTORICAL FINANCIAL DATA
(1) Represents interest expense net of interest income.
(2) Represents a charge recorded in connection with the settlement of litigation
relating to the ESOP. See "Business--Litigation."
(3) Represents a charge recorded in connection with the recent or anticipated
departure of certain executives and other employees of the Company, as well
as certain charges relating to benefits granted under certain employment
agreements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(4) Represents a charge recorded in connection with the Company's decision to
close, replace or sell approximately 20 stores, two of which had been closed
at the end of fiscal year 1997.
(5) Reflects an extraordinary loss of $9.8 million resulting from the early
extinguishment of debt, net of tax, refinanced in the Recapitalization.
(6) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges (net of
capitalized interest). Fixed charges consist of net interest expense on all
indebtedness and capitalized interest, amortization of deferred financing
costs, and one-third of rental expense on operating leases representing that
portion of rental expense deemed by the Company to be attributable to
interest. For fiscal year 1997, the deficiency in earnings to cover fixed
charges was $55.9 million.
(7) "EBITDA" represents earnings before net interest expense, income taxes and
depreciation and amortization. EBITDA is not intended to represent cash
flows from operations as defined by generally accepted accounting principles
("GAAP") and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA is included in this Prospectus as it is a basis
upon which the Company assesses its financial performance and certain
covenants in the Company's borrowing arrangements are tied to similar
measures.
(8) Included in EBITDA for the 52 weeks ended June 28, 1997 are $63.4 million of
charges to record an inventory charge, year-end closed store accrual (see
footnote 4), the settlement of the ESOP litigation (see footnote 2), costs
associated with implementation of the Company's frequent shopper program, a
severance accrual (see footnote 3), compensation expense related to the
issuance of shares of restricted Common Stock to certain employees and
accruals for transaction costs related to the Recapitalization and the
Financings, sales taxes, payroll taxes, legal expenses, rent and other
payables. See "Management's Discussion and Analysis of Operations and
Financial Condition."
(9) Capital expenditures include purchases of real estate, buildings and
equipment. Certain items included in capital expenditures are subsequently
financed through sale leaseback transactions. In first quarter 1998 and
fiscal years 1997, 1996 and 1995, proceeds from asset sales (a substantial
portion of which were sale leasebacks of certain real estate properties)
were $12.2 million, $55.4 million, $30.3 million and $59.3 million,
respectively.
(10) The following table sets forth additional information concerning changes in
the Company's store base:
<TABLE>
<CAPTION>
16 WEEKS ENDED FISCAL YEAR ENDED
-------------------------------- -------------------------------------
OCTOBER 18, OCTOBER 19, JUNE 28, JUNE 29, JUNE 24,
1997 1996 1997 1996 1995
--------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Beginning of period.............................. 121 120 120 120 121
Newly constructed.............................. 1 2 8 4 3
Acquired....................................... 0 1 2 -- --
Closed......................................... (5) (5) (9) (4) (4)
--- --- --- --- ---
End of period.................................... 117(a) 118 121 120 120
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
- ------------------------
(a) Includes 14 stores that, as of October 18, 1997, the Company has decided to
close, replace or sell.
12
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE DECIDING
TO TENDER OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE
GENERALLY APPLICABLE TO THE OLD NOTES AS WELL AS THE EXCHANGE NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
Old Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Company does not currently intend to register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Old Notes were acquired in the
ordinary course of such Holders' business and such Holders have no arrangement
with any person to participate in the distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes will be adversely affected.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company continued to be significantly leveraged after the
Recapitalization and the Financings. See "The Recapitalization" and
"Capitalization." As of October 18, 1997, the Company had $356.8 million of
consolidated indebtedness, $217.5 million of consolidated common stockholders'
equity and $224.0 million available to be borrowed under the Revolving Credit
Facility (reduced by $1.0 million to reflect outstanding letters of credit).
After giving pro forma effect to the Recapitalization and the Financings as if
they had occurred at the beginning of fiscal year 1997, the Company's pro forma
earnings would have been insufficient to cover fixed charges by $53.8 million
for fiscal year 1997. Pro forma income (loss) before extraordinary item for
fiscal year 1997 would have been $(39.4) million as compared to $(40.7) million
for the same period on a historical basis, and pro forma interest expense for
fiscal year 1997 would have been $34.7 million as compared to $36.8 million for
the same period on a historical basis. For first quarter 1998, the ratio of
earnings to fixed charges was 1.48x. Income (loss) before extraordinary item for
first quarter 1998 was $7.5 milion as compared to $3.4 million for the first
quarter of fiscal year 1997, and interest expense for first quarter 1998 was
$10.5 million as compared to $11.2 million for the first quarter of fiscal year
1997. See "Capitalization" and "Pro Forma Consolidated Condensed Financial
Statement." The Company and its subsidiaries may incur additional indebtedness
in the future, subject to certain limitations contained in the instruments
governing its indebtedness. Accordingly, the Company will have significant debt
service obligations.
The Company's debt service obligations will have important consequences to
Holders, including the following: (i) a substantial portion of the Company's
cash flow from operations will be dedicated to the payment of principal and
interest on its indebtedness, thereby reducing the funds available to the
Company for operations, future business opportunities and other purposes and
increasing the Company's vulnerability to adverse general economic and industry
conditions; (ii) the Company's ability to obtain additional financing in the
future may be limited; (iii) certain of the Company's borrowings (including, but
not limited to, the amounts borrowed under the Credit Facilities) will be at
variable rates of interest, which would
13
<PAGE>
make the Company vulnerable to increases in interest rates; and (iv) all of the
indebtedness incurred in connection with the Credit Facilities will become due
prior to the time the principal payment on the Exchange Notes will become due.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Exchange Notes)
and to make scheduled payments under its operating leases depends on its future
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. Based upon the current level
of operations and anticipated growth, management believes that future cash flow
from operations, together with available borrowings under the Revolving Credit
Facility, will be adequate to meet the Company's anticipated requirements for
working capital, capital expenditures, interest payments and scheduled principal
payments for the foreseeable future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." There can be no assurance, however, that the Company's business will
continue to generate sufficient cash flow from operations in the future to
service its debt and make necessary capital expenditures. If unable to do so,
the Company may be required to refinance all or a portion of its existing debt,
including the Exchange Notes, to sell assets or to obtain additional financing.
There can be no assurance that any such refinancing or that any such sale of
assets or additional financing would be possible on terms reasonably favorable
to the Company.
RESTRICTIVE LOAN COVENANTS
The Credit Facilities and the Indenture contain numerous financial and
operating covenants that will limit the discretion of the Company's management
with respect to certain business matters. These covenants will place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments, and to sell or otherwise dispose of assets and merge
or consolidate with other entities. In addition, the Credit Facilities provide
that the Company must meet or exceed a ratio of a measure similar to EBITDA to
interest expense and must not exceed a ratio of total debt to a measure similar
to EBITDA. The Credit Facilities also impose limits on lease expense and capital
expenditures. A failure to comply with the obligations contained in the Credit
Facilities or the Indenture could result in an event of default under either the
Credit Facilities or the Indenture which could result in acceleration of the
related debt and the acceleration of debt under other instruments evidencing
indebtedness that may contain cross-acceleration or cross-default provisions.
If, as a result thereof, a default occurs with respect to Senior Indebtedness,
the subordination provisions in the Indenture would likely restrict payments to
the Holders. See "Description of Credit Facilities" and "Description of the
Exchange Notes--Certain Covenants."
ADVERSE CONSEQUENCES OF HOLDING COMPANY STRUCTURE
The Company is a holding company which conducts substantially all of its
operations through its subsidiaries. Consequently, the Exchange Notes are
effectively subordinated to the obligations of the Company's subsidiaries,
including the guarantee by its subsidiaries of obligations under the Credit
Facilities. In the event of an insolvency, liquidation or other reorganization
of any of the subsidiaries of the Company, the creditors of the Company
(including the Holders), as well as stockholders of the Company, will have no
right to proceed against the assets of such subsidiaries or to cause the
liquidation or bankruptcy of such subsidiaries under Federal bankruptcy laws.
Creditors of such subsidiaries, including lenders under the Credit Facilities,
would be entitled to payment in full from such assets before the Company would
be entitled to receive any distribution therefrom. Except to the extent that the
Company may itself be a creditor with recognized claims against such
subsidiaries, claims of creditors of such subsidiaries will have priority with
respect to the assets and earnings of such subsidiaries over the claims of
creditors of the Company, including claims under the Exchange Notes. In
addition, as a result of the Company being a holding company, the Company's
operating cash flow and its ability to service its indebtedness, including the
Exchange Notes, is dependent upon the operating cash flow of its subsidiaries
14
<PAGE>
and the payment of funds by such subsidiaries to the Company in the form of
loans, dividends or otherwise. As of October 18, 1997, the subsidiaries of the
Company had total liabilities of $382.5 million, excluding guarantees of $125.0
million of indebtedness under the Credit Facilities.
SUBORDINATION
The Company's obligations under the Exchange Notes will be subordinate and
junior in right of payment to all existing and future Senior Indebtedness of the
Company. As of October 18, 1997, the aggregate amount of the Company's
outstanding Senior Indebtedness was approximately $125.0 million (excluding
unused commitments). Additional Senior Indebtedness may be incurred by the
Company from time to time, subject to certain restrictions. By reason of such
subordination, in the event of an insolvency, liquidation, or other
reorganization of the Company, the lenders under the Credit Facilities and other
creditors who are holders of Senior Indebtedness must be paid in full before the
Holders may be paid; accordingly, there may be insufficient assets remaining
after payment of prior claims to pay amounts due on the Exchange Notes. In
addition, under certain circumstances, no payments may be made with respect to
the Exchange Notes if a default exists with respect to Senior Indebtedness.
ENCUMBRANCES ON ASSETS TO SECURE CREDIT FACILITIES
In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the Exchange Notes will not be secured by any of
the Company's assets. The Company's obligations under the Credit Facilities will
be secured by a first priority pledge of and security interest in (i) all the
common stock of existing and subsequently acquired direct domestic subsidiaries
of the Company (which at Closing consisted of Randall's Food & Drugs, Inc. and
Randall's Properties Inc.) other than common stock of unrestricted subsidiaries
and subsidiaries created or acquired in connection with permitted acquisitions,
(ii) 65% of the common stock of each subsequently acquired direct foreign
subsidiary and (iii) evidence of indebtedness in excess of $5.0 million received
by the Company in connection with asset sales other than sales in the ordinary
course of business or in connection with permitted sale-leasebacks. If the
Company becomes insolvent or is liquidated, or if payment under any of the
Credit Facilities is accelerated, the lenders under the Credit Facilities will
be entitled to exercise the remedies available to a secured lender under
applicable law. See "Description of Credit Facilities" and "Description of the
Exchange Notes."
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control, the
Company will (unless the Company elects to redeem the Exchange Notes in the
event of a Change of Control prior to July 1, 2002 at a price of 100% of the
principal amount thereof plus the Applicable Premium) make an offer to purchase
all or any part of the Exchange Notes at a price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
the date of purchase. The Credit Facilities will prohibit the Company from
repurchasing any Exchange Notes, except with certain proceeds of one or more
Equity Offerings and offerings of Subordinated Indebtedness, a portion of excess
cash flow and other amounts not applied to repay borrowings under the Term Loan
Facility less certain investments in acquisition subsidiaries and minority
investments. The Credit Facilities will also provide that certain change of
control events with respect to the Company, which is defined under the Credit
Facilities to include all events that result in a Change of Control under the
Indenture, would constitute a default thereunder. Any default under the Credit
Facilities would result in an Event of Default under the Indenture if the
lenders under the Credit Facilities accelerated their loans. In the event of a
default under the Credit Facilities, the subordination provisions under the
Indenture would likely restrict payments to the Holders. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing the Exchange Notes, or if the Company is required to make an Asset
Sale Offer pursuant to the terms of the Exchange Notes, the
15
<PAGE>
Company could seek the consent of its lenders to purchase the Exchange Notes or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or refinance such borrowings, the Company
would remain prohibited from purchasing the Exchange Notes. In such case, the
Company's failure to purchase tendered Exchange Notes would constitute an Event
of Default under the Indenture, which would result in an event of default under
the Credit Facilities. If, as a result thereof, a default occurs with respect to
any Senior Indebtedness (including obligations under the Credit Facilities), the
subordination provisions in the Indenture would likely restrict payments to the
Holders. The provisions relating to a Change of Control included in the
Indenture may increase the difficulty of a potential acquiror obtaining control
of the Company. There can be no assurance that the Company will have the
financial resources to repurchase the Notes in the event of a Change of Control
Offer or retire its obligations under the Credit Facilities in the event of a
Change of Control. See "Description of the Exchange Notes--Repurchase at the
Option of Holders--Change of Control."
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse club
stores, deep discount drug stores and supercenters. Supermarket chains generally
compete on the basis of location, quality of products, service, price, product
variety and store condition. The Company regularly monitors its competitors'
prices and adjusts its prices and marketing strategy as management deems
appropriate in light of existing conditions. The Company faces increased
competitive pressure in all of its markets from existing competitors which have
opened, and which the Company expects to continue to open, a significant number
of new stores in the Company's markets. During fiscal years 1995, 1996 and 1997,
the Company estimates that its competitors have opened an aggregate of
approximately 115 stores and remodeled an aggregate of approximately 100 stores
in its markets. Some of the Company's competitors have greater financial
resources than the Company and could use these resources to take measures which
could adversely affect the Company's competitive position. The Company's ability
to remain competitive in its markets will depend in part on its ability to
remodel and update stores in response to remodelings and new store openings by
its competitors. See "Business--Competition."
DIFFICULTY IN ACHIEVING POST-RECAPITALIZATION STRATEGY
The post-Recapitalization business strategy that has been developed by the
Company is based on the Company's review of its operations and its competitive
position. See "Prospectus Summary--Business Strategy" and "Business--Business
Strategy." The Company may decide to alter or discontinue certain aspects of the
business strategy described herein and may adopt alternative or additional
strategies. In addition, there can be no assurance that any such strategies, if
implemented, will be successful or will improve operating results. Moreover,
there can be no assurance that the successful implementation of such a strategy
will result in improved operating results. Further, other conditions may exist,
such as increased competition, or an economic downturn in the Company's markets,
which may offset any improved operating results that are attributable to such a
strategy.
Generally, new stores opened by the Company operate at a loss for varying
periods of time, depending on such factors as prevailing competition and the
Company's market position in the surrounding community. Pursuing a strategy of
growth and expansion in light of the current highly competitive industry
conditions could lead to a near-term decline in earnings as a result of opening
and operating a substantial number of new stores, particularly with respect to
stores in markets where the Company does not have an established presence.
16
<PAGE>
MSP LITIGATION
Following the Cullum Acquisition, the Company terminated Cullum's Management
Security Plan for Cullum Companies, Inc. (the "MSP") and in respect of such
terminations paid participants the greater of (i) the amount of such
participant's deferral and (ii) the net present value of an accrued benefit,
based upon the participant's current salary, age and years of service.
Thirty-five of the former MSP participants have instituted a claim against the
Company on behalf of all persons who were participants in the MSP on its date of
termination (which is alleged by plaintiffs to be approximately 250 persons).
The plaintiffs have asked the court to recognize their action as a class action,
to recover additional amounts under the MSP, for a declaration of rights under
an employee pension benefit plan and for breach of fiduciary duty. The
plaintiffs assert that the yearly plan agreement executed by each participant in
the MSP was a contract for a specified retirement and death benefit set forth in
such plan agreements and that such benefits were vested and nonforfeitable. 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 has scheduled a pre-trial
conference with the parties for January 22, 1998. The trial is expected 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 does not anticipate an unfavorable outcome based on management's
independent analysis of the facts relating to such litigation.
GEOGRAPHIC CONCENTRATION
Substantially all of the Company's stores are located in the Houston,
Dallas/Fort Worth and Austin metropolitan areas in Texas which have experienced
economic and demographic growth over the past several years. Although the Texas
economy has diversified in recent years, it remains dependent to some extent on
energy-related industries and a significant economic downturn in any or all of
these areas, or in the energy-related industry generally, could have a material
adverse effect on the Company.
DEPENDENCE ON KEY MANAGEMENT
The Company's success depends largely upon the abilities and experience of
certain key management personnel. The loss of the services of one or more of
such key personnel, and in particular R. Randall Onstead, the Company's
President and Chief Executive Officer, could have a material adverse effect on
the Company. The Company does not maintain key-man life insurance policies on
any of its executives. See "Management" and "Principal Shareholders."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of
17
<PAGE>
hazardous materials. The Company believes that it currently conducts its
operations, and in the past has operated its business, in substantial compliance
with applicable environmental laws and regulations. From time to time,
operations of the Company have resulted or may result in noncompliance with or
liability for cleanup pursuant to environmental laws and regulations. The
Company has determined, based on site evaluations, that underground storage
tanks at truck fueling sites in Texas and Nebraska may have leaked fuel or other
materials and resulted in soil contamination. At the Abilene, Texas site, based
on soil and groundwater remediation efforts to date, the Company estimates a
range of future expenditures between $300,000 and $700,000, substantially all of
which has been reserved. With respect to a second site, located in Dallas,
Texas, the Company has paid remediation costs of approximately $300,000, and
state regulatory authorities have advised the Company that no further corrective
action is necessary. The Company expects to submit its final closure report to
the state shortly, which will be the last submission associated with that
location. One other site, located in Garland, Texas, was sold to a party who
accepted responsibility for corrective action pertaining to leaking underground
storage tank site remediation. Under applicable environmental laws, the Company
may remain liable for remediation at the Garland site, which the Company
estimates may cost up to approximately $100,000. Remediation of the Nebraska
site had been initiated by the Nebraska Department of Environmental Quality
("NDEQ") using funds from a state fund (the "Nebraska Fund") dedicated to
remediation of leaking underground storage tanks. Due to shortfalls in the
Nebraska Fund, the NDEQ, which has not classified the Company's site as a high
priority, suspended the remediation efforts. The Company anticipates that future
remediation efforts at such site, if any, would be paid for by the Nebraska
Fund. The Company believes that the remediation efforts described above, which
represent the Company's material environmental matters, will not have a material
adverse effect on its results of operations, financial condition and cash flow.
See "Business--Environmental Matters."
The Company has not incurred material capital expenditures for environmental
controls during the previous three years, nor does the Company anticipate
incurring any such material expenditures to comply with environmental
regulations during the current fiscal or the succeeding fiscal year.
CONTROL BY KKR AFFILIATES
RFM Acquisition holds approximately 62% of the issued and outstanding shares
of Common Stock. RFM Acquisition is a Delaware limited liability company whose
sole member is KKR 1996 Fund L.P. KKR 1996 Fund L.P. is a Delaware limited
partnership whose sole general partner is KKR Associates 1996 L.P. KKR
Associates 1996 L.P. is a Delaware limited partnership whose sole general
partner is KKR 1996 GP L.L.C. KKR 1996 GP L.L.C. is a Delaware limited liability
company whose members are also the members of the limited liability company
which is the general partner of KKR. Accordingly, affiliates of KKR control the
Company and have the power to elect all of its directors, appoint new management
and approve any action requiring the approval of the Company's shareholders,
including adopting amendments to the Company's Articles of Incorporation and
approving mergers or sales of substantially all of the Company's assets. There
can be no assurance that the interests of KKR and its affiliates will not
conflict with the interests of the Holders. See "Management," "Principal
Shareholders" and "Certain Relationships and Related Transactions."
LACK OF PRIOR MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in June 1997 to a small number of institutional
investors and are eligible for trading in the PORTAL Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the Exchange
Notes and there can be no assurance as to the liquidity of markets that may
develop for the Exchange Notes, the ability of the holders of the Exchange Notes
to sell their Exchange Notes or the price at which such holders would be able to
sell their Exchange
18
<PAGE>
Notes. If such markets were to exist, the Exchange Notes could trade at prices
that may be lower than the initial market values thereof depending on many
factors, including prevailing interest rates and the markets for similar
securities. Although there is currently no market for the Exchange Notes, the
Initial Purchasers have advised the Company that they currently intend to make a
market in the Exchange Notes. However, the Initial Purchasers are not obligated
to do so, and any market making with respect to the Exchange Notes may be
discontinued at any time without notice.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
19
<PAGE>
THE RECAPITALIZATION
THE SUBSCRIPTION AGREEMENT
RFM Acquisition, the Company and Robert R. Onstead entered into the Subscription
Agreement as of April 1, 1997 pursuant to which RFM Acquisition acquired control
of the Company. Pursuant to the Subscription Agreement, RFM Acquisition paid a
total of $225.0 million to the Company, including $210.0 million as
consideration for the Company's issuance to RFM Acquisition of 18,579,686 shares
of Common Stock and $15.0 million as consideration for the RFM Option.
At a special meeting of the Company's shareholders held on June 9, 1997 (the
"Special Meeting"), the shareholders approved a single proposal (the
"Shareholder Proposal") to (i) amend the Company's existing Articles of
Incorporation to increase the number of authorized shares of Common Stock from
25,000,000 shares to 75,000,000 (the "Charter Amendment"), (ii) approve the
Subscription Agreement and (iii) approve the Shareholders Agreement pursuant to
which certain shareholders of the Company agreed to vote approximately 75% of
the Common Stock in favor of the Shareholder Proposal.
Pursuant to the Subscription Agreement, Robert R. Onstead and the Company
have agreed to indemnify RFM Acquisition for damages relating to breaches of the
representations, warranties, covenants and agreements contained in the
Subscription Agreement. The Company will be required to indemnify RFM
Acquisition for damages from breaches in an amount up to $10.0 million through
the issuance of additional shares of Common Stock to RFM Acquisition, subject to
a deductible of $2.5 million (except that such deductible will not apply to
breaches of representations and warranties relating to the Company's Employee
Stock Ownership Plan (the "ESOP") or to liabilities for taxes or breaches of
agreements or covenants of the Company). Robert R. Onstead is obligated to
indemnify RFM Acquisition for the next $3.0 million in indemnification
obligations through the payment of cash (i) to RFM Acquisition in the case of a
breach of the representation or warranty relating to the capital structure of
the Company and (ii) otherwise to the Company. The number of additional shares
that may be issued pursuant to the indemnification obligations of the Company is
based on the fair market value of a share of Common Stock as of the date of
issuance of such shares. Pursuant to separate agreements, the Company has agreed
to indemnify RFM Acquisition in the event the Company incurs any liability from
a claim filed against the Company by participants in the MSP. See "Risk
Factors--MSP Litigation" and "Business--Litigation-- MSP Litigation."
In connection with the consummation of the Recapitalization, the Company
paid to KKR a fee of $8.0 million for negotiating the Recapitalization and
arranging the financing therefor. The Company is also required to reimburse KKR
for all of its expenses contemplated by the Subscription Agreement.
THE TENDER OFFER
Pursuant to the Subscription Agreement, the Company purchased 5,585,186
shares of Common Stock at $16.00 per share in connection with the Tender Offer.
These shares were allocated among three tender offer pools: (i) 1,104,336 shares
held by the ESOP (the "ESOP Shares"), (ii) 200,435 shares of the 613,457 shares
which are subject to repurchase obligations of the Company pursuant to
pre-existing contractual arrangements with certain shareholders (such 613,457
shares being referred to as the "Putable Shares") and (iii) 4,280,415 shares
(other than Putable Shares) held by holders of Common Stock other than the ESOP
("Non-ESOP Shares"). The number of shares subject to each tender offer pool
represented approximately 33% of the ESOP Shares and the Non-ESOP Shares, and
35% of the Putable Shares, calculated as of April 1, 1997.
THE SHAREHOLDERS AGREEMENT
RFM Acquisition and certain of the Company's shareholders, including RKO
Management Ltd., Robert R. Onstead, Onstead Foundation, Onstead Charitable
Remainder Unitrust, Onstead Family Trust
20
<PAGE>
for R. Randall Onstead, Jr., Onstead Family Trust for Ann Onstead Hill, Onstead
Family Trust for Mary Onstead, Onstead Family Trust for Charlie Onstead, R.
Randall Onstead, Jr., Mary Onstead, Charles Martin Onstead, R.C. Barclay Family
Trust, Randall C. Barclay Estate, Bobby L. Gowens, Tom Arledge, Lee Straus,
Terry Poyner, Mark Prestidge and Joe Rollins, entered into a voting, repurchase
and shareholders agreement dated as of April 1, 1997 (the "Shareholders
Agreement").
The shareholders party to the Shareholders Agreement will have the right to
participate pro rata in certain sales of Common Stock by RFM Acquisition or its
affiliates (the "RFM Tag Along") and RFM Acquisition or its affiliates will have
the right to require such shareholders to participate pro rata in certain sales
by RFM Acquisition or its affiliates (the "RFM Drag Along").
21
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer. The Company used the proceeds from the Equity Investment,
together with approximately $278.0 million of aggregate proceeds from the
issuance of the Old Notes and borrowings under the Credit Facilities to (i)
consummate the Tender Offer for $89.4 million, (ii) apply $28.7 million to the
Preferred Stock Redemption, (iii) apply $336.0 million to the Debt Prepayment,
(iv) pay the Make-Whole Premium (including accrued interest) of approximately
$14.9 million and (v) pay an estimated $33.8 million in expenses and transaction
fees. The Company, concurrently with the Closing, made an $11.3 payment in
connection with the settlement of litigation relating to its ESOP. See
"Business--Litigation".
The indebtedness of the Company repaid in connection with the
Recapitalization and the Financings (the "Old Indebtedness") consisted of (i)
$144.5 million aggregate principal amount of loans under a term loan facility
provided pursuant to the credit agreement dated as of November 1, 1993, as
amended, among the Company, certain of its subsidiaries, the banks party thereto
and Texas Commerce Bank National Association ("Texas Commerce"), as agent (the
"TCB Credit Facility"), (ii) $55.0 million aggregate principal amount of loans
under a $65.0 million revolving credit facility provided pursuant to the TCB
Credit Facility, (iii) $39.5 million aggregate principal amount of 8.70% Series
A Senior Notes due December 1, 2003 (the "Series A Senior Notes") issued
pursuant to the note purchase agreement dated as of November 1, 1993, as
amended, among the Company, certain of its subsidiaries and the insurance
companies party thereto (the "Note Purchase Agreement"), (iv) $71.0 million
aggregate principal amount of 9.16% Series B-1 Senior Notes due December 1, 2005
(the "Series B-1 Senior Notes") issued pursuant to the Note Purchase Agreement
and (v) $25.0 million aggregate principal amount of 9.16% Series B-2 Senior
Notes due December 1, 2003 (the "Series B-2 Senior Notes", together with the
Series A Senior Notes and the Series B-1 Senior Notes, the "Senior Notes")
issued pursuant to the Note Purchase Agreement.
The sources and uses of the funds for the Recapitalization, the Financings
and the related transactions, were as follows (dollars in thousands):
SOURCES OF FUNDS
<TABLE>
<S> <C>
Revolving Credit Facility......................................................... $ 3,000
Term Loan Facility................................................................ 125,000
Old Notes......................................................................... 149,800
Equity Investment................................................................. 225,000
---------
Total sources................................................................. $ 502,800
---------
---------
</TABLE>
USES OF FUNDS
<TABLE>
<S> <C>
Tender Offer...................................................................... $ 89,400
Preferred Stock Redemption........................................................ 28,700
Debt Prepayment................................................................... 336,000
Make-Whole Premium (including accrued interest of $0.9 million)................... 14,900
Expenses and transaction fees(1).................................................. 33,800
---------
Total uses.................................................................... $ 502,800
---------
---------
</TABLE>
(1) Includes a portion of the $11.3 million payment made by the Company in
connection with the settlement of the ESOP litigation.
22
<PAGE>
CAPITALIZATION
The following table sets forth as of October 18, 1997 the unaudited
consolidated historical cash and cash equivalents and capitalization of the
Company. This table should be read in conjunction with the notes thereto and the
historical consolidated financial statements of the Company and its subsidiaries
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
OCTOBER 18,
1997
-----------
<S> <C>
(DOLLARS IN THOUSANDS)
Cash and equivalents.............................................................................. $ 42,528
-----------
-----------
Debt:
Capital lease obligations....................................................................... $ 79,394
Other indebtedness.............................................................................. 2,610
Credit Facilities (1)........................................................................... 125,000
Old Notes....................................................................................... 149,761
-----------
Total debt.................................................................................... 356,765
Redeemable Common Stock........................................................................... 4,337
Stockholders' equity.............................................................................. 217,475
-----------
Total capitalization.......................................................................... $ 578,577
-----------
-----------
</TABLE>
- ------------------------
(1) As of October 18, 1997, the Company had availability of $224.0 million under
the Revolving Credit Facility (reduced to reflect $1.0 million of
outstanding letters of credit). See "Description of Credit Facilities."
23
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENT
The following unaudited pro forma consolidated condensed financial statement
(the "Pro Forma Financial Statement") has been derived by the application of pro
forma adjustments to the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma consolidated condensed
statements of operations for the period presented give effect to the
Recapitalization, the Financings and the related transactions (including the
offering of the Old Notes) as if such transactions were consummated as of June
30, 1996 (the first day of fiscal year 1997). The adjustments are described in
the accompanying notes. The Pro Forma Financial Statement should not be
considered indicative of actual results that would have been achieved had the
Recapitalization, the Financings and the related transactions (including the
offering of the Old Notes) been consummated for the period indicated and does
not purport to indicate results of operations for any future period. The Pro
Forma Financial Statement should be read in conjunction with the Company's
historical consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
24
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
52 WEEKS ENDED JUNE 28, 1997
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
--------- --------------- -----------
<S> <C> <C> <C>
Net sales.................................................................... $2,344,983 $ -- $2,344,983
Cost of sales................................................................ 1,710,345 -- 1,710,345
--------- ------- -----------
Gross profit............................................................... 634,638 -- 634,638
Store operating, selling and administrative expenses......................... 558,065 -- 558,065
Depreciation and amortization................................................ 48,875 -- 48,875
Interest expense, net........................................................ 36,828 (2,175)(a) 34,653
Litigation and severance/benefits............................................ 14,012 -- 14,012
Estimated store closing costs................................................ 32,790 -- 32,790
--------- ------- -----------
Income (loss) before income taxes and extraordinary item................... (55,932) 2,175 (53,757)
(Benefit) provision for income taxes......................................... (15,215) 827(b) (14,388)
--------- ------- -----------
Income (loss) before extraordinary item.................................... $ (40,717) $ 1,348 $ (39,369)
--------- ------- -----------
--------- ------- -----------
Pro forma ratio of earnings to fixed charges (c)............................. (c)
-----------
-----------
</TABLE>
- --------------------------
(a) The pro forma adjustments to net interest expense reflect the following:
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED
-------------
<S> <C>
JUNE 28, 1997
-------------
Interest on historical debt repaid(1):
Revolving credit facility........................................................ $ (3,720)
Term loan facility............................................................... (11,750)
Senior Notes..................................................................... (12,336)
Interest expense on new debt (2):
Revolving Credit Facility........................................................ 249
Term Loan Facility............................................................... 8,913
Notes............................................................................ 14,063
Amortization of deferred financing costs (eight years)............................. 2,406
-------------
Total adjustment................................................................. $ (2,175)
-------------
-------------
</TABLE>
-------------------------
1) The details of the amounts and interest rates relating to the
historical debt repaid are listed under "Use of Proceeds."
2) Reflects assumed weighted average interest rates of 7.16% on $3.0
million under the Revolving Credit Facility, an effective yield of
9.40% on $150.0 million aggregate principal amount of the Notes, and
an interest rate of 7.13% on $125.0 million of borrowings under the
Term Loan Facility.
A 0.25% increase or decrease in the assumed average interest on
borrowings under the Credit Facilities would change the pro forma
interest expense by $0.3 million for the period ended June 28, 1997 and
the pro forma net earnings (loss) would change by approximately $0.2
million. For fiscal year 1997, each $1.0 million increase or decrease in
the Revolving Credit Facility would change pro forma net interest expense
by approximately $0.1 million. The pro forma net earnings (loss) would
change by approximately $0.1 million.
(b) The adjustment reflects the tax effect of the pro forma adjustments at a 38%
effective tax rate.
(c) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges (net of
capitalized interest). Fixed charges consist of interest expense on all
indebtedness and capitalized interest, amortization of deferred financing
costs, and one-third of rental expense on operating leases representing that
portion of rental expense deemed by the Company to be attributable to
interest. The Company's pro forma earnings, which include certain
non-recurring charges, would have been insufficient to cover fixed charges
by $53.8 million for fiscal year 1997.
25
<PAGE>
SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
The following table sets forth selected historical consolidated condensed
financial and other data for the Company. The historical consolidated financial
statements of the Company for fiscal year 1997 have been audited by Deloitte &
Touche LLP and the historical consolidated financial statements for fiscal years
1996, 1995, the fiscal year ended June 25, 1994 ("fiscal year 1994") and the
fiscal year ended June 26, 1993 ("fiscal year 1993") have been audited by Arthur
Andersen LLP. The historical consolidated financial data as of June 28, 1997 and
June 29, 1996 and for the fiscal years 1997, 1996 and 1995 have been derived
from, and should be read in conjunction with, the audited consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. The historical unaudited consolidated financial data for the 16
weeks ended October 18, 1997 and October 19, 1996 have been derived from, and
should be read in conjunction with, the unaudited consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included in the unaudited
consolidated financial statements of the Company. Interim results for the 16
weeks ended October 18, 1997 are not necessarily indicative of results that can
be expected for the fiscal year ending June 27, 1998. See "Pro Forma
Consolidated Condensed Financial Statement," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
UNAUDITED
16 WEEKS ENDED FISCAL YEAR ENDED
------------------------ --------------------------------------------------
OCTOBER 18, OCTOBER 19, JUNE 28, JUNE 29, JUNE 24, JUNE 25,
(DOLLARS IN THOUSANDS) 1997 1996 1997 1996 1995 1994
- ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales....................................... $ 719,377 $ 683,705 $2,344,983 $2,368,645 $2,328,247 $2,304,524
Cost of sales................................... 522,237 500,924 1,710,345 1,737,987 1,728,698 1,718,761
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.................................. 197,140 182,781 634,638 630,658 599,549 585,763
Store operating, selling and administrative
expenses...................................... 163,979 154,908 558,065 507,894 501,634 495,280
Depreciation and amortization................... 15,117 13,314 48,875 45,814 47,447 45,065
Interest expense, net(1)........................ 10,522 11,162 36,828 38,981 43,411 50,442
(Gain) on sale of warehouse..................... -- -- -- -- -- (5,187)
Litigation charge(2)............................ -- -- 9,500 1,000 -- --
Severance/benefits charge(3).................... -- -- 4,512 -- -- --
Estimated store closing costs................... -- -- 32,790(4) 1,215 -- --
Income (loss) before income taxes and
extraordinary item.......................... 7,522 3,397 (55,932) 35,754 7,057 163
Benefit (provision) for income taxes............ (3,780) (2,188) 15,215 (16,316) (7,020) (3,667)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item....... 3,742 1,209 (40,717) 19,438 37 (3,504)
Loss on extinguishment of debt(5)............... -- -- (9,798) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............................. $ 3,742 $ 1,209 $ (50,515) $ 19,438 $ 37 $ (3,504)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Ratio of earnings to fixed charges(6)........... 1.48x 1.22x -- 1.67x 1.13x 1.00x
OTHER DATA:
EBITDA(7)(8).................................... $ 33,161 $ 27,873 $ 29,771 $ 120,549 $ 97,915 $ 90,483
Capital expenditures(9)......................... 22,025 37,085 73,864 66,131 59,850 79,279
Stores open at end of period(10)................ 117 118 121 120 120 121
BALANCE SHEET DATA (END OF PERIOD):
Working capital................................. $ 25,534 $ 13,762 $ 11,429 $ 29,895 $ 30,186 $ 44,211
Total assets.................................... 879,057 848,669 862,374 823,265 816,790 876,820
Total debt and capital lease obligations........ 356,765 446,821 362,148 437,982 463,944 533,273
Redeemable Common Stock......................... 4,337 25,801 5,002 31,045 18,749 16,097
Stockholders' equity............................ 217,475 142,521 213,361 136,650 134,753 128,165
CASH FLOW DATA:
Cash flows from operating activities............ $ 32,579 $ 20,703 $ 18,392 $ 63,846 $ 53,508 $ 62,239
Cash flows from investing activities............ (8,714) (28,100) (48,468) (33,782) (108) 7,651
Cash flows from financing activities............ (4,452) 8,239 21,505 (31,229) (54,331) (107,037)
<CAPTION>
JUNE 26,
(DOLLARS IN THOUSANDS) 1993
- ------------------------------------------------ -----------
(52 WEEKS)
<S> <C>
OPERATING DATA:
Net sales....................................... $2,038,360
Cost of sales................................... 1,520,094
-----------
Gross profit.................................. 518,266
Store operating, selling and administrative
expenses...................................... 405,434
Depreciation and amortization................... 46,189
Interest expense, net(1)........................ 58,553
(Gain) on sale of warehouse..................... --
Litigation charge(2)............................ --
Severance/benefits charge(3).................... --
Estimated store closing costs................... --
Income (loss) before income taxes and
extraordinary item.......................... 8,090
Benefit (provision) for income taxes............ (6,772)
-----------
Income (loss) before extraordinary item....... 1,318
Loss on extinguishment of debt(5)............... 13,633
-----------
Net income (loss)............................. $ (12,315)
-----------
-----------
Ratio of earnings to fixed charges(6)........... 1.12x
OTHER DATA:
EBITDA(7)(8).................................... $ 112,832
Capital expenditures(9)......................... 51,543
Stores open at end of period(10)................ 109
BALANCE SHEET DATA (END OF PERIOD):
Working capital................................. $ 78,862
Total assets.................................... 934,416
Total debt and capital lease obligations........ 598,020
Redeemable Common Stock......................... 36,460
Stockholders' equity............................ 112,396
CASH FLOW DATA:
Cash flows from operating activities............ $ 101,453
Cash flows from investing activities............ (81,010)
Cash flows from financing activities............ (9,233)
</TABLE>
See Notes to Selected Historical Consolidated Financial and Other Data
26
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
(1) Represents interest expense net of interest income.
(2) Represents a charge recorded in connection with the settlement of litigation
relating to the ESOP. See "Business-- Litigation."
(3) Represents a charge recorded in connection with the recent or anticipated
departure of certain executives and other employees of the Company, as well
as certain charges relating to benefits granted under certain employment
agreements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(4) Represents a charge recorded in connection with the Company's decision to
close, replace or sell approximately 20 stores, two of which had been closed
at the end of fiscal year 1997.
(5) The net loss for the fiscal year 1993 reflects an extraordinary loss of
$13.6 million resulting from the retirement of a total of $224.7 million
aggregate principal amount of 16% subordinated discount debentures and $78.6
million aggregate principal amount of 14% senior subordinated debentures.
The net loss for fiscal year 1997 reflects an extraordinary loss of $9.8
million resulting from the early extinguishment of debt, net of tax.
(6) For purposes of determining the ratio of earnings to fixed charges,
refinanced in the Recapitalization, earnings are defined as earnings before
income taxes, plus fixed charges (net of capitalized interest). Fixed
charges consist of interest expense on all indebtedness and capitalized
interest, amortization of deferred financing costs, and one-third of rental
expense on operating leases representing that portion of rental expense
deemed by the Company to be attributable to interest. For fiscal year 1997,
the deficiency in earnings to cover fixed charges was $55.9 million.
(7) "EBITDA" represents earnings before net interest expense, income taxes and
depreciation and amortization. EBITDA is not intended to represent cash
flows from operations as defined by GAAP and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. EBITDA is included
in this Prospectus as it is a basis upon which the Company assesses its
financial performance and certain covenants in the Company's borrowing
arrangements are tied to similar measures.
(8) Included in EBITDA for fiscal year 1997 are $63.4 million of charges to
record an inventory charge, a year-end closed store accrual (see footnote
4), the settlement of the ESOP litigation (see footnote 2), costs associated
with implementation of the Company's frequent shopper program, severance
accrual (see footnote 3), compensation expense related to the issuance of
shares of restricted Common Stock to certain employees and accruals for
transaction costs related to the Recapitalization and the Financings, sales
taxes, payroll taxes, legal expenses, rent and other payables. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
(9) Capital expenditures include purchases of real estate, buildings and
equipment. Certain items included in capital expenditures are subsequently
financed through sale leaseback transactions. In fiscal years 1994, 1995,
1996, 1997 and first quarter 1998, proceeds from asset sales (a substantial
portion of which were sale leasebacks of certain real estate properties)
were $78.3 million, $59.3 million, $30.3 million, $55.4 million and $12.2
million, respectively. For fiscal year 1994, capital expenditures include
$22.3 million relating to the acquisition of 15 stores in Austin and Houston
from Appletree Markets, Inc.
(10) The following sets forth additional information concerning changes in the
Company's store base:
<TABLE>
<CAPTION>
16 WEEKS ENDED FISCAL YEAR ENDED
-------------------------------- --------------------------------------------------
OCTOBER 18, OCTOBER 19, JUNE 28, JUNE 29, JUNE 24, JUNE 25,
1997 1996 1997 1996 1995 1994
--------------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of period................ 121 120 120 120 121 109
Newly constructed................ 1 2 8 4 3 5
Acquired......................... 0 1 2 0 0 15(b)
Closed........................... (5) (5) (9) (4) (4) (8)(b)
--- --- ----- --- --- ---
End of period...................... 117(a) 118 121 120 120 121
--- --- ----- --- --- ---
--- --- ----- --- --- ---
<CAPTION>
JUNE 26,
1993
-----------
<S> <C>
TOTAL STORES:
Beginning of period................ 45
Newly constructed................ 4
Acquired......................... 63(c)
Closed........................... (3)
---
End of period...................... 109
---
---
</TABLE>
- ------------------------------
(a) Includes 14 stores that, as of October 18, 1997, the Company has decided to
close, replace or sell.
(b) Reflects the acquisition of 15 stores in Austin and Houston from AppleTree
Markets, Inc. and the immediate closure of three of such stores in Austin.
(c) Includes the acquisition by the Company in August 1992 of 100% of the stock
of Cullum (representing 62 TOM THUMB stores).
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations of the
Company covers periods before completion of the Recapitalization, the Financings
and the related transactions. Accordingly, the discussion and analysis of such
periods does not reflect the significant impact that the Recapitalization, the
Financings and the related transactions will have on the Company. However, since
the Recapitalization occurred prior to the close of fiscal year 1997, the
balance sheet of the Company as of June 28, 1997, and hence the discussion of
liquidity and capital resources, reflects the impact of the Recapitalization and
the Financings. See "Risk Factors," "Pro Forma Consolidated Condensed Financial
Statement" and the discussion below under "-- Liquidity and Capital Resources"
for further discussion relating to the impact that the Recapitalization, the
Financings and the related transactions had and may in the future have on the
Company.
GENERAL
The Company operates a chain of 117 supermarkets primarily under the
RANDALLS and TOM THUMB banners in the Houston, Dallas/Fort Worth and Austin
metropolitan areas. The Company operates on a 52 or 53 week fiscal year ending
on the last Saturday of June. The consolidated statements of operations for
fiscal years 1995 and 1997 include 52 weeks of operations while fiscal year 1996
includes 53 weeks of operations. Same store sales is defined as net sales for
stores in operation in each of the entire current fiscal period and the
comparable period of the prior fiscal year. Replacement stores are included in
the same store sales calculation. A replacement store is defined as a store that
is opened to replace a store that is closed nearby. At the close of fiscal year
1997, the Company selected 20 stores to be closed, replaced or sold. See
"Business--Store Development."
COMPARISON OF 16 WEEKS ENDED OCTOBER 18, 1997 TO 16 WEEKS ENDED OCTOBER 19, 1996
A table showing the percentage of net sales represented by certain items in
the Company's consolidated condensed statements of operations is as follows:
<TABLE>
<CAPTION>
16 WEEKS ENDED 16 WEEKS ENDED
(DOLLARS IN THOUSANDS) OCTOBER 18, 1997 OCTOBER 19, 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales....................... $ 719,377 100.0% $ 683,705 100.0%
Cost of sales................... 522,237 72.6 500,924 73.3
--------- --------- --------- ---------
Gross profit.................. 197,140 27.4 182,781 26.7
Store operating, selling and
administrative expenses....... 163,979 22.8 154,908 22.7
Depreciation and amortization... 15,117 2.1 13,314 1.9
Interest expense, net........... 10,522 1.5 11,162 1.6
Litigation charge............... -- -- -- --
Severance/benefits charge....... -- -- -- --
Estimated store closing costs... -- -- -- --
Income before income taxes and
extraordinary item............ 7,522 1.0 3,397 0.5
Benefit (provision) for income
taxes......................... (3,780) (0.5) (2,188) (0.3)
Loss on extinguishment of
debt.......................... -- -- -- --
--------- --------- --------- ---------
Net income...................... $ 3,742 0.5% $ 1,209 0.2%
--------- --------- --------- ---------
--------- --------- --------- ---------
EBITDA.......................... $ 33,161 4.6% $ 27,873 4.1%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
28
<PAGE>
NET SALES
Net sales increased by $35.7 million, or 5.2%, during first quarter 1998 as
compared to the 16 weeks ended October 19, 1996 ("first quarter 1997"). The
increase is primarily attributable to additional sales of $39.8 million
generated from the opening of one new store during first quarter 1998 and the
operation in first quarter 1998 of six stores (excluding four replacement
stores) opened during fiscal year 1997. In addition, the Company experienced an
increase in same store sales of 2.0% in first quarter 1998. These increases were
offset by a decline of $13.7 million generated from the closing of two stores
(in addition to three stores closed at quarter end) during first quarter 1998
and the closing of five stores (excluding four stores which were closed and
replaced) in fiscal year 1997 which were operating in first quarter 1997.
The Company's trend in same store sales has improved from a decrease of 3.6%
during first quarter 1997 to an increase of 2.0% during first quarter 1998. This
improvement has resulted from the success of the frequent shopper program
introduced in October 1996, other marketing initiatives and the contribution of
four replacement stores. The Company cannot predict whether the improvement in
the trend in same store sales that occurred in first quarter 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 increased by $14.4 million and, as a percentage of net sales,
increased to 27.4% for first quarter 1998 from 26.7% for first quarter 1997.
This increase is attributable primarily to an increased level of sales, an
increase in vendor rebates and higher margins from new and replacement stores.
The higher gross margins of new and replacement stores are due to their larger
formats, more expansive specialty departments and broader range of products and
services.
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Store operating, selling and administrative expenses increased by $9.1
million and, as a percentage of net sales, increased to 22.8% for first quarter
1998 from 22.7% for first quarter 1997. The increase is the result of
expenditures to introduce and promote the Company's frequent shopper program,
bonus awards, expenses related to the introduction and operation of the
Company's PEAPOD on-line ordering and home delivery program, and store occupancy
costs of new and replacement stores in excess of the occupancy costs of closed
stores. The Company is focused on reducing store operating, selling and
administrative expenses and, although there can be no assurance, does not expect
these expenses to increase as a percentage of net sales in future periods of
fiscal year 1998.
EBITDA
EBITDA increased by $5.3 million and, as a percentage of net sales,
increased to 4.6% for first quarter 1998 from 4.1% for first quarter 1997.
Operating income increased by $3.5 million and, as a percentage of net sales,
increased to 2.5% for first quarter 1998 from 2.1% for first quarter 1997. This
increase is attributable to the increase in gross profit, offset partially by
the increase in store operating, selling and administrative expenses, as
described above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased by $1.8 million and, as a
percentage of net sales, increased to 2.1% for first quarter 1998 from 1.9% for
first quarter 1997. This increase is primarily due to new stores opened in
fiscal 1997 and first quarter 1998.
29
<PAGE>
INTEREST EXPENSE, NET
Net interest expense for first quarter 1998 declined by $0.6 million
compared to first quarter 1997 due primarily to a net reduction of debt.
(PROVISION) FOR INCOME TAXES
The provision for income taxes for first quarter 1998 was $3.8 million
compared to $2.2 million for first quarter 1997.
NET INCOME
Net income for first quarter 1998 was $3.7 million compared to net income of
$1.2 million for first quarter 1997.
COMPARISON OF FISCAL YEARS 1997 AND 1996
A table showing the percentage of net sales represented by certain items in
the Company's consolidated condensed statements of operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
(DOLLARS IN THOUSANDS) JUNE 28, 1997 JUNE 29, 1996
----------------------- -----------------------
<S> <C> <C> <C> <C>
(52 WEEKS) (53 WEEKS)
Net sales............................... $ 2,344,903 100.0% $ 2,368,645 100.0%
Cost of sales........................... 1,710,345 72.9 1,737,987 73.4
------------ --------- ------------ ---------
Gross profit.......................... 634,638 27.1 630,658 26.6
Store operating, selling and
administrative expenses............... 558,065 23.8 507,894 21.5
Depreciation and amortization........... 48,875 2.1 45,814 1.9
Interest expense, net................... 36,828 1.6 38,981 1.6
Litigation charge....................... 9,500 0.4 1,000 --
Severance/benefits charge............... 4,512 0.2 -- --
Estimated store closing costs........... 32,790 1.4 1,215 --
Income (loss) before income taxes and
extraordinary item.................... (55,932) (2.4) 35,754 1.5
Benefit (provision) for income taxes.... 15,215 0.6 (16,316) (0.7)
Loss on extinguishment of debt.......... 9,798 0.4 -- --
------------ --------- ------------ ---------
Net income (loss)....................... $ (50,515) (2.2)% $ 19,438 0.8%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
EBITDA.................................. $ 29,771 1.3% $ 120,549 5.1%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
</TABLE>
NET SALES
Net sales decreased by $23.7 million, or 1.0%, during fiscal year 1997 as
compared to fiscal year 1996. The decrease in net sales is attributable to the
additional week of operations in fiscal year 1996. Based on a comparable 52 week
year, net sales increased by $18.8 million, or 0.8% of net sales. The increase
is primarily attributable to additional sales of $93.5 million generated from
the opening of six new stores during fiscal year 1997 and the operation for
fiscal year 1997 of three stores opened during fiscal year 1996. This increase
was offset by a decline in same store sales of 1.45% from fiscal year 1996 due
to continued competitor store openings and remodels, and a decrease in sales of
$41.7 million from fiscal year 1996 due to the closure of five stores during
fiscal year 1997, two more than were closed during fiscal year 1996.
The Company's trend in same store sales has improved during fiscal year 1997
from a decrease of 3.6% in the first quarter, to a decrease of 1.3% in the
second quarter, to an increase of 0.1% in the third quarter, to an increase of
0.3% in the fourth quarter. This improvement has resulted from the introduction
30
<PAGE>
of the frequent shopper program and other marketing initiatives and the
contribution of three replacement stores. The Company cannot predict whether the
improvement in the trend in same store sales that occurred in fiscal year 1997
will continue in future periods, 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 increased by $4.0 million and, as a percentage of net sales,
increased to 27.1% for fiscal year 1997 from 26.6% for fiscal year 1996. This
increase is attributable to higher margins from new and replacement stores, an
increase in vendor rebates, as well as the impact for fiscal year 1997 of price
increases implemented by the Company late in the second quarter of fiscal year
1996. The higher gross margins of new and replacement stores are due to their
larger formats, more expansive specialty departments and broader range of
products and services.
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Store operating, selling and administrative expenses increased by $50.2
million and, as a percentage of net sales, increased to 23.8% for fiscal year
1997 from 21.5% for fiscal year 1996. The increase is the result of increased
advertising expenditures to introduce and promote the Company's frequent shopper
program, expenses related to the introduction and start-up of the Company's
PEAPOD on-line ordering and home delivery program, store occupancy costs of new
and replacement stores in excess of the occupancy costs of closed stores, and an
increase in labor and benefit costs associated in part with the new and
replacement stores. Also included in store operating, selling and administrative
expenses for fiscal year 1997 are $19.3 million of charges, including
recognition of compensation expense in connection with the issuance of
restricted Common Stock to certain of its employees, charges to record accruals
for sales taxes, payroll taxes, legal expenses, rent and other payables, an
inventory charge, costs associated with implementation of the frequent shopper
program and transaction costs related to the Recapitalization and the
Financings. The Company is focused on reducing store operating, selling and
administrative expenses and, although there can be no assurance, does not expect
these expenses to increase as a percentage of net sales in fiscal year 1998 as
compared to fiscal year 1997.
EBITDA
EBITDA declined by $90.8 million from fiscal year 1996 and, as a percentage
of net sales, declined to 1.3% for fiscal year 1997 from 5.1% for fiscal year
1996. Operating income (loss) declined by $93.9 million from fiscal year 1996
and, as a percentage of net sales, declined to 0.1% for fiscal year 1997 from
3.2% for fiscal year 1996. This decrease is attributable to the increase in
store operating, selling and administrative expenses described above, partially
offset by the $4.0 million increase in gross profit as described above, and an
additional $44.1 million of other charges. Included in the other charges are a
year-end closed store charge of $30.1 million, settlement of the ESOP litigation
for $9.5 million and a severance charge of $4.5 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased by $3.0 million and, as a
percentage of net sales, increased to 2.1% for fiscal year 1997 from 1.9% for
fiscal year 1996. This increase is primarily due to new store openings during
fiscal year 1997.
INTEREST EXPENSE, NET
Net interest expense for fiscal year 1997 declined by $2.1 million compared
to fiscal year 1996 due primarily to a net reduction of debt. The refinancing of
the TCB Credit Facility and the Senior Notes that occurred on June 27, 1997 had
minimal impact on interest expense for fiscal year 1997.
31
<PAGE>
LITIGATION CHARGE
During fiscal year 1995, the Company was named as a defendant in a class
action lawsuit alleging the violation of various federal and state laws in
connection with the operation of the ESOP. The Company and other defendants
elected to settle the suit for $16.5 million, of which the Company was liable
for $11.3 million plus $0.2 million in administrative expenses. Net of insurance
proceeds, the Company paid $10.5 million in the aggregate in connection with the
settlement. During fiscal year 1997 the Company increased its existing
litigation reserves by $9.5 million to fully reserve for such matter. See
"Business--Litigation."
SEVERANCE/BENEFITS CHARGE
For fiscal year 1997, the Company recorded a non-recurring charge of $4.5
million representing a reserve recorded in connection with the recent or
anticipated departures of certain executives and other employees of the Company,
as well as certain charges relating to benefits granted under certain employment
agreements.
ESTIMATED STORE CLOSING COSTS
For fiscal year 1997, the Company recorded a charge of $32.8 million which
includes $3.7 million relating to stores that were closed or sold in fiscal year
1997 and $29.1 million related to 20 stores that the Company had decided, as of
June 28, 1997, to close, replace or sell, two of which had been closed as of
June 28, 1997. These costs include estimated inventory losses of $3.0 million,
lease termination costs of $11.7 million and losses related to the impairment of
certain store assets for the stores to be closed of $18.1 million. The Company
believes that planned replacement stores will generate revenues and operating
income in excess of the stores to be replaced after giving effect to increases
in store occupancy costs, labor and benefits associated with such replacement
stores. The Company believes that planned closures and sales of stores will
result in reduced revenues of approximately $100 million per year, but increases
in operating income of approximately $5 million per year. Management's plan
currently provides for various replacement, sale and closing dates from June
1997 to June 1999.
BENEFIT (PROVISION) FOR INCOME TAXES
The benefit for income taxes for fiscal year 1997 was $21.2 million due to a
loss before income taxes of $55.9 million and early extinguishment of debt of
$9.8 million. The benefit consists of $15.2 million related to loss before
income taxes and extraordinary item and $6.0 million related to extraordinary
item.
NET INCOME (LOSS)
Net loss for fiscal year 1997 was $50.5 million compared to net earnings of
$19.4 million for fiscal year 1996.
32
<PAGE>
COMPARISON OF FISCAL YEARS 1996 AND 1995
A table showing the percentage of net sales represented by certain items in
the Company's condensed consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
(DOLLARS IN THOUSANDS) JUNE 29, 1996 JUNE 24, 1995
----------------------- -----------------------
<S> <C> <C> <C> <C>
(53 WEEKS) (52 WEEKS)
Net sales............................... $ 2,368,645 100.0% $ 2,328,247 100.0%
Cost of sales........................... 1,737,987 73.4 1,728,698 74.2
------------ --------- ------------ ---------
Gross profit.......................... 630,658 26.6 599,549 25.8
Store operating, selling and
administrative expenses............... 510,109 21.5 501,634 21.5
Depreciation and amortization........... 45,814 1.9 47,447 2.0
Interest expense, net................... 38,981 1.6 43,411 1.9
------------ --------- ------------ ---------
Income before income taxes.............. 35,754 1.5 7,057 0.3
(Provision) for income taxes............ (16,316) 0.7 (7,020) 0.3
------------ --------- ------------ ---------
Net income.............................. $ 19,438 0.8% $ 37 0.0%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
EBITDA.................................. $ 120,549 5.1% $ 97,915 4.2%
------------ --------- ------------ ---------
------------ --------- ------------ ---------
</TABLE>
NET SALES
Net sales increased by $40.4 million, or 1.7%, during fiscal year 1996 as
compared to fiscal year 1995. Included in this increase is approximately $44.7
million of net sales resulting from the additional week of operations in fiscal
year 1996. In addition, this increase is attributable to additional sales of
$86.6 million generated from the opening of three new stores in fiscal year 1996
and the operation for the entire fiscal year 1996 of three new stores opened in
fiscal year 1995, which was offset by a decrease in sales of $32.0 million from
the closure of four stores in fiscal year 1996 and the closure of four stores in
fiscal year 1995 and a decline in same store sales of 2.5% due to continued
competitor store openings and remodels.
GROSS PROFIT
Gross profit increased by $31.1 million and, as a percentage of net sales,
increased to 26.6% for fiscal year 1996 from 25.8% for fiscal year 1995.
Included in this increase is approximately $11.9 million of gross profit
resulting from the additional week of operations in the 53 week fiscal year
1996. The remainder of the increase is due primarily to an increase in the
amount of vendor rebates and the effect of price increases implemented by the
Company late in the second quarter of fiscal year 1996. The increase in vendor
rebates is due to the Company negotiating for additional vendor rebates
resulting in lower net product costs instead of receiving advertising allowances
which are recorded as a credit to store operating, selling and administrative
expenses.
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Store operating, selling and administrative expenses increased by $8.5
million for fiscal year 1996 compared to fiscal year 1995. As a percentage of
net sales, store operating, selling and administrative expenses has remained
constant at 21.5% of net sales for each of fiscal years 1996 and 1995. Included
in store operating, selling and administrative expenses is approximately $9.6
million of expenses resulting from the additional week of operations in the 53
week fiscal year of 1996. The remainder of the increase is also the result of a
number of other factors, including store occupancy costs of new and replacement
stores in excess of the occupancy costs of closed stores, the full year impact
of rent expense associated with seven stores that were sold and leased back in
fiscal year 1995. In addition, the Company negotiated for lower advertising
allowances which are recorded as a credit to store operating, selling and
administrative expenses, in exchange for increased vendor rebates to lower net
product costs (as described above under
33
<PAGE>
"-- Gross Profit"). These increases were offset by a decline in gross
advertising expenses, professional fees and other operating expenses.
EBITDA
EBITDA increased by $22.6 million and, as a percentage of net sales,
increased to 5.1% for fiscal year 1996 from 4.2% for fiscal year 1995. Operating
income increased by $24.2 million and, as a percentage of net sales, increased
to 3.2% for fiscal year 1996 from 2.2% for fiscal year 1995. The increase in
EBITDA and operating income is attributable to the increase in gross profit
partially offset by the increase in store operating, selling and administrative
expenses as described above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $1.6 million and, as a
percentage of net sales, decreased to 1.9% for fiscal year 1996 from 2.0% for
fiscal year 1995. The decrease in expense of $1.6 million is attributed to
reduced capital expenditures for store fixtures and equipment in fiscal year
1996 as compared to fiscal year 1995.
INTEREST EXPENSE, NET
Net interest expense for fiscal year 1996 declined by $4.4 million compared
to fiscal year 1995 due primarily to a net reduction of debt of $26.0 million.
PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal year 1996 increased by $9.3
million compared to fiscal year 1995 due to the increase in earnings before
income taxes to $35.8 million for fiscal year 1996 compared to earnings before
income taxes of $7.1 million for fiscal year 1995.
NET EARNINGS
Net earnings for fiscal year 1996 increased by $19.4 million to $19.4
million from net earnings of $37,000 for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company, and as a result, the Company's operating
cash flow and its ability to service its indebtedness, including the Exchange
Notes, is dependent upon the operating cash flow of its subsidiaries and the
payment of funds by such subsidiaries to the Company in the form of loans,
dividends or otherwise.
The Company's principal sources of liquidity are expected to be cash flow
from operations, borrowings under the Revolving Credit Facility and proceeds
from the sale leaseback of real estate properties. Management anticipates that
the Company's principal uses of liquidity will be to provide working capital,
meet debt service requirements and finance the Company's expansion and
remodeling plans. Management believes that cash flows generated from operations
and borrowings under the Credit Facilities will adequately provide for its
working capital and debt service needs and will be sufficient to fund the
Company's expected capital expenditures.
The Credit Facilities are comprised of the Term Loan Facility and the
Revolving Credit Facility. In the future, the Company will use the proceeds from
the Revolving Credit Facility to provide for working capital requirements and
the implementation of the Company's strategy to expand and enhance its store
base and optimize its distribution facility. At Closing, all amounts outstanding
under the TCB Credit Facility were repaid and the commitments thereunder
terminated and the Senior Notes were similarly retired. As of October 18, 1997,
the Company had $224.0 million available (reduced by $1.0 million to reflect
outstanding letters of credit) to be borrowed under the Revolving Credit
Facility.
Historically, the Company has funded working capital requirements, capital
expenditures and other cash requirements primarily through cash flow from
operations and borrowings under the revolving credit
34
<PAGE>
facility of the TCB Credit Facility and the proceeds of sale leasebacks. In
first quarter 1998 and fiscal years 1997, 1996 and 1995, operating activities
generated cash of $32.6 million, $18.4 million, $63.8 million and $53.5 million,
respectively. Net borrowings (repayments) of revolving loans under the Company's
credit facilities were $(3.0) million, $3.0 million, $17.0 million and $(14.0)
million during first quarter 1998 and fiscal years 1997, 1996 and 1995,
respectively.
Cash flows used in (or provided by) investing activities were $8.7 million,
$48.5 million, $33.8 million and $0.1 million in first quarter 1998 and fiscal
years 1997, 1996 and 1995, respectively. Capital expenditures include
expenditures related to the construction of new stores, the purchase of real
estate, the remodeling of existing stores, ongoing store expenditures for
equipment and maintenance, as well as expenditures relating to warehousing,
distribution, manufacturing facilities and equipment, data processing and
computer equipment. To finance store development, the Company has traditionally
purchased real estate and constructed stores from operating cash flows and from
the proceeds of its revolving credit facility and then entered into sale
leaseback transactions, the proceeds of which were applied to reduce debt
incurred to construct the stores. Capital expenditures since fiscal year 1994
were primarily financed from internally generated funds, proceeds from the sale
of real estate properties (including sale leaseback transactions) and borrowings
under the TCB Credit Facility. In first quarter 1998 and fiscal years 1997, 1996
and 1995, capital expenditures were $22.0 million, $73.9 million, $66.1 million
and $59.9 million, respectively. Proceeds from asset sales (a substantial
portion of which were sale leasebacks of certain real estate properties) totaled
$55.4 million during fiscal year 1997 compared to $30.3 million during fiscal
year 1996. As a result of the disposal of certain assets, a gain of $0.9 million
was recognized during fiscal year 1997. The Company expects to accelerate its
store development program and optimize its distribution system which will result
in a level of capital expenditures significantly in excess of historical levels.
For fiscal year 1998, the Company expects to make approximately $70.0 million of
capital expenditures to open five new stores, commence construction on seven new
stores and purchase land for three new stores, and make approximately $55.0
million of capital expenditures to renovate or remodel 35 stores. See "Business
- -- Store Development." Depending on store size and format, the cost to build and
open a new store ranges from approximately $8.0 million to $12.0 million. As of
October 18, 1997, the Company had approximately $27.8 million of commitments to
make capital expenditures. The Company anticipates funding its capital
expenditures with cash flow from operations and borrowings under the Revolving
Credit Facility and proceeds from sale leaseback transactions.
The principal uses of cash from financing activities during fiscal year 1997
were net repayments of long-term debt of $400.0 million, the Tender Offer of
$89.4 million, the Preferred Stock Redemption of $28.7 million, the payment of
the Make-Whole Premium of $14.9 million, payment of preferred stock dividends of
$2.3 million, the accelerated amortization of deferred financing costs of $1.8
million and purchase of treasury stock of $0.9 million, offset by a net increase
in capital lease obligations of $5.4 million and net proceeds from the
Recapitalization and the Financings of $55.3 million. In fiscal year 1996, the
primary uses of cash from financing activities were net repayments of long-term
debt and capital lease obligations of $26.0 million and payment of preferred
stock dividends of $5.9 million and issuance of common stock of $0.6 million.
The primary uses of cash from financing activities in fiscal year 1995 were net
repayments of long-term debt and capital lease obligations of $63.7 million and
issuance of common stock of $9.4 million.
See "Risk Factors--MSP Litigation" and "Business--Litigation" for a
description of material litigation to which the Company is a party.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
adopted this standard in the first quarter of fiscal year 1997. The adoption of
SFAS No. 121 did not have a significant impact on the Company's financial
condition, results of operations or cash flows.
35
<PAGE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for Stock-Based Compensation," effective for financial statements
for fiscal years beginning after December 15, 1995. This statement defines a
fair value-based method of accounting for employee stock options or similar
equity instruments. As the statement permits, the Company will continue to
account for these types of instruments using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The statement, if adopted, would not have
materially affected reported amounts for net income (loss) and income (loss) per
share in fiscal years 1997 and 1996.
EFFECTS OF INFLATION
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has generally
been able to maintain gross profit margins by adjusting retail prices, but
competitive conditions may from time to time render the Company unable to do so
while maintaining its market share.
36
<PAGE>
BUSINESS
GENERAL
The Company is the second largest supermarket operator in its principal
markets, with 117 stores located in Houston (52 stores), Dallas/Fort Worth (52
stores), and Austin (13 stores). With over 30 years of operations in Houston and
49 years of operations in Dallas/Fort Worth, the Company has developed a loyal
customer base and a portfolio of large, attractive stores in prime locations.
The Company offers customers an expanded selection of high quality products,
exceptional customer service and a variety of specialty departments. These
strengths, together with the Company's position as a Texas-based supermarket
operator, have enabled it to maintain a number two market share in Houston,
Dallas and Austin, the Company's principal markets. For fiscal year 1997, the
Houston, Dallas, Fort Worth and Austin markets represented approximately 47%,
35%, 7% and 11% of the Company's net sales, respectively. For fiscal year 1997,
the Company generated net sales of approximately $2.34 billion and EBITDA of
$29.8 million. For first quarter 1998, the Houston, Dallas, Fort Worth and
Austin markets represented approximately 46%, 36%, 8% and 10% of the Company's
net sales, respectively. For first quarter 1998, the Company generated net sales
of approximately $719.4 million and EBITDA of $33.2 million.
The Company operates combination food and drug stores which emphasize high
quality products, exceptional customer service and expanded selections of
quality meat, seafood, produce and other perishables. This format appeals to a
broad customer base by offering shoppers an extensive variety of products and
services, including large produce and perishables departments, in-store
bakeries, delicatessens, full-service meat and seafood departments, salad bars,
banks, pharmacies, full-service floral departments, expanded cosmetic
departments, video rental departments and film processing counters. The Company
operates 79 traditional combination food and drug stores under the RANDALLS
banner in Houston and Austin and the TOM THUMB banner in Dallas/Fort Worth
averaging approximately 50,200 square feet. For fiscal year 1997, these stores
generated sales of approximately $1.59 billion, or 68% of net sales, and average
sales weekly per store of approximately $356,000. For first quarter 1998, these
stores generated sales of approximately $461.4 million, or 64% of net sales, and
average sales weekly per store of approximately $345,000.
The Company's NEW GENERATION and FLAGSHIP STORES are each variations of the
Company's traditional combination food and drug stores, offering an even wider
selection of premium products and services:
NEW GENERATION STORES emphasize expanded perishable food departments and
open product preparation in order to create a farmer's market atmosphere and
highlight product freshness to customers. The Company's 21 New Generation
Stores operate under the RANDALLS banner in Houston and Austin and the TOM
THUMB banner in Dallas, and average approximately 68,400 square feet. For
fiscal year 1997, New Generation Stores generated sales of approximately
$450.0 million, or 19% of net sales, and average weekly sales per store of
approximately $493,000. For first quarter 1998, New Generation Stores
generated sales of approximately $161.3 million, or 23% of net sales, and
average weekly sales per store of approximately $483,000.
FLAGSHIP STORES target customers seeking an expanded array of premium
services and a wider variety of top quality gourmet and specialty
selections. Flagship Stores feature additional "one-stop" shopping
conveniences and many higher margin specialty products and services,
including in-store gourmet coffee bars and eating areas, expanded bakery
departments staffed with French pastry chefs, a wide range of freshly
prepared foods (including made-to-order pizza, pastas and barbecued meats),
home delivery and catering. The Company operates seven Flagship Stores under
the RANDALLS FLAGSHIP banner in Houston averaging approximately 57,500
square feet and one store of approximately 34,500 square feet under the
SIMON DAVID banner in Dallas. For fiscal year 1997, Flagship Stores
generated sales of approximately $221.8 million, or 10% of net sales, and
average weekly sales per store of approximately $578,000. For first quarter
1998, Flashship Stores generated sales of approximately $72.4 million, or
10% of net sales, and average weekly sales per store of approximately
$565,000.
The Company also operates 9 conventional stores which offer a similar variety of
food products and specialty departments as its traditional combination food and
drug stores, but do not include pharmacies.
37
<PAGE>
Conventional stores average approximately 20,600 square feet. For fiscal year
1997, conventional stores generated sales of approximately $80.0 million, or 3%
of net sales, and average weekly sales per store of approximately $171,000. For
first quarter 1998, conventional stores generated sales of approximately $23.4
million, or 3% of net sales, and average weekly sales per store of approximately
$162,000.
COMPANY STRENGTHS
STRONG FRANCHISE AND DISTINCTIVE IMAGE. Over its history, the Company has
established a reputation for providing high quality products and exceptional
service to customers. The Company's stores are known for their broad selection
of high quality meats, seafood, produce and other perishables, which are
complemented by a variety of specialty departments to create a differentiated,
"one-stop" shopping experience. In a series of paid telephone surveys of Houston
and Dallas residents, the Company has consistently received the highest ratings
for specialty categories, such as fresh meat, produce, bakery and floral, and
service categories, such as customer assistance, quick checkout, cleanliness,
product variety and selection. In addition, the Company's long-standing practice
of reinvesting in the community by partnering with customers in charitable
giving programs, such as the "Good Neighbor" program, further enhances customer
loyalty and provides the Company with an additional competitive advantage.
ATTRACTIVE STORES IN PRIME LOCATIONS. The Company has developed a portfolio
of large, attractive stores in prime locations which provide flexibility in
store layout and merchandising. Since 1992, the Company has increased average
store size from approximately 46,400 square feet to approximately 51,500 square
feet by pursuing a strategy of store expansion in selected markets. The Company
attempts to optimize operating results by selecting the variation of its
combination food and drug store that is best suited to each store site's
demographics, local preferences and competition.
LEADING MARKET SHARES. The Company believes that its strong franchise and
distinctive image have enabled it to establish a number two market share in
Houston, Dallas and Austin, its principal markets. The Company's market shares
in Houston, Dallas, Austin, and Fort Worth are approximately 22%, 19%, 19% and
9%, respectively. The Company's history as a local supermarket operator and the
recent introduction of its frequent shopper program have helped the Company to
maintain its strong market position despite aggressive store opening and
remodeling programs by competitors in recent years. Management believes that
following the Recapitalization and the Financings, the Company's competitive
position will be strengthened by store remodels and new construction. In
addition, management believes that its frequent shopper program will continue to
enhance its competitive position.
GROWING MARKETS. Over the past several years, Texas has been one of the
fastest growing states in terms of population, income and employment, and
economists project growth in excess of the national average to continue in the
near future. Since 1990, the Houston, Dallas, Fort Worth and Austin markets have
experienced compound annual employment growth of 1.9%, 2.6%, 2.2% and 5.5%,
respectively, all exceeding the national average of 1.5%. In 1996, grocery sales
in Texas increased 5.2% versus 3.3% for the country as a whole, and the Houston,
Dallas/Fort Worth and Austin markets accounted for total grocery sales of
approximately $14.8 billion, or 48.9% of total grocery sales in Texas.
EXPERIENCED MANAGEMENT TEAM. The Company's executive officers have spent
the majority of their careers in the supermarket business and have an average of
15 years of experience in the food retailing industry. In addition, the Company
believes opportunities exist to enhance the existing management team with
additional experienced industry executives. Management's expertise and in-depth
knowledge of the Company's markets are further complemented by the financial
expertise of KKR.
CUSTOMER SERVICE-ORIENTED WORKFORCE. The Company emphasizes friendly,
efficient and knowledgeable customer service. All employees are trained to
actively address the needs of customers. These employees reinforce the Company's
distinctive service-oriented image and differentiate it from its competitors.
The Company is dedicated to promoting from within its organization and believes
that it possesses considerable management depth among its workforce, with store
directors having an average of over 15 years of experience with the Company.
38
<PAGE>
BUSINESS STRATEGY
ACCELERATE NEW STORE DEVELOPMENT AND REMODELING PROGRAM. The Company
believes that it will be able to capitalize on the continued growth in its
markets by accelerating its new store development and remodeling program. In
recent years, the Company has not had the financial resources to aggressively
remodel its existing store base or construct new stores. Since the beginning of
fiscal year 1995, the Company has opened only 16 stores and remodeled 10 stores
(while closing 22 stores), compared to management's estimate that its
competitors have opened approximately 115 stores and remodeled approximately 100
stores in the Company's markets over the same period. The Recapitalization and
the Financings will provide the Company with increased financial flexibility,
enabling it to undertake significant remodeling in the Houston area, new store
construction and remodeling in Dallas/Fort Worth and selected store expansion in
the Austin market. For fiscal year 1998, the Company expects to make
approximately $70.0 million of capital expenditures to open five new stores,
commence construction on seven new stores and purchase land for three new
stores, and make approximately $55.0 million of capital expenditures to renovate
or remodel 35 stores. As of the date of this Prospectus, the Company has no
estimate of the size of its capital expenditure budget for fiscal years
subsequent to fiscal year 1998 as such budgets are established on an annual
basis by the Board of Directors of the Company.
REDUCE OPERATING COSTS. The Company has identified a number of initiatives
designed to improve operating results by lowering operating costs. Specific
initiatives include: (i) applying the Company's successful labor scheduling
guidelines throughout all operational areas; (ii) implementing performance
measurement standards to further improve operating efficiency; (iii) enhancing
category management to improve store-level merchandising efforts and to increase
promotional buying opportunities; (iv) improving shelf pricing procedures to
decrease the frequency of price changes and inaccurate labeling; and (v)
introducing production planning in the perishables departments. The breadth of
these initiatives reflects the significant opportunities available to the
Company.
DIFFERENTIATE BASED ON HIGH QUALITY PRODUCTS AND SERVICES AT A COMPETITIVE
PRICE. Throughout its history, the Company has developed a reputation for
operating large, attractive stores with an extensive variety of specialty
departments staffed by well-trained, service-oriented employees. The Company
offers an expanded selection of high quality products at competitive prices to
create a differentiated "one-stop" shopping experience. In addition, the Company
is committed to being the "first to market" in providing solutions to its
customers' changing lifestyle needs, as is evidenced by the recent launches of
its frequent shopper program and the PEAPOD on-line grocery ordering and home
delivery program.
LEVERAGE FREQUENT SHOPPER PROGRAM. The Company believes that significant
opportunities exist to increase revenue and focus its marketing efforts by
leveraging its frequent shopper program. Data collected from customers
participating in the frequent shopper program enables the Company to track sales
trends, demographic patterns and customer preferences, and utilize that data to
allocate shelf space, target marketing activities and increase customer loyalty.
INCREASE PRIVATE LABEL SALES. Relative to national brands, private label
products provide comparable quality at lower prices to shoppers and higher gross
margins to the Company. The Company currently offers a three-tiered private
label program, including PRESIDENT'S CHOICE premium private label products, its
own REMARKABLE private label products and VALUE TIME private label products
catering to value-conscious consumers. In recent years the Company's private
label sales have been lower than the national average. The Company is currently
expanding its private label offerings across all tiers, with particular emphasis
on increasing REMARKABLE label offerings.
OPERATING INITIATIVES
LABOR SCHEDULING AND WORK METHODS. The Company is currently in the process
of introducing a labor scheduling system based upon engineered labor standards,
corporate productivity guidelines and customer service standards. Subsequent to
the implementation of such system to the front-end of its stores, the
39
<PAGE>
system will be expanded storewide. As part of this program, the Company intends
to redesign certain work standards to improve labor productivity.
COMPANY-WIDE PERFORMANCE MEASURES. The Company is currently evaluating its
existing set of financial reporting and performance measurement systems to
ensure that these systems support its business strategy and identify those
factors which lead to enhanced operating profitability. The reporting systems
will monitor each department's performance relative to identified financial
goals and report exceptions to management.
CATEGORY MANAGEMENT. The Company is in the process of implementing
store-wide category management programs as part of a coordinated merchandising
effort. The next phase of this initiative includes the integration of category
management plans with operating budgets and with company-wide promotional
efforts and the identification of enhanced performance measures. The program
will enable the Company to execute more consistent promotional programs at the
store level and increased promotional buying opportunities. The Company plans to
work more closely with vendors to coordinate joint advertising and promotional
programs and increase vendor support. As a part of this initiative, the Company
will begin to track inventory in each store with a goal of reducing the
frequency of inadequate store inventory levels.
COMPANY HISTORY
Co-founders Robert R. Onstead, R.C. Barclay, and Norman N. Frewin began
operations in Houston on July 4, 1966 with the purchase of two existing grocery
stores. The Company's stores emphasized service and personal attention with an
overriding goal to treat each customer as a member of the family. As the first
two stores prospered, the Company was able to open a third store in 1968 and a
fourth in 1970. In early 1979, the Company acquired four grocery stores, each
approximately 40,000 square feet in size and substantially larger than any of
its existing stores, to increase its store total to 14. The Company continued to
expand in the Houston area in the 1980s, operating 39 stores by 1989, many of
which were in excess of 40,000 square feet.
In August 1992, having accumulated a portfolio of 45 stores in the Houston
market, the Company acquired 100% of the stock of Cullum Companies, Inc.
("Cullum"), a food and drug retailer which operated 62 stores in Dallas and
Austin under the TOM THUMB banner (the "Cullum Acquisition"). Cullum had
operated in Dallas since 1948 and in Austin since 1972. In January 1994, the
Company acquired 12 stores in Austin (three of which were closed immediately
after the acquisition) and three stores in Houston from AppleTree Markets, Inc.
STORE DEVELOPMENT
The Company's long history of developing stores in densely populated areas
has resulted in a portfolio of large, attractive stores in prime locations which
offers the Company significant competitive advantages. The Company attempts to
optimize operating results by selecting the variation of its combination food
and drug store that is best suited to each store site's demographics, local
preferences and competition. The Company carefully monitors changes in
neighborhood demographics to determine whether a change in format is warranted
and selectively converts stores when opportunities arise.
The Company believes that the appearance of its stores is an integral
component of the customer's shopping experience. The Company's goal is to
maintain clean, well-lit stores with attractive architectural features that
enhance the image of its stores as upscale markets catering to the changing
lifestyle needs of quality conscious customers. As a result of acquisitions, new
store construction and remodelings, total square footage in the Company's stores
has increased 23% since 1992 from approximately 4,915,000 square feet to
approximately 6,021,000 square feet and average store size has increased from
approximately 46,400 square feet to approximately 51,500 square feet over the
same period. While most of its newer stores are larger and while the Company
expects the average size of its stores to grow as stores are remodeled and new
stores are opened, the Company intends to remain flexible as to the size of new,
acquired and remodeled stores.
40
<PAGE>
The following table sets forth certain information with respect to store
size.
<TABLE>
<CAPTION>
NUMBER OF STORES
AS OF OCTOBER 18, 1997
-------------------------
<S> <C>
STORE SIZE:
Less than 20,000 square feet.............................................................. 6
Between 20,000 and 30,000 square feet..................................................... 2
Between 30,000 and 40,000 square feet..................................................... 15
Between 40,000 and 50,000 square feet..................................................... 13
Between 50,000 and 60,000 square feet..................................................... 58
Over 60,000 square feet................................................................... 23
</TABLE>
The following table sets forth additional information concerning the
Company's stores for the indicated period:
<TABLE>
<CAPTION>
16 WEEKS ENDED FISCAL YEAR ENDED
---------------------------- ---------------------------------------------------------------
OCTOBER 18, OCTOBER 19, JUNE 28, JUNE 29, JUNE 24, JUNE 25, JUNE 26,
1997 1996 1997 1996 1995 1994 1993
------------- ------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of period....... 121 120 120 120 121 109 45
Newly constructed....... 1 2 8 4 3 5 4
Acquired................ 0 1 2 0 0 15(b) 63(c)
Closed.................. (5) (5) (9) (4) (4) (8)(b) (3)
--- --- --- --- --- --- ---
End of period............. 117(a) 118 121 120 120 121 109
--- --- --- --- --- --- ---
--- --- --- --- --- --- ---
MAJOR REMODELS(d)........... 0 0 0 5 5 5 1
</TABLE>
- ------------------------
(a) Includes 14 stores that, as of October 18, 1997, the Company has decided to
close, replace or sell.
(b) Reflects the acquisition of 15 stores in Austin and Houston from AppleTree
Markets, Inc. and the immediate closure of three of such stores in Austin.
(c) Includes the acquisition by the Company in August 1992 of 100% of the stock
of Cullum (representing 62 TOM THUMB stores).
(d) Includes the completion of major remodels involving expenditures of at least
$1.0 million per store.
In fiscal year 1997, the Company opened three stores in Houston, six stores
in Dallas and one store in Austin, while closing nine stores. In first quarter
1998, the Company opened one store in Houston, while closing two stores in
Houston and three stores in Austin. In addition, the Company has decided to
close, replace, or sell up to 14 stores as part of a strategic review of its
operations. Over the next three years, the Company presently plans to open an
average of eight to 10 new stores per year and engage in an average of 25 major
and other remodels per year, with a focus on new store openings in Dallas and
remodels in Houston. The Company's plans to remodel existing stores and
construct new stores are reviewed continually and are subject to change. The
Company has been highly selective in acquiring store locations and attempts to
take advantage of market research and its extensive knowledge of Texas markets
in evaluating opportunities. In conducting market research for store locations
the Company typically evaluates population shifts, demographic conditions,
socio-economic characteristics, zoning changes, traffic patterns, new
construction, anticipated cannibalization of the Company's existing stores and
the proximity of competitors' stores, in an effort to determine a future store's
sales potential. The Company's ability to expand and remodel existing stores and
to open new stores is subject to many factors, including successful negotiation
of new leases or amendments to existing leases, successful site acquisition and
the availability of financing on acceptable terms, and may be limited by zoning,
environmental and other governmental regulations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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INDUSTRY OVERVIEW
The $426.0 billion food retailing industry in the United States includes
national and regional supermarket chains, independent and specialty grocers,
traditional convenience food stores and newer "alternative format" food stores,
including warehouse club stores, deep discount food operators and supercenters.
Management believes that the food retailing industry is identified by four
trends: consolidation, shift in store formats, increased private label
penetration and increased sales of home meal replacement products.
A large portion of the U.S. supermarket industry is highly fragmented.
According to industry reports, the top 10 supermarket operators (excluding
convenience and grocery stores with annual sales of less than $2.0 million and
also excluding warehouse stores, club stores, deep food discounters and
supercenters) accounted for approximately 37% of the approximately $323.0
billion of 1996 domestic supermarket sales, while no supermarket operator
outside of the top five accounted for more than 3.5% of such sales. In addition,
approximately 150 supermarket operators had sales of $250 million or more in
1995. Recently, the food retailing industry has been experiencing consolidation
as larger supermarket chains acquire smaller independent competitors within
their markets as well as supermarket chains in different geographic markets.
According to the PROGRESSIVE GROCER ANNUAL REPORT published in April 1997,
high-volume supermarket chains accounted for 78% of 1996 supermarket sales, as
compared to only 61% in 1976.
In an effort to increase sales and margins, supermarkets are introducing new
formats and remodeling older stores more frequently. Operators have shifted
resources to building larger stores or reformatting conventional stores into
superstores or combination stores to accommodate higher margin specialty
departments, such as bakery, seafood, delicatessen, health and beauty aids,
pharmacies and video rentals. As a result of this trend, the average size of a
chain store has increased to 37,000 square feet.
The percentage of gross supermarket sales derived from private label
products has increased significantly in recent years to a range of 15% to 20%.
Private label goods enable grocery chains to provide a product with quality
comparable to a branded product at a lower cost. In addition to providing
enhanced gross margins and a value-oriented product to customers, certain food
retailers also are able to use private label products as negotiating leverage
with branded suppliers to enhance margins on branded products as well. Over a
longer term, private label products build customer loyalty by offering a product
label that the customer can only purchase at the retailer's stores.
Management believes that, in recent years, the trend toward increased
convenience has led to an increase in eating away from home and the purchase of
prepared meals for home consumption. According to the U.S. Department of
Commerce, retail sales for "eating and drinking" establishments increased by
6.2% per annum from 1986 to 1995, significantly higher than the 3.7% annual
growth experienced by "food stores" during the same period. In response to this
trend, supermarkets have expanded their frozen food selections, full-service
specialty departments such as delicatessens, and home meal replacement products,
each of which provide convenience-oriented consumers with an alternative to
restaurants and fast food establishments.
MARKET OVERVIEW
Over the past several years, Texas has been one of the fastest growing
states in terms of population, income and employment, and economists project
growth in excess of the national average to continue in the near future. Since
1990, the Houston, Dallas, Fort Worth and Austin markets have experienced
compound annual employment growth of 1.9%, 2.6%, 2.2% and 5.5%, respectively,
all exceeding the national average of 1.5%. In 1996, grocery sales in Texas
increased 5.2% versus 3.3% for the country as a whole, and the Houston,
Dallas/Fort Worth and Austin markets accounted for total grocery sales of
approximately $14.8 billion, or approximately 48.9% of total grocery sales in
Texas. Texas has experienced a structural shift away from energy-based
industries such as oil and gas, towards growth industries such as healthcare and
technology. As a result of this increased diversification, the Texas economy has
become less susceptible to energy-related economic cycles.
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HOUSTON
With a population of approximately 4.2 million, the Houston metropolitan
area is expanding at a rate slightly above national levels. In addition to the
energy industry, Houston is also home to global technology, biomedical,
aerospace and engineering firms. Annual population and job growth in the Houston
area are projected at 1.8% and 2.2%, respectively, through 2000, compared to
0.9% and 1.1% nationally through 2000, respectively. In addition, the Houston
market experienced 4.5% cumulative annual growth in retail sales during 1995 and
1996, compared to 5.1% nationally.
DALLAS/FORT WORTH
The Dallas/Fort Worth metropolitan area has a population of approximately
4.4 million and has benefited in recent years from strong oil and natural gas
markets, continued strong growth in the high technology sector and renewed
strength in the airline industry. Annual population and job growth in the
Dallas/Fort Worth area are projected at 1.8% and 2.3%, respectively, through
2000, compared to 0.9% and 1.1% nationally through 2000, respectively. In
addition, the Dallas/Fort Worth market experienced 6.9% cumulative annual growth
in retail sales during 1995 and 1996 compared to 5.1% nationally.
AUSTIN
With a population of approximately 1.0 million, the Austin metropolitan area
has experienced population growth during the past five years that is three times
the national average. This significant population growth has been driven by the
area's opportunities in the semiconductor industry and other technology-related
industries. Annual population and job growth in the Austin area are projected at
2.1% and 2.6%, respectively, through 2000, compared to 0.9% and 1.1% nationally
through 2000, respectively. In addition, the Austin market experienced 14.7%
cumulative annual growth in retail sales during 1995 and 1996 compared to 5.1%
nationally.
MERCHANDISING
The Company's merchandising strategy is designed to create a differentiated
"one-stop" shopping experience that blends concerns for value and quick service
with variety, quality and convenience. Management believes that its
merchandising strengths have fostered a loyal customer base by establishing a
distinctive reputation for providing high quality products and a variety of
specialty departments.
EXPANDED SELECTIONS OF QUALITY MEAT, SEAFOOD, PRODUCE AND OTHER
PERISHABLES. The Company's stores are well-known for their broad selection of
quality meats, seafood, produce and other perishables. The Company believes that
its reputation for carrying select cuts of beef, natural poultry and pork, fresh
seafood and local produce differentiates its stores from those of its
competitors. The Company's full-service meat departments generally incorporate
an open design which fosters interaction among butchers and customers. All meat
offerings are skillfully trimmed and appealingly displayed. A wide range of home
replacement meals, such as shish kebabs, chicken kiev and stuffed game hens, are
featured in each store's meat department and many stores' meat departments
include full-service smokehouses. Fresh fish and seafood from nearby Gulf waters
are delivered daily to each store. The Company's produce departments are
designed to portray an open market feel with carefully selected and hand stacked
produce and offerings of fresh herbs and organically grown fruits and
vegetables. An extensive variety of produce from local growers is given special
emphasis in store merchandising.
HIGH QUALITY CONVENIENCE-ORIENTED SPECIALTY DEPARTMENTS AND SERVICES. Based
on market and demographic data, management believes that supermarkets offering a
broad array of products and time-saving services are perceived by customers as
part of a solution to today's lifestyle demands. Accordingly, a principal
component of the Company's merchandising strategy is to design stores which
offer a "one-stop" shopping experience. In-store services such as bank branches,
ATMs, drycleaning services and video rental departments are strategically placed
near the front of the stores. Gourmet coffee bars, in-store bakeries and
prepared foods sections are conveniently located near seating areas. Most stores
are open 24 hours, with well-lit parking lots and on-site security personnel.
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INCREASED EMPHASIS ON PREPARED FOODS AND HOME MEAL REPLACEMENT ITEMS. Many
stores offer daily selections of pastas and dinner entrees, as well as
made-to-order pizzas, rotisserie chickens, quiches, hot and cold sandwiches and
salads. In Flagship and New Generation Stores, food is prepared in open areas to
increase shoppers' confidence in product freshness. In Flagship Stores,
selections extend to panini sandwiches made of focaccia bread baked on the
premises and a sushi bar staffed by trained sushi chefs. In many stores, baked
goods are made daily from scratch, including bagels, hot rolls, scones, brioche
and specialty breads; and each Flagship Store is staffed with a French pastry
chef. Each store contains a full-service florist shop offering flowers and
plants delivered daily by vendors, and most stores are staffed by master
florists or designers. Most stores offer an extensive selection of wines and
champagnes, including wines from well-known California and French vineyards as
well as local vineyards.
The Company's video rental departments feature over 5,000 movie titles,
rental VCRs and snack centers all contained in an appealing alcove decorated
with glossy posters and monitors playing current videos. Most stores include a
bank branch and/or ATM machines, one-hour photo processing, as well as a
full-service pharmacy. Customer service centers in each store provide a wide
array of services, including the purchase of lottery and movie tickets, check
cashing, payment of utility bills, car licenses, and hunting and fishing
licenses.
PRIVATE LABEL PROGRAM
The Company supplements its branded grocery offerings with a selection of
private label goods, including grocery, general merchandise, floral, health and
beauty products, dairy, produce and delicatessen products. In comparison to
national brands, private label goods provide comparable quality at lower prices
to customers and higher gross margins to the Company. The Company currently
offers a three-tiered private label program including PRESIDENT'S CHOICE premium
private label products, its own REMARKABLE brand private label products and
VALUE TIME private label products catering to value-conscious consumers. The
Company procures REMARKABLE and VALUE TIME products through Topco Associates,
Inc., a national food buying cooperative owned by over 45 retail, wholesale and
food service operators and offering over 6,000 private label branded goods. In
addition, Daymon Associates, a leading sales and marketing company for private
label brands, manages the Company's private label program. The Company has not
entered into any contractual agreements with Daymon Associates. In recent years
the Company's private label sales have been significantly lower than the
national average; however, the Company is currently expanding its private label
offerings across all tiers, with particular emphasis on increasing REMARKABLE
label offerings.
ADVERTISING AND MARKETING
The Company advertises through television, radio, newspapers and newspaper
inserts, with an emphasis placed on its reputation for providing high quality
products and exceptional service. The Company distributes a large number of its
circulars to target markets each week. The Company regularly promotes new
products and services through in-store demonstrations and samplings, and "point
of sale" coupons. In addition, in order to enhance its name recognition and
quality-oriented image, the Company sponsors a number of local and nationally
recognized charitable organizations and professional sports franchises. The
Company also provides coupons which are printed on the reverse side of the
shopper's receipt.
The Company's frequent shopper program has become the cornerstone of its
marketing efforts since its inception in the fall of 1996. Currently, frequent
shopper card holders account for a majority of the Company's total sales and a
significant percentage of the Company's total transactions. Data generated from
frequent shopper card purchases enables the Company to track changing sales and
demographic patterns and customer preferences. The Company uses such data to
allocate advertising resources and shelf space accordingly and focus on targeted
marketing activities (i.e., direct mailings) that are tailored to the needs of
identifiable consumer segments.
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Frequent shopper card holders currently receive check-cashing privileges,
debit card capability, electronic discounts and direct mailings from the
Company. In addition, in conjunction with the Company's "Good Neighbor" program,
frequent shopper card holders can select from one of over 5,000 participating
not-for-profit organizations, and the Company will donate a fixed percentage of
the holder's frequent shopper card purchases to that organization.
PURCHASING AND DISTRIBUTION
The Company is currently undertaking an evaluation of its existing
distribution channels. The Company has traditionally purchased a portion of its
merchandise from third party suppliers. Approximately 30% of the Company's
purchases are supplied directly to the Company's stores by Fleming, one of the
nation's largest food distribution companies, pursuant to a 1993 supply
agreement which expires in June 2001. The Company has initiated a legal action
against Fleming, one of its long-time suppliers. In the action, the Company
alleges, among other things, that Fleming violated the terms of a supply
agreement signed in 1993. Under the terms of the supply agreement, the Company
was to purchase groceries and other items at Fleming's cost, plus a small
markup. Among the violations alleged by the Company are claims that Fleming
wrongfully manipulated its costing procedures, which resulted in overcharges,
and then unilaterally changed the overall pricing formula. Additionally, the
Company alleged that Fleming failed to provide supporting documentation for
purchases as required under the contract. Since 1993 when the supply agreement
was signed, the Company has purchased approximately $2.0 billion in products
from Fleming. Based on the supporting documents provided to the Company by
Fleming to date, the Company will be seeking a substantial amount of damages
from Fleming and termination of the supply agreement. Fleming has filed an
answer denying each allegation and a counterclaim alleging that the Company
failed to purchase the quantities required by the supply agreement.
An additional 30% of the Company's purchases, including beverages, tobacco
products, milk, bread and snack foods, are supplied directly to the Company's
stores by vendors, with the remaining 40% of products being self-distributed.
The Company believes it can improve its cost structure and manage working
capital more efficiently by enhancing its distribution capabilities.
The Company currently operates two distribution facilities in Houston and
one in Dallas, totaling over 600,000 square feet. The Telge Road facility in
Houston consists of 109,640 square feet of refrigerated space to store
perishable goods, 33,020 square feet of dry grocery space and 7,000 square feet
of office space, and is located on approximately 70 acres of Company-owned land,
10 of which have been developed. The Rogerdale facility in Houston consists of
155,728 square feet of dry grocery space and 13,916 square feet of office space,
and is located on approximately 29 acres of Company-owned land, approximately 20
of which have been developed. The Inwood facility located in Dallas consists of
78,854 square feet of refrigerated space, 194,020 square feet of dry grocery
space, and 21,900 square feet of office space, and is located on approximately
25 acres of Company-owned land, substantially all of which has been developed.
Each store submits orders to the distribution facilities through a
centralized processing system, and merchandise is normally received by the
stores on the next day. Merchandise is delivered from the distribution
facilities through a leased fleet of 34 tractors, 66 refrigerated trailers and
18 dry trailers. The majority of the Company's stores in Houston and Dallas are
located within a 70 mile radius of a distribution facility.
The Rogerdale facility currently is for sale. The Company intends to expand
the Telge Road facility in connection with the anticipated consummation of such
sale.
INFORMATION TECHNOLOGY SYSTEMS
The Company's information systems include IBM personal computer-based
point-of-sale hardware and software in every checkout lane of each store,
thereby facilitating the implementation of the frequent shopper program. The
Company has an electronic payment system which includes check verification,
credit and debit card processing, ACH payment option, video rental application,
and a check collection system. These systems are fully integrated into the IBM
point-of-sale system.
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The Company has a direct store delivery system, which integrates the receipt
of goods at each store with accounting and merchandising at the Company's
corporate headquarters. This integrated system provides the Company timely
information and greater efficiency and control over product receipts,
merchandising and accounts payable functions. In addition, the Company has
electronic time and attendance and labor scheduling systems that enable store
management to better control labor costs and increase the automation level of
the payroll process.
The Company is in the final stage of converting from a mainframe data center
operation to client-server based "open systems" architecture that will be the
foundation for its future technology development. Management expects that the
expanded functionality of its information capabilities will permit the
refinement of tools it can apply to better analyze data from the frequent
shopper program.
The Company is in the process of converting from a mainframe based
accounting software system to a client server based accounting system that
enhances the accounting process and provides for greater and more timely access
to Company accounting information. The Company also uses Electronic Data
Interchange to transmit and receive documents from suppliers. The Company is
using a warehousing and merchandising system developed internally running on a
UNIX machine using Informix as its database engine.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse club
stores, deep discount drug stores and supercenters. Supermarket chains generally
compete on the basis of location, quality of products, service, price, variety
and store condition. The Company regularly monitors its competitors' prices and
adjusts its prices and marketing strategy as management deems appropriate in
light of existing conditions. The Company faces increased competitive pressure
in all of its markets from existing competitors which have opened, and appear to
have plans to continue to open, a significant number of new stores in the
Company's markets. Some of the Company's competitors have greater financial
resources than the Company and could use these resources to take measures which
could adversely affect the Company's competitive position.
The Company's principal competitors in Houston are The Kroger Co.
("Kroger"), Fiesta Mart Inc. and H.E. Butt Grocery Company ("H.E.B."), with
market shares of approximately 26%, 11% and 8%, respectively. The Company's
principal competitors in Dallas are Albertsons Inc. ("Albertsons"), Minyard Food
Stores ("Minyard") and Kroger, with market shares of approximately 21%, 15% and
15%, respectively. The Company's principal competitors in Fort Worth are
Albertsons, Kroger, Winn-Dixie Stores and Minyard, with market shares of
approximately 22%, 19%, 17% and 10%, respectively. The Company's principal
competitors in the Austin metropolitan area are H.E.B. and Albertsons, with
market shares of approximately 48% and 17%, respectively.
EMPLOYEES AND LABOR RELATIONS
The Company is one of the leading private employers in Texas. As of October
18, 1997, the Company employed 17,894 persons, of whom approximately 41% were
full-time and approximately 59% were part-time employees. Of this number, 16,890
were employed in supermarkets, 480 were employed in the warehouse operations and
524 were employed in the Company's business offices. The Company currently
employs an average of 144 employees in each store.
<TABLE>
<S> <C>
EMPLOYEE TYPE: TOTAL
---------
Salaried............................................................................ 1,978
Hourly:
Full-time......................................................................... 5,283
Part-time......................................................................... 10,633
---------
Total............................................................................... 17,894
---------
---------
</TABLE>
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The Company's employees are not members of unions or parties to collective
bargaining agreements.
PROPERTIES
The Company operates a total of 117 supermarkets, with 52 located in the
Houston metropolitan area, 52 in the Dallas/Fort Worth metropolitan area and 13
in the Austin metropolitan area. Four of the Company's stores are owned and 113
are leased (two of which are held through interests in joint ventures).
The Company's real estate holdings consist of 138 leasehold (the "Leased
Properties") and 30 owned (the "Fee Properties") properties. The Company also
owns interests in five properties through joint ventures (the "Joint Venture
Properties"). The Company's ownership interests in the Joint Venture Properties
range from 50% to 83.3%. The book value of the Company's investments in the five
Joint Venture Properties is $1.6 million. As of October 18, 1997, the Joint
Venture Properties had $17.3 million of indebtedness, all of which is
nonrecourse to the Company. The Company shares in the profits and losses on the
Joint Venture Properties on a pro rata basis with the other joint venture
owners. See Footnote 4 to the Consolidated Financial Statements.
LEASED PROPERTIES
The Company leases 138 properties under standard commercial leases which
generally obligate the Company to pay its proportionate share of real estate
taxes, common area maintenance charges and insurance costs. In addition, such
leases generally provide for percentage of sales rent when sales from the store
exceed a certain dollar amount. Generally these leases have 20-year terms, with
four five-year renewal options. The Company owns a majority of the fixtures and
equipment in each leased location and has made various leasehold improvements to
the store sites. Company stores are located on 113 of the 138 Leased Properties
and, of the remaining 25 leases, 17 have been assigned or subleased to
unaffiliated third parties, generally in connection with store closings.
FEE PROPERTIES
The Company owns the 30 Fee Properties through Randall's Properties, Inc., a
wholly-owned subsidiary. The Fee Properties consist of the Company's
headquarters in Houston (comprised of two sites), the three Warehouses, two
shopping centers which are not occupied by Company stores, one store leased to
an unaffiliated party, four free-standing supermarkets, 16 undeveloped
properties and two properties currently under construction. The Company has
entered into a sale leaseback arrangement with third parties in connection with
the two properties currently under construction.
JOINT VENTURE PROPERTIES
The five Joint Venture Properties are comprised of two shopping centers
which contain Company stores and three parcels of undeveloped land. The joint
ventures relating to the Joint Venture Properties were originally formed in
order to acquire land, develop shopping centers and lease the land. The Company
does not intend to enter into any additional joint venture or similar
arrangements in the future.
TRADENAMES AND TRADEMARKS
The Company uses a variety of tradenames and trademarks. Except for
RANDALLS, TOM THUMB and REMARKABLE, the Company does not believe any of such
tradenames or trademarks are material to its business. The Company has granted
the right to certain retail shopping centers to use the RANDALLS, TOM THUMB and
SIMON DAVID tradenames as part of the tradenames of such shopping centers, so
long as the Company's stores are operating in such shopping centers.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of hazardous materials. Under various
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or
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petroleum product releases at such property and may be held liable to a
governmental entity or to third parties for damages and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
The Company believes that it currently conducts its operations, and in the past
has operated its business, in substantial compliance with applicable
environmental laws and regulations. There can be no assurance that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Properties will not
be affected by tenants, by the condition of land or operations in the vicinity
of the Properties (such as the presence of underground storage tanks), or by
third parties unrelated to the Company. From time to time, operations of the
Company have resulted or may result in noncompliance with or liability for
cleanup pursuant to environmental laws and regulations. The Company has
determined that underground storage tanks at truck fueling sites in Texas and
Nebraska may have leaked fuel and other materials and resulted in soil
contamination. At the Abilene, Texas site, based on soil and groundwater
remediation efforts to date, the Company estimates a range of future
expenditures between $300,000 and $700,000, substantially all of which has been
reserved. With respect to a second site, located in Dallas, Texas, the Company
has paid remediation costs of approximately $300,000, and state regulatory
authorities have advised the Company that no further corrective action is
necessary. The Company expects to submit its final closure report to the state
shortly, which will be the last submittal associated with that location. One
other site, located in Garland, Texas, was sold to a party who accepted
responsibility for corrective action pertaining to leaking underground storage
tank site remediation. Under applicable environmental laws, the Company may
remain liable for remediation of the Garland site, which the Company estimates
may cost up to approximately $100,000. Remediation of the Nebraska site had been
initiated by the NDEQ using funds from the Nebraska Fund dedicated to
remediation of leaking underground storage tanks. Due to shortfalls in the
Nebraska Fund, the NDEQ, which has not classified the Company's site as a high
priority, suspended the remediation efforts. The Company anticipates that future
remediation efforts at such site, if any, would be paid for by the Nebraska
Fund. The Company believes that the remediation efforts described above, which
represent the Company's material environmental matters, will not have a material
adverse effect on its financial condition, results of operations and cash flow.
The Company has not incurred material capital expenditures for environmental
controls during the previous three years, nor does the Company anticipate
incurring any such material expenditures to comply with environmental
regulations during the current fiscal or the succeeding fiscal year.
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental agencies,
including, but not limited to, the U.S. Food and Drug Administration, the U.S.
Department of Agriculture, and other federal, state and local agencies. The
Company's stores are also subject to local laws regarding the sale of alcoholic
beverages.
LITIGATION
MSP LITIGATION
Following the Cullum Acquisition, the Company terminated the MSP and in
respect of such terminations paid participants the greater of (i) the amount of
such participant's deferral and (ii) the net present value of an accrued
benefit, based upon the participant's salary, age and years of service. Thirty-
five of the former MSP participants have instituted a claim against the Company
on behalf of all persons who were participants in the MSP on its date of
termination (which is alleged by plaintiffs to be approximately 250 persons).
The plaintiffs have asked the court to recognize their action as a class action,
to recover additional amounts under the MSP, for a declaration of rights under
an employee pension benefit plan and for breach of fiduciary duty. The
plaintiffs assert that the yearly plan agreement executed by each participant in
the MSP was a contract for a specified retirement and death benefit set forth in
such plan agreements and that such benefits were vested and nonforfeitable. 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
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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. 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
has scheduled a pre-trial conference with the parties for January 22, 1998. The
trial is expected 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 does not anticipate an unfavorable outcome based on management's
independent analysis of the facts relating to such litigation.
ESOP LITIGATION
On November 28, 1995, two individuals filed a lawsuit on behalf of the ESOP
and certain participants and former participants in and beneficiaries of the
ESOP. The lawsuit alleged that the Company, certain employees thereof and
certain entities which engaged in a variety of services relating to the ESOP had
violated various federal and state laws in connection with the operation of the
ESOP, including transactions by the ESOP involving the Common Stock. The Company
and the other defendants denied all of the allegations. The plaintiffs'
representatives and the Company and the other defendants subsequently agreed to
settle the litigation. Although the defendants continue to deny all charges of
wrongdoing or liability against them, they have concluded that it was desirable
to settle the litigation in order to avoid further expense, inconvenience and
distraction, noting the uncertainty and risks inherent in litigation.
The Company and the other defendants elected to settle the suit pursuant to
a settlement agreement (the "Settlement Agreement") for $16.5 million, of which
the Company was liable for $11.3 million plus $0.2 million in expenses. Net of
insurance proceeds, the Company has paid $10.5 million in the aggregate in
connection with the settlement. The Company increased its existing litigation
reserves by $9.5 million during fiscal year 1997 to fully reserve for such
matters and concurrently with the Closing, the Company paid $11.3 million into a
trust fund pursuant to the Settlement Agreement.
In addition, the settlement provides for certain changes in the operation of
the ESOP, including the addition of a 401(k) feature offering a variety of
professionally managed mutual fund investments and the cessation of additional
investments by the ESOP in the Common Stock. Under the Settlement Agreement, the
Company and the other defendants were released from further liability relating
to the litigation by all the members of the plaintiffs' class.
EEOC LITIGATION
On June 5, 1997, the U.S. District Court for the Southern District of Texas
granted a joint motion by the Company and the Equal Employment Opportunity
Commission (the "EEOC") for entry of a consent decree (the "Consent Decree")
settling a charge by the EEOC Commissioner filed in 1989 that the Company
violated Title VII of the Civil Rights Act of 1964, as amended. The Consent
Decree provides that between January 1, 1988 and December 31, 1992 the Company
violated Title VII by (i) failing to hire African American, Hispanic and female
applicants for entry-level jobs, (ii) segregating female and Hispanic employees,
(iii) failing to select African Americans and women for the Grocery Management
Training Program and (iv) failing to maintain required records. Under the terms
of the Consent Decree, the Company is required to pay $2.3 million, representing
back pay and interest, into a fund to be divided among entry-level claimants,
and $0.2 million into a fund to be divided among grocery department management
trainee claimants. The Company will bear the costs of administering the
settlement, which the Company estimates to be approximately $0.8 million. As of
October 18, 1997, the Company has reserved $3.3 million for expected
expenditures in connection with the EEOC settlement. Qualified
49
<PAGE>
promotion claimants will be placed on a preferential promotion list from which
future promotions will be made by the Company. The Consent Decree includes
certain requirements to properly notify potential claimants and certain enhanced
reporting requirements. The Consent Decree will be effective for a two-year
period, except that the obligations to distribute back pay, offer employment,
retain information and make reports will extend beyond the two-year term.
During the course of the EEOC investigation evidence was uncovered that the
Company may not have hired certain persons for age and other reasons. The
Company has agreed to settle these charges for an immaterial amount of money.
FLEMING DISPUTE
On July 30, 1997, the Company initiated an arbitration proceeding before the
American Arbitration Association against Fleming Companies, Inc. ("Fleming"),
one of its long-time suppliers. In the action, the Company alleges that Fleming
violated the terms of a supply agreement signed in 1993, commited fraud by
reason of certain statements and representations that Fleming should have known
were untrue and violated the Racketeering Influence and Corrupt Organizations
Act, as amended. Under the terms of the supply agreement, the Company was to
purchase groceries and other items at Fleming's cost, plus a small markup. Among
the violations alleged by the Company are claims that Fleming wrongfully
manipulated its costing procedures, which resulted in overcharges, and then
unilaterally changed the overall pricing formula. Additionally, the Company
alleged that Fleming failed to provide supporting documentation for purchases as
required under the contract. Since 1993 when the supply agreement was signed,
the Company has purchased approximately $2.0 billion in products from Fleming.
Based on the supporting documents provided to the Company by Fleming to date,
the Company will be seeking a substantial amount of damages from Fleming and
termination of the supply agreement. The Company is currently in the process of
analyzing its transactions with Fleming to quantify its request for damages, but
a quantification is not expected until later in fiscal year 1998. Fleming has
filed an answer denying each allegation and a counterclaim alleging that the
Company failed to purchase the quantities required by the supply agreement.
Fleming has asserted a further counterclaim that the Company has engaged in the
self-supply of certain products in violation of the supply agreement. Fleming
asserts that such alleged breaches resulted in excess of $0.7 million in damages
to Fleming. In the event the Company were to prevail, an award of damages could
be material and, if the supply agreement were terminated, the Company believes
it would be able to decrease its costs of supply below historical levels. In the
event the Company were to not succeed in the arbitration and Fleming were to
prevail on its counterclaim, the Company does not believe that such result would
have a material adverse effect on the Company as the Fleming counterclaim seeks
an immaterial amount of damages and the continuation of the Fleming supply
agreement would not result in a change from the Company's historical operating
performance.
Other than the foregoing matters, the Company believes it is not a party to
any pending legal proceedings, including ordinary litigation incidental to the
conduct of its business and the ownership of its property, the adverse
determination of which would have a material adverse effect on the Company, its
operations or its financial condition.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions with the Company of
directors and executive officers of the Company, together with certain other key
personnel. The Board of Directors will be subject to change from time to time.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --------- ---------------------------------------------------
<S> <C> <C>
Robert R. Onstead.................................. 66 Chairman of the Board
R. Randall Onstead................................. 41 President, Chief Executive Officer and Director
Douglas G. Beckstett............................... 45 Senior Vice President, Human Resources
Michael M. Calbert................................. 35 Senior Vice President, Corporate Planning and
Development
Frank Lazaran...................................... 41 Senior Vice President, Sales and Merchandising
Curtis D. McClellan................................ 30 Vice President, Corporate Controller
D. Mark Prestidge.................................. 38 President, Dallas Division
J. Russell Robinson................................ 55 Senior Vice President, Chief Information Officer
Joe R. Rollins..................................... 41 Senior Vice President, Real Estate and Assistant
Secretary
Lee E. Straus...................................... 48 Senior Vice President, Finance, Secretary and
Treasurer
John V. Sullivan................................... 40 Senior Vice President, Houston Operations,
Randall's Food & Drugs, Inc.
Henry R. Kravis.................................... 53 Director
George R. Roberts.................................. 53 Director
Paul E. Raether.................................... 50 Director
James H. Greene, Jr................................ 47 Director
Nils P. Brous...................................... 32 Director
A. Benton Cocanougher.............................. 59 Director
</TABLE>
ROBERT R. ONSTEAD is a co-founder of the Company and has been its Chairman
for all 31 years of its existence. Mr. Onstead attended the University of North
Texas.
R. RANDALL ONSTEAD has been President and Chief Executive Officer of the
Company since April 1996, a Director of the Company for 11 years and has been
with the Company for 19 years. From 1986 to April 1996, Mr. Onstead served as
President and Chief Operating Officer. Prior to 1986, Mr. Onstead was Assistant
Grocery Buyer for five years after serving in various management positions since
1978. He has a B.S. degree in Marketing from Texas Tech University and has
attended Harvard Business School's Management Development Program.
DOUGLAS G. BECKSTETT joined the Company as Senior Vice President of Human
Resources in June 1997. He had 20 years of Human Resources experience prior to
joining the Company, most recently serving as vice president of Human Resources
for APS Inc. He received his bachelor's degree in management science with a
concentration in organizational theory in 1974 from Duke University and his
M.B.A., with honors, in organizational behavior in 1977 from Boston University.
MICHAEL M. CALBERT joined the Company in September 1994 as Senior Vice
President, Corporate Controller and was promoted to Senior Vice President,
Corporate Planning and Development in 1996. From 1984 to 1994, he served as a
Manager in the audit and consulting groups of Arthur Andersen LLP. Mr. Calbert
is responsible for the coordination and implementation of the Company's overall
strategic
51
<PAGE>
plan. Mr. Calbert is a certified public accountant and received a B.B.A. degree
from Stephen F. Austin State University.
FRANK LAZARAN joined the Company as Senior Vice President of Sales and
Merchandising in November 1997. Prior to joining the Company, he served as Group
Vice President, Sales, Advertising and Merchandising for Ralph's Grocery Company
where he worked for 23 years. Mr. Lazaran has a B.S. degree in Business
Administration from California State University at Long Beach.
CURTIS D. MCCLELLAN was named Vice President and Corporate Controller of the
Company on August 12, 1997. Mr. McClellan most recently served as Controller in
the Dallas Division. Other positions he has held include director of operational
accounting, chief accounting manager, and accounting manager. He joined the
Company in 1991 after working for Price Waterhouse L.L.P. in the Audit
Department for two years. He received his bachelor's degree in business
administration with an emphasis in accounting from Abilene Christian University.
He is a certified public accountant.
D. MARK PRESTIDGE was appointed President, Tom Thumb Stores Division in
March 1996. From April 1994 to 1996, Mr. Prestidge served as Division Vice
President, Tom Thumb Stores Division after serving for two years as a Vice
President/District Manager of the Division. From 1980 to 1992, he served in
various store management positions at the Company. Mr. Prestidge joined the
Company in 1979 and oversees the management of the Tom Thumb stores division's
retail stores, merchandising, procurement, and distribution operations.
J. RUSSELL ROBINSON joined the Company as Senior Vice President, Chief
Information Officer in June 1997. Prior to joining the Company, he served as
Vice President, Information Services for Ralph's Grocery Company where he worked
for 12 years. Mr. Robinson has a B.A. degree in Business Administration from
California State University at Long Beach and an M.B.A. degree from the
University of Southern California.
JOE R. ROLLINS was promoted to Senior Vice President, Real Estate in August
1996, after serving 12 years as Vice President, Real Estate. From 1978 to 1984,
he served as Real Estate Manager for Kroger in Houston. Mr. Rollins is
responsible for new store site evaluation and acquisition and leasing
arrangements for stores, warehouses and other facilities. In addition, he
negotiates the purchase and sale of real property. Mr. Rollins has a B.B.A.
degree from Texas Tech University.
LEE E. STRAUS joined the Company in August 1994 as Senior Vice
President-Finance, Secretary and Treasurer after more than 21 years in various
positions at Texas Commerce Bancshares. From 1989 to 1994, Mr. Straus served as
President of Texas Commerce Mortgage Company, and prior to that was Executive
Vice President, Chief Administrative Officer, of Texas Commerce Bancshares. He
has a M.B.A. from Stanford University.
JOHN W. SULLIVAN was named Senior Vice President, Houston Operations for
Randall's Food & Drugs, Inc. in August 1997. With seven years of prior
supermarket experience, he joined the Company in 1982 as a Manager Trainee and
worked his way up from Grocery Director to District Manager in Austin. From
August 1993 to August 1997, he served as Division Vice President in Austin and
in Houston. Mr. Sullivan attended St. Edward's University in Austin, Texas.
HENRY R. KRAVIS is a managing member of KKR & Co. LLC, the limited liability
company which serves as the general partner of KKR. He is also a director of
Amphenol Corporation, AutoZone, Inc., Borden, Inc., Bruno's, Inc., Evenflo &
Spalding Holdings Corporation, Flagstar Companies Inc., Flagstar Corporation,
The Gillette Company, IDEX Corporation, K-III Communications Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Group, Inc., Merit Behavioral
Care Corporation, Newsquest Capital plc, Owens-Illinois Group, Inc.,
Owens-Illinois, Inc., Safeway Inc., Sotheby's Holdings Inc., Union Texas
Petroleum Holdings, Inc., and World Color Press, Inc.
52
<PAGE>
GEORGE R. ROBERTS is a managing member of KKR & Co. LLC, the limited
liability company which serves as the general partner of KKR. He is also a
director of Amphenol Corporation, AutoZone, Inc., Borden, Inc., Bruno's, Inc.,
Evenflo & Spalding Holdings Corporation, Flagstar Companies Inc., Flagstar
Corporation, IDEX Corporation, K-III Communications Corporation, KinderCare
Learning Centers, Inc., KSL Recreation Group, Inc., Merit Behavioral Care
Corporation, Newsquest Capital plc, Owens-Illinois Group, Inc., Owens-Illinois,
Inc., Safeway Inc., Union Texas Petroleum Holdings, Inc., and World Color Press,
Inc.
PAUL E. RAETHER is a member of KKR & Co. LLC, the limited liability company
which serves as the general partner of KKR. He is also a director of Bruno's,
Inc., Flagstar Companies, Inc., Flagstar Corporation, IDEX Corporation and KSL
Recreation Group, Inc.
JAMES H. GREENE, JR. is a member of KKR & Co. LLC, the limited liability
company which serves as the general partner of KKR. He is also a director of
Bruno's, Inc., Owens-Illinois, Inc., Owens-Illinois Group, Inc., Safeway Inc.
and Union Texas Petroleum Holdings, Inc.
NILS P. BROUS has been an executive of KKR since 1992. Prior thereto, he was
an associate at Goldman, Sachs & Co. Mr. Brous is also a director of Bruno's,
Inc., Canadian General Insurance Group Limited and KinderCare Learning Centers,
Inc.
A. BENTON COCANOUGHER is currently Dean of the Lowry Mays College and
Graduate School of Business at Texas A&M University. He is also a director of
Smith Barney Concert Series Mutual Funds, First American Bank -- Bryan and First
American State Savings Bank Texas. Mr. Cocanougher has a B.B.A., M.B.A. and
Ph.D. from the University of Texas at Austin.
Messrs. Kravis and Roberts are first cousins. Robert R. Onstead and R.
Randall Onstead are father and son.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses incurred
in attending all Board and committee meetings. It is anticipated that each
director who is not an employee of the Company will receive an aggregate annual
fee of $30,000. Directors who are also employees of the Company will receive no
remuneration for serving as directors.
EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for fiscal year 1997 for (i) the Chief Executive Officer of the
Company during such fiscal year, (ii) the Chairman of the Board of the Company
during such fiscal year and (iii) each of the five other most highly compensated
executive officers of the Company, determined as of June 28, 1997 (collectively,
the "Named Executive Officers").
53
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ----------------
FISCAL OTHER ANNUAL RESTRICTED ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) STOCK AWARDS(2) COMPENSATION
- ---------------------------------------- --------- ---------- --------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $
Robert R. Onstead....................... 1997 500,096 0 35,385 -- 255,639(3)
Chairman of the Board
R. Randall Onstead...................... 1997 375,192 185,589 9,807 103,480(4)(5) 169,064(3)
President and Chief Executive Officer
Ron W. Barclay.......................... 1997 200,192 92,125 16,812 60,465(4) --
Executive Vice President,
Chief Administrative Officer
& Assistant Secretary (6)
Michael M. Calbert...................... 1997 175,000 133,000 11,289 58,382(4)(5) --
Senior Vice President,
Corporate Planning and
Development
Thomas K. Arledge....................... 1997 175,192 89,000 19,762 58,382(4) --
Senior Vice President,
Retail Operations (7)
Terry P. Poyner (8)..................... 1997 171,415 75,875 8,353 49,627(4) --
Senior Vice President,
Merchandising/Logistics
Lee E. Straus........................... 1997 153,846 71,731 3,500 46,708(4)(5) --
Senior Vice President,
Finance, Secretary and
Treasurer
</TABLE>
- ------------------------
(1) The amounts shown in this column represent annual payments for club
allowance, car allowance and/ or reimbursement of medical expenses.
(2) As of June 28, 1997, the aggregate number and value of the Company's
restricted stock for all executive officers was 34,408 shares with a value
of $416,681 based on the purchase price of the Common Stock in the
Recapitalization.
(3) Includes income recognized upon the purchase of a whole life insurance
policy for the benefit of the individual.
(4) Includes income recognized upon the vesting of restricted Common Stock as of
the Closing.
(5) On November 14, 1997 pursuant to the Company's 1997 Stock Purchase Plan for
Key Employees of Randall's Food Markets, Inc. and Subsidiaries, Mr. Onstead
was granted options to purchase 371,595 shares of Common Stock, (ii) Mr.
Calbert purchased 16,515 shares of Common Stock and was granted options to
purchase 51,610 shares of Common Stock and (iii) Mr. Straus purchased 18,051
shares of Common Stock and was granted options to purchase 51,010 shares of
Common Stock. The purchase price for the shares and the exercise price for
the options was $12.11 per share, with 50% of such shares to vest 20% per
year over five years and the remaining 50% to vest based on the attainment
of certain earnings targets by the Company. See "--1997 Stock Purchase and
Option Plan."
(6) Mr. Barclay retired from the Company effective as of August 16, 1997.
(7) Mr. Arledge terminated his employment with the Company effective as of
August 14, 1997.
(8) Mr. Poyner terminated his employment with the Company effective as of
October 31, 1997.
54
<PAGE>
STOCK OPTION AND RESTRICTED STOCK PLAN
The Company Stock Option and Restricted Stock Plan (the "Stock Plan")
provides for participation by key executives who are selected by the Company's
Executive Committee. There are 1.5 million shares available for awards under the
Stock Plan. To date, the following options have been granted: options to
purchase 35,928 shares at $9.65 per share; options to purchase 25,209 shares at
$11.90 per share; options to purchase 20,000 shares at $10.75 per share; options
to purchase 20,001 shares at $15.00 per share; and options to purchase 495,810
shares at $18.15 per share. As of June 28, 1997 approximately 76,295 shares
subject to options were exercisable.
OPTION GRANTS
On December 30, 1994, the Company granted options to purchase $1,300,000 of
Common Stock to each of Messrs. Calbert, Arledge and Straus (the "1994 Option
Grant"). The options granted to Messrs. Calbert and Arledge consisted of five
tranches of formula grants to be made on the last business day of five
consecutive calendar years commencing December 30, 1994. Mr. Arledge's options
were cancelled in connection with his resignation from the Company effective as
of August 14, 1997. With respect to vested options, he received aggregate
consideration of $27,255 (the difference between the respective exercise prices
of such options and $12.11 per share). Mr. Arledge's unvested options were
cancelled without any payment. The options granted to Mr. Straus consisted of
three tranches of formula grants to be made on the last business day of three
consecutive calendar years commencing December 30, 1994.
The number of options in each tranche of formula grants is determined by
dividing $100,000 by the value of a share of Common Stock at successive calendar
year ends. The exercise prices which have been fixed as of the present time are
$9.65, $11.90 and $15.00 for each of Messrs. Calbert and Straus. The exercise
prices of the two remaining tranches for Mr. Calbert will be determined on the
last business day of each of calendar years 1997 and 1998.
The following Option Grants Table sets forth, as to the Named Executive
Officers, certain information relating to stock options granted during fiscal
year 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME SARS GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------------- ----------------- ----------------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Onstead............... 0 0 -- -- -- --
R. Randall Onstead.............. 0 0 -- -- -- --
Ron W. Barclay(1)............... 0 0 -- -- -- --
Michael M. Calbert(2)........... 6,667 33 15.00 12/30/2004 30,935(3) 73,070(3)
Thomas K. Arledge(4)............ -- -- -- -- -- --
Terry P. Poyner................. 0 0 -- -- -- --
Lee E. Straus(2)................ 6,667 33 15.00 12/30/2004 30,935(3) 73,070(3)
</TABLE>
- ------------------------
(1) Mr. Barclay retired from the Company effective as of August 16, 1997.
(2) Represents the number of options granted on December 29, 1995 to each of
Messrs. Calbert, Arledge and Straus pursuant to the 1994 Option Grant.
(3) The value of the Common Stock was $10.50 based upon an appraisal of the
Common Stock as of June 28, 1997. Based upon the exercise prices, the
amounts shown in these columns are the potential realizable value of options
granted at assumed rates of stock price appreciation (5% and 10%, as set by
the executive compensation disclosure provisions of the proxy rules)
compounded annually over
55
<PAGE>
the option term and have not been discounted to reflect the present value of
such amounts. The assumed rates of stock price appreciation are not intended
to forecast the future appreciation of the Common Stock.
(4) Mr. Arledge's options were cancelled in connection with his resignation from
the Company effective as of August 14, 1997. With respect to vested options,
he received aggregate consideration of $27,255 (the difference between the
respective exercise prices of such options and $12.11 per share). Mr.
Arledge's unvested options were cancelled without any payment.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND OPTION VALUES AS OF JUNE
28, 1997
The following table sets forth certain information concerning the number of
stock options held by the Named Executive Officers as of June 28, 1997, and the
value of in-the-money options outstanding as of such date.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE- MONEY
OPTIONS AS OF OPTIONS AS
NUMBER OF SHARES JUNE 28, 1997 OF JUNE 28, 1997
ACQUIRED ON (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE) UNEXERCISABLE)
- ------------------------------------------ --------------------- ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Robert R. Onstead......................... 0 $ 0 0 $ 0
R. Randall Onstead........................ 0 0 0 0
Ron W. Barclay(1)......................... 0 0 0 0
Michael M. Calbert(2)(3).................. 0 0 18,765/8,281 8,808/1,372
Thomas K. Arledge(4)...................... -- -- -- --
Terry P. Poyner........................... 0 0 0 0
Lee E. Straus(2).......................... 0 0 18,765/8,281 8,808/1,372
</TABLE>
- ------------------------
(1) Mr. Barclay retired from the Company effective as of August 16, 1997.
(2) The value of the Common Stock was $10.50 based upon an appraisal of the
Common Stock as of June 28, 1997.
(3) The number of unexercisable options does not include two tranches totaling
$200,000 of Common Stock granted to Mr. Calbert whose exercises price will
be fixed on December 31, 1997 and December 31, 1998, respectively.
Consequently the number of options relating to such grant cannot be
determined until the fair market value of a share of Common Stock is
determined on such dates. See "--Option Grants."
(4) Mr. Arledge's options were cancelled in connection with his resignation from
the Company effective as of August 14, 1997. With respect to vested options,
he received aggregate consideration of $27,255 (the difference between the
respective exercise prices of such options and $12.11 per share). Mr.
Arledge's unvested options were cancelled without any payment.
In fiscal year 1997, the Company issued certain employees 139,382 shares of
restricted Common Stock, of which 5,000 have been forfeited. In addition, these
employees were granted options to purchase 523,355 shares of Common Stock at an
exercise price of $18.15 per share, of which 27,545 have been forfeited. These
options become exercisable on September 30, 2000 and expire on September 30,
2006.
1997 STOCK PURCHASE AND OPTION PLAN
The Company has adopted the 1997 Stock Purchase and Option Plan for Key
Employees of Randall's Food Markets, Inc. and Subsidiaries (the "1997 Plan").
Grants made pursuant to the Stock Plan will become subject to, and be
exercisable only in accordance with, the provisions of the 1997 Plan.
The 1997 Plan provides for the issuance of shares of authorized but unissued
or reacquired shares of Common Stock, subject to adjustment to reflect certain
events such as stock dividends, stock splits,
56
<PAGE>
recapitalizations, mergers or reorganizations of or by the Company. The 1997
Plan is intended to assist the Company in attracting and retaining employees of
outstanding ability and to promote the identification of their interests with
those of the stockholders of the Company. The 1997 Plan permits the issuance of
Common Stock (the "1997 Plan Purchase Stock") and the grant of Non-Qualified
Stock Options and Incentive Stock Options (the "1997 Plan Options") to purchase
shares of Common Stock and other stock-based awards (the issuance of 1997 Plan
Purchase Stock and the grant of 1997 Plan Options and other stock-based awards
pursuant to the 1997 Plan being a "1997 Plan Grant"). In addition, it is
expected that loans of up to approximately $8.0 million in the aggregate will be
made to employees to finance purchases of Common Stock pursuant to the 1997
Plan. These loans will be secured by pledges to the Company of Common Stock
owned by such employees. Unless sooner terminated by the Company's Board of
Directors, the 1997 Plan will expire ten years after its approval by the
Company's stockholders. Such termination will not affect the validity of any
1997 Plan Grant outstanding on the date of the termination.
The Compensation Committee of the Board of Directors will administer the
1997 Plan, including, without limitation, the determination of the employees to
whom 1997 Plan Grants will be made, the number of shares of Common Stock subject
to each 1997 Plan Grant, and the various terms of 1997 Plan Grants. The
Compensation Committee of the Board of Directors may from time to time amend the
terms of any 1997 Plan Grant, but, except for adjustments made upon a change in
the Common Stock by reason of a stock split, spin-off, stock dividend, stock
combination or reclassification, recapitalization, reorganization,
consolidation, change of control, or similar event, such action shall not
adversely affect the rights of any participant under the 1997 Plan with respect
to the 1997 Plan Purchase Stock and the 1997 Plan Options without such
participant's consent. The Board of Directors will retain the right to amend,
suspend or terminate the 1997 Plan.
BONUS PLANS
Prior to the Recapitalization, the Company maintained a bonus plan covering
different executive populations at and above the district vice president level.
Bonus payments under these plans were part cash and part stock and were keyed to
relevant performance factors within each group. The maximum bonuses ranged from
40% of annual base salary for certain vice presidents to 100% of annual base
salary for the seven most senior executives. Performance criteria are a
combination of corporate performance, individual and district or division goals,
as appropriate. The Company has adopted a new bonus plan for fiscal year 1998
which completely replaces the old bonus plan. Under the new plan, separate bonus
programs have been established for (i) officers (including Named Executive
Officers), administrative department directors and key managers, (ii) store
directors and department managers, (iii) pharmacists, (iv) merchandisers; (v)
in-store service personnel and (vi) pricing coordinators. The bonus payments
will consist solely of cash payments and will be keyed to different performance
measures for each eligible employee group. For example, bonus payments to
officers (including Named Executive Officers), administrative department
directors and key managers will be based upon achievement of yearly EBITDA and
same-store sales targets. The new bonus programs are not set forth in any formal
documents.
RETIREMENT PLANS
The Company maintains two qualified retirement plans. One, the Company's
hourly employees' retirement plan, is a defined benefit pension plan. The other
plan is the ESOP, which currently holds 2,275,622 shares of Common Stock. The
ESOP provides for pass through voting with respect to a potential change in
control. The Company also maintains the nonqualified Key Employee Stock Purchase
Plan (the "KeySOP") which provides benefits to key employees and highly
compensated employees whose benefits under the ESOP are limited due to Internal
Revenue Code requirements. As of June 28, 1997, this plan held 42,601 shares of
Common Stock, and the ESOP and KeySOP held an aggregate of 2,318,223 shares of
Common Stock, or approximately 7.7% of the outstanding shares of Common Stock as
of such date.
No additional shares of Common Stock will be purchased by the ESOP. Although
it will no longer acquire shares of Common Stock, the Company has combined the
ESOP with a 401(k) plan option with
57
<PAGE>
diversified investment alternatives. The Company recently settled a class action
lawsuit brought on behalf of the ESOP and made a payment of $11.3 million in
connection with such settlement. See "Business-- Litigation." In addition, no
additional shares of Common Stock will be purchased by the KeySOP.
SAVINGS AND INVESTMENT PLAN
The Board of Directors of the Company adopted the Savings and Investment
Plan (the "Savings Plan") effective January 1, 1990. All full-time employees of
the Company and its subsidiaries are eligible to participate in the Savings Plan
upon completion of one year of service and the attainment of the age of 18.
Participants may contribute, in increments of 1%, up to 10% (6% before July 1,
1994) of their compensation to the Savings Plan. In accordance with the
provisions of the Savings Plan, the Board of Directors has elected, since April
1, 1991, not to match employee contributions. Pursuant to the Subscription
Agreement, subject to certain exceptions, the Company will continue to maintain
the Savings Plan and other benefit plans of the Company, or substitute plans
that are no less favorable in the aggregate to the employees of the Company than
such existing plans, until December 31, 1997.
EMPLOYEE WELFARE BENEFITS AND RETIREE INSURANCE BENEFITS
The Company provides welfare and other benefits only for its full-time
employees. In addition to health and medical insurance, the Company also
provides other standard benefits such as paid vacation and holidays, life
insurance, sick pay and long-term disability coverage for eligible employees.
The Company is self-insured with respect to health benefits for its employees.
The long-term disability coverage and life insurance for eligible employees is
fully insured. The Company has a stop loss policy in effect with respect to its
self-insured medical plan and is reimbursed by the stop loss carrier for all
claims that exceed the stop loss level, which is $200,000 for calendar 1997.
Reimbursement for stop loss claims is handled by the third party administrator
who pays all medical claims. In the event charges for any eligible employee
exceeds $200,000 in one plan year, the third party administrator pays the claim
for the plan and then submits the claim to the carrier for reimbursement. Total
medical claims paid by the Company in calendar 1996 were $20.7 million. Total
claims reimbursed in calendar year 1996 were $0.4 million.
The Company does not generally provide retiree medical or retiree life
insurance benefits. However, the Company does have individual arrangements which
provide for health benefits for life with respect to four surviving family
members of the founders. These persons are Robert R. Onstead, Kay Onstead, Mabel
Frewin and Deloris Barclay.
EMPLOYMENT CONTRACTS
Effective April 1, 1997 (the "Effective Date"), the Company entered into
employment agreements with Robert R. Onstead, R. Randall Onstead and Ron W.
Barclay (the "Employment Agreements") which became effective upon consummation
of the Equity Investment and are subject to the terms and conditions described
below.
ROBERT R. ONSTEAD. The Employment Agreement with Robert R. Onstead provides
that Mr. Onstead will continue to serve as Chairman of the Board through July 1,
1998 (the "Initial Period"). From July 2, 1998, Mr. Onstead shall become
Chairman Emeritus for life and serve as a consultant until such time as 10% of
the Common Stock (or the common stock of a successor to the Company) is tradable
on a national stock exchange (the "Consulting Period"). In addition, Mr. Onstead
will continue to be nominated as a director (and the Company shall use its best
efforts to secure his election as such) until such time as his stock ownership
in the Company falls below 10% of the outstanding Common Stock.
During the Initial Period the Company will pay Mr. Onstead a monthly salary
of $41,667 and will generally continue to furnish the perquisites and benefits
that were available to Mr. Onstead prior to the Effective Date. During the
Consulting Period, the Company will pay Mr. Onstead a monthly fee of $16,667. In
addition, following the Initial Period, Mr. Onstead will receive monthly
retirement payments in the amount of $8,333 until Mr. Onstead owns less than 3%
of the outstanding Common Stock (or of the outstanding interest in a successor).
The Company will furnish Mr. Onstead (and his spouse) at no cost to
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them with lifetime medical, dental and life insurance benefits. The Company will
also provide Mr. Onstead with certain office amenities for life; provided that
the annual cost thereof may not exceed $100,000.
In the event Mr. Onstead's employment or consulting engagement is terminated
(i) by the Company (A) due to his death or disability, (B) as a result of Mr.
Onstead's gross negligence or willful misconduct in the performance of his
duties and services or his material breach of any material provision of his
Employment Agreement which is not corrected within 30 days of notice thereof or
(C) in connection with the insolvency, liquidation or any other event which
results in the discontinuance of the existence of the Company without a
successor thereto, or (ii) by Mr. Onstead other than as a result of the
Company's material breach of any material provision of his Employment Agreement
which is not corrected within 30 days of notice thereof (a termination under
clause (i) or (ii) being hereinafter referred to as a "Non-Severance
Termination"), the Company will cease to pay Mr. Onstead's salary or consulting
fee (as applicable) upon such termination. In the event of a change of control
of the Company, Mr. Onstead's employment shall terminate 30 days after such
event and the Company (or its successor) will cease to pay Mr. Onstead's salary
or consulting fee (as applicable) upon such termination.
In the event Mr. Onstead incurs a termination other than a Non-Severance
Termination prior to the expiration of the Initial Period, the Company is
required to pay Mr. Onstead an amount equal to the sum of (x) the aggregate
amount of salary that he would have received for the remainder of the Initial
Period and (y) the economic value of the benefits he would have received during
such period.
In the event Mr. Onstead incurs a termination other than a Non-Severance
Termination during his consulting engagement, the Company is required to
continue to pay Mr. Onstead all amounts due in respect of his consulting
engagement on the same basis as if Mr. Onstead had remained a consultant through
the Consulting Period.
R. RANDALL ONSTEAD. The Employment Agreement with R. Randall Onstead
provides that Mr. Onstead will serve as President and Chief Executive Officer,
for which he will receive a minimum monthly base salary of $35,417. Pursuant to
his Employment Agreement, Mr. Onstead also will be granted options to purchase
371,594 shares of Common Stock at a price of $12.11 per share, with 50% of such
shares to vest 20% per year over five years and the remaining 50% to vest based
on the attainment of certain performance goals. In addition to receiving other
benefits and perquisites available to similarly situated executives of the
Company, Mr. Onstead will also be extended a $750,000 line of credit by the
Company which will be secured by his Common Stock and be payable 180 days after
termination of his Employment Agreement to the extent not satisfied out of (i)
any compensation due him and payable upon the termination of his employment and
(ii) the proceeds from the disposition of Common Stock and options by him. This
line of credit will bear interest at the applicable federal rate, which is
published in a revenue ruling each month by the Internal Revenue Service. No
advances have been made to Mr. Onstead under this line of credit.
In the event Randall Onstead incurs a Non-Severance Termination, the Company
will cease to pay Mr. Onstead's salary upon such termination. In the event Mr.
Onstead incurs a termination of employment other than a Non-Severance
Termination (which shall include a termination of employment by Mr. Onstead due
to the assignment to him by the Board of duties materially inconsistent with his
position) within two years of the Effective Date, he shall be entitled to a
severance payment in an amount equal to three times the sum of (i) his base
salary on the date of termination and (ii) the average annual bonus paid or
payable with respect to the immediately preceding three calendar years. He shall
also be entitled to three years continued medical and dental coverage at no cost
to him for himself, his spouse and his dependents. In the event Mr. Onstead
incurs a termination of employment other than a Non-Severance Termination after
two years following the Effective Date, he shall be entitled to a severance
payment in an amount equal to two times the sum of (i) his base salary on the
date of termination and (ii) the average annual bonus paid or payable with
respect to the immediately preceding two calendar years. He shall also be
entitled to two years continued medical and dental coverage at no cost to him
for himself, his spouse and his dependents. Regardless of the timing of any such
termination, if Mr. Onstead's employment is
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terminated without cause, he shall be entitled to the Company's investment in
certain life insurance policies.
RON W. BARCLAY. Ron W. Barclay retired from the Company effective as of
August 16, 1997. The Employment Agreement with Mr. Barclay provides that,
following Mr. Barclay's termination, he is entitled to outplacement services for
a period of one year in an amount not to exceed $30,000. Mr. Barclay agrees not
to engage in any business activity in the United States which is in competition
with the business of the Company for a period of two years following his
termination. In consideration of the foregoing obligation, the Company will pay
Mr. Barclay a total of $200,000 in bi-weekly installments over such two-year
period. Furthermore, for a period of three years following his termination, Mr.
Barclay agrees not to solicit any employees of the Company or solicit any
suppliers of the Company in connection with any business that is in competition
with the Company.
Mr. Barclay's Employment Agreement provides for a consulting engagement for
a period of three years following his termination of employment. In respect of
such engagement, Mr. Barclay shall receive $6,000 per year payable in a lump sum
upon his termination of employment and shall receive continued medical and
dental insurance coverage during his consulting engagement.
In addition, Mr. Barclay executed a severance and release agreement to his
Employment Agreement (the "Severance and Release Agreement"), entitling him to
the following severance benefits: (i) continued salary from his date of
termination to the effective date of the Severance and Release Agreement reduced
by the amount of any payments made in respect of the non-competition obligation
described above and (ii) a lump sum payment equal to $647,857 reduced by any
payment made pursuant to clause (i) of this paragraph.
In the event Mr. Barclay dies during his consulting engagement, his estate
shall be entitled to receive a lump sum payment equal to the difference between
(i) $865,857 and (ii) any amounts paid in respect of Mr. Barclay's consulting
engagement and non-competition obligation. In the event of Mr. Barclay's death
during his consulting engagement the Company will provide 36 months continued
medical and dental insurance coverage for his qualified dependents.
TERMINATION AGREEMENT
Effective on or about April 1, 1997, the Company entered into a termination
agreement with Bob L. Gowens (the "Gowens Agreement"). Pursuant to the Gowens
Agreement, Mr. Gowens resigned from all positions with the Company and the
Company accepted such resignation. Mr. Gowens has received a severance payment
of $625,000 reduced by certain amounts. In addition, he is entitled to
outplacement services for a period of one year in an amount not to exceed
$30,000.
Mr. Gowens agrees not to engage in any business activity in the United
States which is in competition with the business of the Company for a period of
two years following his termination. In consideration of the foregoing
obligation, the Company will pay Mr. Gowens a total of $200,000 in bi-weekly
installments over such two-year period. Furthermore, for a period of three years
following his termination, Mr. Gowens agrees not to solicit any employees of the
Company or solicit any suppliers of the Company in connection with any business
that is in competition with the Company.
The Gowens Agreement provides for a consulting engagement for a period of
three years following his termination of employment. In respect of such
engagement, Mr. Gowens shall receive $25,000 per year payable in a lump sum upon
his termination of employment and shall receive continued medical and dental
insurance coverage during his consulting engagement. Under the terms of the
Gowens Agreement, the Company is released from all claims Mr. Gowens may have
against it.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning beneficial
ownership of shares of Common Stock as of November 30, 1997 by: (i) persons
known by the Company to own beneficially more than 5% of the outstanding shares
of Common Stock; (ii) each person who is a director of the Company; (iii) each
person who is a Named Executive Officer; and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL PERCENTAGE
OWNERSHIP OF OF CLASS
NAME OF BENEFICIAL OWNER COMMON STOCK OUTSTANDING(A)
- ---------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
KKR 1996 GP L.L.C.(b)
c/o Kohlberg Kravis Roberts & Co., L.P.
9 West 57th Street
New York, NY 10019........................................................ 18,579,686 61.7%(c)
Henry R. Kravis(b)........................................................ -- --
George R. Roberts(b)...................................................... -- --
Paul E. Raether(b)........................................................ -- --
James H. Greene(b)........................................................
Nils P. Brous(b).......................................................... --
Robert R. Onstead(d)(e)..................................................... 6,054,165 20.1
Randall's Food Markets, Inc. Employee Stock Ownership Plan.................. 2,275,622 7.6
R. Randall Onstead(d)(f).................................................... 210,524 *
Ron W. Barclay(d)(g)........................................................ 265,515 *
Michael M. Calbert(d)(f).................................................... 37,171 *
Thomas K. Arledge(d)(h)..................................................... -- --
Terry P. Poyner(d)(i)....................................................... 4,635 *
Lee E. Straus(d)(f)......................................................... 20,644 *
All directors and executive officers as group (15 persons).................. 25,604,593 85.1%
</TABLE>
- ------------------------
* Less than one percent.
(a) The amounts and percentage of Common Stock beneficially owned are reported
on the basis of regulations of the Commission governing the determination of
beneficial ownership of securities. Under the rules of the Commission, a
person is deemed to be a "beneficial owner" of a security if that person has
or shares "voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Under these rules,
more than one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to
which he has no economic interest. The percentage of class outstanding is
based on the 30,089,459 shares of Common Stock outstanding as of November
30, 1997. In connection with the Subscription Agreement, the Company has
agreed to certain indemnities for the benefit of RFM Acquisition which are
payable in additional shares of Common Stock, and the percentages in the
table do not reflect any issuances thereunder. See "The Recapitalization."
(b) Shares of Common Stock shown as beneficially owned by KKR 1996 GP L.L.C. are
held by RFM Acquisition. KKR 1996 GP L.L.C. is the sole general partner of
KKR Associates 1996 L.P., a Delaware limited partnership. KKR Associates
1996 L.P. is the sole general partner of KKR 1996 Fund L.P., a Delaware
limited partnership. KKR 1996 Fund L.P. is the sole member of RFM
Acquisition. KKR 1996 GP L.L.C. is a limited liability company, the managing
members of which are Messrs. Henry R. Kravis and George R. Roberts and the
other members of which are Messrs. Robert I. MacDonnell, Paul E. Raether,
Michael W. Michelson, James H. Greene, Jr., Michael T. Tokarz,
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Perry Golkin, Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly.
Messrs. Kravis, Roberts, Raether and Greene are directors of the Company.
Each of such individuals may be deemed to share beneficial ownership of the
shares shown as beneficially owned by KKR 1996 GP L.L.C. Each of such
individuals disclaims beneficial ownership of such shares. Mr. Nils P. Brous
is a limited partner of KKR Associates 1996 L.P. and also is a director of
the Company.
(c) KKR 1996 GP L.L.C. will own approximately 62% of the Common Stock on a fully
diluted basis assuming exercise of the RFM Option and the completion of
issuances of stock and options to certain members of management under the
1997 Plan.
(d) Does not include shares of Common Stock held by these individuals as part of
their participation in the ESOP.
(e) Includes shares held by Mr. Onstead's family partnership, his spouse and the
Onstead Foundation.
(f) On November 14, 1997, pursuant to the 1997 Plan, (i) Mr. Onstead was granted
options to purchase 371,595 shares of Common Stock, (ii) Mr. Calbert
purchased 16,515 shares of Common Stock and was granted options to purchase
51,610 shares of Common Stock and (iii) Mr. Straus purchased 18,051 shares
of Common Stock and was granted options to purchase 51,610 shares of Common
Stock. The purchase price for the shares and the exercise price for the
options is $12.11 per share. The purchase of such shares by Messrs. Calbert
and Straus are reflected in the table.
(g) Mr. Barclay retired from the Company effective as of August 16, 1997.
(h) Mr. Arledge terminated his employment with the Company effective as of
August 14, 1997.
(i) Mr. Poyner terminated his employment with the Company effective as of
October 31, 1997.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
KKR 1996 GP L.L.C. beneficially owns approximately 62% of the Company's
outstanding shares of Common Stock. The managing members of KKR 1996 GP L.L.C.
are Messrs. Henry R. Kravis and George R. Roberts and the other members of which
are Messrs. Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson, Michael
T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S. Robbins, Scott M.
Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts, Raether and Greene are
directors of the Company, as is Mr. Nils P. Brous, who is a limited partner of
KKR Associates 1996 L.P. Each of the members of KKR 1996 GP L.L.C. is also a
member of the limited liability company which serves as the general partner of
KKR and Mr. Brous is an executive of KKR. KKR, an affiliate of RFM Acquisition
and KKR 1996 GP L.L.C., received a fee of $8.0 million in cash for negotiating
the Recapitalization and arranging the financing therefor, plus the
reimbursement of its expenses in connection therewith, and, from time to time in
the future, KKR may receive customary investment banking fees for services
rendered to the Company in connection with divestitures, acquisitions and
certain other transactions. In addition, KKR has agreed to render management,
consulting and financial services to the Company for an annual fee of $1.0
million. See "Management--Directors and Executive Officers" and "Principal
Shareholders."
RFM Acquisition has the right, under certain circumstances and subject to
certain conditions, to require the Company to register under the Securities Act
shares of Common Stock held by it pursuant to a registration rights agreement
entered into at the Closing (the "RFM Registration Rights Agreement"). Such
registration rights will generally be available to RFM Acquisition until
registration under the Securities Act is no longer required to enable it to
resell the Common Stock owned by it. The RFM Registration Rights Agreement
provides, among other things, that the Company will pay all expenses in
connection with the first six demand registrations requested by RFM Acquisition
and in connection with any registration commenced by the Company as a primary
offering in which RFM Acquisition participates through piggy-back registration
rights granted under such agreement. RFM Acquisition's exercise of its
registration rights under the RFM Registration Rights Agreement will be subject
to the RFM Tag Along and the RFM Drag Along provided for in the Shareholders
Agreement. See "The Recapitalization-- Shareholders Agreement."
On March 1, 1997, the Company loaned $20,000 to the Onstead Family Trust.
This loan is evidenced by a promissory note, bears interest at a rate of 5% per
annum and is payable on March 1, 1998, or on the Company's earlier demand.
In connection with the Company's grant of $250,000 worth of restricted
Common Stock (25,907 shares) to Michael Calbert on December 30, 1994, the
Company loaned Mr. Calbert $100,000 on January 26, 1995 to pay related income
taxes. So long as Mr. Calbert is in active employment during the 15 days before
and after each payment date, the Company has agreed to forgive the scheduled
repayments. The loan is evidenced by a promissory note, bears interest at 8% per
annum and is payable in annual installments of $20,000 each, plus interest,
beginning December 1, 1995 and ending December 1, 1999. The note is secured by
the 25,907 shares, one-fifth of which are released each year beginning December
1, 1995.
Robert R. Onstead owns a 7% carried interest and the estate of Randall C.
Barclay owns a 3% carried interest in the limited partnership that developed and
owns a shopping center in which one of the Company's stores is the anchor
tenant. The base rent for this store is $392,796 per year, which is considered
market rent.
The Company purchases uniforms and other merchandise from Coastal Athletic
Supply ("Coastal"), which is majority owned by Ann and Preston Hill (Robert R.
Onstead's daughter and son-in-law). Purchases from Coastal during fiscal years
1995, 1996 and 1997 were $1,097,407, $775,609 and $1,152,483, respectively. In
addition, the Company guarantees the obligations of Coastal to Uniforms To You
("UTY") and M.J. Soffe Co. ("Soffe") for merchandise purchased on the Company's
behalf (the "Uniform Guarantees"). As of June 28, 1997, the obligations subject
to the Uniform Guarantees were $68,203 to UTY and $136,428 to Soffe,
respectively; the highest balances due with respect to such obligations were
$57,740 to UTY and $0 to Soffe, respectively, for fiscal year 1995, $69,892 to
UTY and $0 to Soffe, respectively, for fiscal year 1996, and $133,432 to UTY and
$136,428 to Soffe, respectively, for fiscal year 1997. The obligations subject
to the Uniform Guarantees are not interest bearing.
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DESCRIPTION OF CAPITAL STOCK
CAPITAL STRUCTURE
The entire authorized capital stock of the Company consists of (i)
75,000,000 shares of Common Stock, (ii) 8,250 shares of Class A Preferred Stock,
and (iii) 5,000,000 shares of serial preferred stock with a par value of $10.00
per share (the "Serial Preferred Stock"). As of October 18, 1997, there were (i)
29,800,261 shares of Common Stock issued and outstanding; (ii) no shares of
Class A Preferred Stock or Serial Preferred Stock issued or outstanding; (iii)
572,521 shares of Common Stock reserved for issuance upon exercise of authorized
but unissued outstanding employee or director stock options to purchase shares
of Common Stock granted under any stock option or stock purchase plan, program
or arrangement of the Company; and (iv) 662,142 shares of Common Stock issuable
upon exercise of outstanding stock options (with an average exercise price of
$16.08).
REPURCHASE RIGHTS
SHAREHOLDER AGREEMENTS. Pursuant to shareholder agreements dated March 29,
1984 and April 8, 1985 among the Company and John N. Frewin, Norman P. Frewin,
Rosemary Frewin Gambino and certain other shareholders parties thereto (the
"Qualified Shareholders"), when a Qualified Shareholder desires to dispose of
shares of Common Stock, the Company has the right to acquire such shares for the
per share value most recently determined on behalf of the trustee of the ESOP.
In the event the Company does not exercise such election, other Qualified
Shareholders have the right to purchase the shares at such valuation. In the
event neither the Company nor the other Qualified Shareholders have exercised
the repurchase right, the selling Qualified Shareholders may require the Company
to repurchase such shares at the valuation. If a Qualified Shareholder becomes
totally disabled and is unable to continue employment with the Company, or if a
Qualified Shareholder is voluntarily or involuntarily terminated from employment
for any reason other than death, the repurchase procedures described above are
automatically operative as if such shareholder had intended to dispose of his or
her shares. Upon the death of a Qualified Shareholder, all shares of Common
stock owned by such shareholder must be sold to the Company at the valuation
referred to above. As of October 18, 1997, holders beneficially owning 346,813
shares of Common Stock possess such repurchase rights under such agreements. In
1992, an additional holder of Common Stock (6,053 shares as of October 18, 1997)
was granted similar repurchase rights.
CULLUM ACQUISITION. In connection with the Cullum Acquisition, the Company
granted the former Cullum shareholders put rights on the shares of Common Stock
issued in such transaction. Pursuant to the Registration Rights and Repurchase
Agreement dated as of August 24, 1992 (the "Former Cullum Shareholders
Agreement"), among the Company and the Morgan Stanley Leveraged Equity Fund II,
L.P. and the other former Cullum shareholders parties thereto (collectively, the
"Former Cullum Shareholders"), the Former Cullum Shareholders have the right to
require the Company to repurchase 60,028 shares of Common Stock for the per
share value most recently determined on behalf of the trustee of the ESOP. This
put right was exercisable commencing on October 15, 1997 and on each subsequent
October 15 to and including October 15, 2001.
REGISTRATION RIGHTS
RFM ACQUISITION. RFM Acquisition has the right, under certain circumstances
and subject to certain conditions, to require the Company to register under the
Securities Act shares of Common Stock held by it pursuant to the RFM
Registration Rights Agreement. Such registration rights will generally be
available to RFM Acquisition until registration under the Securities Act is no
longer required to enable it to resell the Common Stock owned by it. The RFM
Registration Rights Agreement provides, among other things, that the Company
will pay all expenses in connection with the first six demand registrations
requested by RFM Acquisition and in connection with any registration commenced
by the Company as a primary offering in which RFM Acquisition participates
through piggy-back registration rights granted under such agreement.
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<PAGE>
RFM Acquisition's exercise of its registration rights under the RFM Registration
Rights Agreement will be subject to the RFM Tag Along and the RFM Drag Along
provided for in the Shareholders Agreement. See "The Recapitalization --
Shareholders Agreement."
FORMER CULLUM SHAREHOLDERS. The Former Cullum Shareholders Agreement
provides the Former Cullum Shareholders with customary "piggy-back" registration
rights. Should the Company register securities in connection with an offering of
common stock, then the Company must offer to register shares of Common Stock
(including shares of Common Stock issuable upon the conversion of shares of
Convertible Preferred Stock) held by the Former Cullum Shareholders. These
registration rights do not pertain to an offering on Form S-4 or S-8 or a
registration statement that is filed with respect to an exchange offer or an
offering that will be made solely to existing shareholders of the Company.
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DESCRIPTION OF CREDIT FACILITIES
The Credit Facilities are provided by a syndicate of banks and other
financial institutions (the "Lenders") led by The Chase Manhattan Bank, as
administrative agent (the "Administrative Agent"), Chase Securities Inc., as
arranger, National Westminster Bank Plc, as syndication agent, and Citicorp
Securities, Inc., as documentation agent. The Credit Facilities provide for the
Term Loan Facility of up to $125.0 million and the $225.0 million Revolving
Credit Facility. The Revolving Credit Facility includes borrowing capacity of up
to $25.0 million for letters of credit, and up to $25.0 million for short-term
borrowings. The Term Loan Facility matures on the date that is nine years after
the Closing and provides for nominal annual amortization. The final maturity of
loans under the Revolving Credit Facility will be the date that is seven years
after the Closing.
The interest rate under the Term Loan Facility fluctuates based on leverage
and initially will be adjusted LIBOR plus 1.50%. The interest rate under the
Revolving Credit Facility fluctuates based on leverage and initially will be ABR
plus 0.00%. The Company may elect interest periods of 1, 2, 3 or 6 months (or 9
or 12 months, to the extent available from all the Lenders under the relevant
Facility) for Adjusted LIBOR borrowings. Calculation of interest shall be on the
basis of actual days elapsed in a year of 360 days (or 365 or 366 days, as the
case may be, in the case of ABR loans based on the Prime Rate) and interest
shall be payable at the end of each interest period and, in any event, at least
every 3 months or 90 days, as the case may be. ABR is the Alternate Base Rate,
which is the highest of Chase's Prime Rate, the Federal Funds Effective Rate
plus 0.50% and the Base CD Rate plus 1.00%. Adjusted LIBOR and the Base CD Rate
will at all times include statutory reserves to the extent actually incurred
(and, in the case of the Base CD Rate, FDIC assessment rates).
The Company will pay a commitment fee at a rate which will fluctuate based
on leverage and initially will equal 0.25% per annum on the undrawn portion of
the commitments in respect of the Credit Facilities, commencing to accrue with
respect to each Lender's commitment upon the acceptance by the Company of such
Lender's commitment, paid initially at the Closing and quarterly in arrears
after the Closing. The commitment fees will at all times be calculated based on
the actual number of days elapsed over a 365-day year.
The Company will pay a letter of credit fee equal to a rate per annum equal
to the margin for Adjusted LIBOR loans under the Revolving Credit Facility, less
0.125%, on the aggregate face amount of outstanding letters of credit under the
Revolving Credit Facility, payable in arrears at the end of each quarter and
upon the termination of the Revolving Credit Facility, in each case for the
actual number of days elapsed over a 365-day year. In addition, the Company
shall pay to the Fronting Bank, for its own account, (a) a fronting fee of
0.125% per annum on the aggregate face amount of outstanding letters of credit,
payable in arrears at the end of each quarter and upon the termination of the
Revolving Credit Facility, in each case for the actual number of days elapsed
over a 365-day year, and (b) customary issuance, amendment and administration
fees.
The Credit Facilities contain provisions under which commitment fees and
interest rates will be adjusted in increments based on the ratio (the "Leverage
Ratio") of consolidated total debt to consolidated adjusted EBITDA in effect
from time to time. Subject to certain exceptions, the margin for Adjusted LIBOR
loans for the Term Loan Facility and the Revolving Credit Facility, and the
commitment fee rate thereunder, will be, in the case of a Leverage Ratio (i)
greater than or equal to 6.0:1, 2.75%, 2.25% and .500%, respectively, (ii)
greater than or equal to 5.5:1, 2.50%, 2.00% and .425%, respectively, (iii)
greater than or equal to 5.0:1, 2.25%, 1.75% and .375%, respectively, (iv)
greater than or equal to 4.5:1, 2.00%, 1.50% and .375%, respectively, (v)
greater than or equal to 4.0:1, 1.75%, 1.25% and .250%, respectively, (vi)
greater than or equal to 3.5:1, 1.50%, 1.00% and .250%, respectively, (vii)
greater than or equal to 3.0:1, 1.50%, .875% and .250%, respectively, and (viii)
less than 3.0:1, 1.50%, .750%, and .250%, respectively, with the margin for ABR
loans being .125% less than the corresponding margin for Adjusted LIBOR loans
(but not less than 0%).
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The Term Loans are subject to mandatory prepayment with (a) 100% of the net
cash proceeds of certain non-ordinary-course asset sales or other dispositions
of property by the Company and its subsidiaries, except to the extent that such
proceeds are reinvested in the business of the Company and its subsidiaries
(subject to the line of business covenant) within a specified time period and
subject to certain other exceptions, (b) a portion of excess cash flow (as
defined in the Credit Facilities), to the extent not reinvested in the business
of the Company and its subsidiaries within six months after each yearly test
period and (c) 100% of the net proceeds of certain issuances of debt obligations
of the Borrower and its subsidiaries. Voluntary prepayments and Revolving Credit
Facility commitment reductions are permitted in whole or in part at the option
of the Company, in minimum principal amounts, without premium or penalty,
subject to reimbursement of certain of the Lenders' costs under certain
conditions.
The Company's obligations under the Credit Facilities are secured by a
perfected first priority pledge of and security interest in all the common stock
of existing and subsequently acquired direct domestic subsidiaries of the
Company (which at Closing consisted of Randall's Food & Drugs, Inc. and
Randall's Properties, Inc.) other than common stock of unrestricted subsidiaries
and subsidiaries created or acquired in connection with permitted acquisitions,
evidences of indebtedness in excess of $5.0 million received by the Company in
connection with asset sales other than sales in the ordinary course of business
or in connection with permitted sale-leasebacks and 65% of the common stock of
subsequently acquired direct foreign subsidiaries. In addition, indebtedness
under the Credit Facilities is guaranteed by each existing and subsequently
acquired domestic subsidiary of the Company (which at Closing consisted of
Randall's Food & Drugs, Inc. and Randall's Properties, Inc.), subject to certain
exceptions. See "Description of the Exchange Notes--Subordination" and "Risk
Factors--Subordination" and "--Encumbrances on Assets to Secure Credit
Facilities."
The Credit Facilities contain customary covenants and restrictions on the
Company's ability to, among other things, incur debt, grant liens, sell assets,
pay dividends, make investments, prepay or redeem the Notes, enter into leases
or incur capital expenditures. In addition, the Credit Facilities provide that
the Company must meet or exceed a ratio of consolidated adjusted EBITDA to
consolidated adjusted interest expense of 1.75 to 1.00 in fiscal year 1998 and
gradually increasing by fiscal year 2003 through the maturity of the Term Loan
Facility to 3.00 to 1.00 and must not exceed a ratio of consolidated total debt
to consolidated adjusted EBITDA of 6.00 to 1.00 through the second quarter of
fiscal year 1998 and gradually decreasing by fiscal year 2003 through the
maturity of the Term Loan Facility to 3.00 to 1.00.
Events of default under the Credit Facilities include (i) nonpayment of
principal with no period of grace and nonpayment of interest, fees or other
amounts due under the Credit Facilities within five days after the same become
due; (ii) material breach of any representation or warranty; (iii) failure to
observe any term, covenant or agreement contained in the Credit Facilities
beyond an applicable period of grace; (iv) the failure by the Company or its
subsidiaries (1) to make payments in respect of any Indebtedness when due and
such failure continues after the applicable period of grace or (2) to perform or
observe any condition or covenant or any other event shall occur or condition
shall exist relating to such Indebtedness and the effect of such failure, event
or condition is to cause or to permit the holders of such Indebtedness to cause
such Indebtedness to be due prior to its stated maturity and the aggregate
amount of such Indebtedness, together with the aggregate amount of all other
Indebtedness in default, equals or exceeds $20 million; (v) certain events of
bankruptcy or insolvency with respect to the Company or material subsidiaries;
(vi) the occurrence of certain events under the Employee Retirement Income
Security Act of 1974, as amended; (vii) any material provision of the pledge
agreement shall cease to create a valid security interest or the guaranty of the
Company's obligations shall cease to be effective; (viii) judgments against the
Company or its subsidiaries of $20 million or greater that remain unsatisfied,
unvacated or unstayed pending appeal for a period of 60 days after entry; or
(ix) a change of control occurs.
A "change of control" under the Credit Facilities will occur if (a) KKR, its
Affiliates and management of the Company shall cease to own in the aggregate,
directly or indirectly, beneficially and of record, at least 35% of the
outstanding Voting Stock of the Company (other than as the result of one or more
widely
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distributed offerings of common stock of the Company); (b) any person, entity or
"group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act) shall
at any time have acquired direct or indirect beneficial ownership of a
percentage of the outstanding Voting Stock of the Company that exceeds the
percentage of such Voting Stock then beneficially owned, in the aggregate, by
KKR, its Affiliates and management of the Company, unless, in the case of (a) or
(b) above, KKR, its Affiliates and management of the Company have, at such time,
the right or the ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors of the Company; (c)
at any time "continuing directors" shall not constitute a majority of the Board
of Directors of the Company; or (d) a Change of Control (as defined in the
Indenture) shall occur. Continuing directors of the Company under the Credit
Facilities is defined in the Credit Facilities to include members of the Board
of Directors at Closing, individuals who are members of the board for at least
12 months, individuals nominated by KKR and individuals nominated by a majority
of the then continuing directors. The capitalized terms included in the
definition of "change of control" under the Credit Facilities have meanings
comparable to those included in the Indenture.
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $150 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $150 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about January 9, 1998, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on June 27, 1997 in a transaction exempt from the
registration requirements of the Securities Act. Accordingly, the Old Notes may
not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
not later than 100 days after the date of issuance of the Old Notes, and to use
its best efforts to cause the registration statement relating to the Exchange
Offer to become effective under the Securities Act not later than 200 days after
the date of issuance of the Old Notes and the Exchange Offer to be consummated
not later than 30 days after the date of the effectiveness of the Registration
Statement (or use its best efforts to cause to become effective by the 230th
calendar day after the Issuance Date a shelf registration statement with respect
to resales of the Old Notes). A copy of the Registration Rights Agreement has
been filed as an exhibit to the Registration Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company. Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further
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compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and that such Holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Exchange Notes.
See "--Resale of Exchange Notes." Each broker-dealer that receives Exchange
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no-action letter, there can be no assurance that the Staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. A broker-dealer
may not participate in the Exchange Offer with respect to Old Notes acquired
other than as a result of market-making activities or other trading activities.
See "Plan of Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from June 27, 1997.
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Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on February
9, 1998, unless the Company, in its sole discretion, has extended the period of
time for which the Exchange Offer is open (such date, as it may be extended, is
referred to herein as the "Expiration Date") . The Expiration Date will be at
least 20 business days after the commencement of the Exchange Offer in
accordance with Rule 14e-1(a) under the Exchange Act. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Old Notes, by giving oral or written notice to the Exchange
Agent and by timely public announcement no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled Expiration Date.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer unless properly withdrawn. The Company does not anticipate
extending the Expiration Date.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other documents required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO
THE COMPANY.
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If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Old Notes not exchanged are to be delivered to an address
other than that of the registered holder appearing on the note register for the
Old Notes, the signature in the Letter of Transmittal must be guaranteed by an
Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by
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an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver
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any additional documents deemed by the Exchange Agent or the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Old Notes or transfer ownership of such Old Notes on the account books
maintained by a book-entry transfer facility. The Transferor further agrees that
acceptance of any tendered Old Notes by the Company and the issuance of Exchange
Notes in exchange therefor shall constitute performance in full by the Company
of certain of its obligations under the Registration Rights Agreement. All
authority conferred by the Transferor will survive the death or incapacity of
the Transferor and every obligation of the Transferor shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 90 days after the Expiration Date,
make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may
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be retendered by following one of the procedures described under "Procedures for
Tendering Old Notes" above at any time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely book-entry
confirmation of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Old Notes will be credited to an account
maintained with such book-entry transfer facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Notes or the Exchange
Notes or that may materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any law, rule or regulation or applicable interpretations of the
Staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Exchange Offer; or
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(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or have
a material adverse effect on the contemplated benefits of the Exchange Offer
to the Company; or
(f) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any govermental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (v) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the United
States, or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
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The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
Marine Midland Bank Marine Midland Bank
Attn: Corporate Trust Operations Attn: Corporate Trust Operations
140 Broadway, Level A 140 Broadway, Level A
New York, New York 10005-1180 New York, New York 10005-1180
BY FACSIMILE:
(212) 658-2292
Attn.: Paulette Shaw
Telephone: (212) 658-5931
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $500,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction in which the securities laws or blue
sky laws of which require the Exchange Offer to be made by
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<PAGE>
a licensed broker or dealer, the Exchange Offer is being made on behalf of the
Company by one or more registered brokers or dealers which are licensed under
the laws of such jurisdication.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of Old Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
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<PAGE>
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
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<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Old Notes were issued and the Exchange Notes offered hereby will be
issued under the Indenture. The terms of the Exchange Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture describes the
material terms of the Indenture but is subject to, and qualified in its entirety
by reference to, the provisions of the Indenture, including the definitions of
certain terms contained therein and those terms made part of the Indenture by
reference to the Trust Indenture Act. For definitions of certain capitalized
terms used in the following summary, see "--Certain Definitions." The Indenture
is an exhibit to the Registration Statement of which this Prospectus is a part.
On June 27, 1997, the Company issued $150 million aggregate principal amount
of Old Notes under the Indenture. The terms of the Exchange Notes are identical
in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Exchange
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to all existing and future Senior
Indebtedness of the Company. As of October 18, 1997, the aggregate amount of the
Company's outstanding Senior Indebtedness was approximately $125.0 million. The
Indenture will permit the incurrence of additional Senior Indebtedness in the
future.
Operations of the Company are conducted primarily through its Subsidiaries
and, therefore, the Company is dependent upon the cash flow of its Subsidiaries
to meet its obligations, including its obligations under the Exchange Notes. The
Exchange Notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's Subsidiaries. Any right of the Company to receive assets of any of
its Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors, except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company still would be subordinate
to any security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company. As of October 18, 1997, the
Company's Subsidiaries had approximately $382.5 million of liabilities
(excluding guarantees of the Indebtedness under the Credit Facilities)
outstanding. See "Risk Factors--Adverse Consequences of Holding Company
Structure" and "--Subordination."
All of the Company's Subsidiaries will be Restricted Subsidiaries. However,
under certain circumstances, the Company will be able to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not be subject to any of the restrictive covenants set forth in the Indenture.
SUBORDINATION
The payment of the Subordinated Note Obligations is subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash
equivalents of all Senior Indebtedness, whether outstanding on the date of the
Indenture or thereafter incurred. Upon any distribution to creditors of the
Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior
Indebtedness will
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be entitled to receive payment in full in cash equivalents of such Senior
Indebtedness before the Holders will be entitled to receive any payment with
respect to the Subordinated Note Obligations, and until all Senior Indebtedness
is paid in full in cash equivalents, any distribution to which the Holders would
be entitled shall be made to the holders of Senior Indebtedness (except that
Holders may receive (i) shares of stock and any debt securities that are
subordinated at least to the same extent as the Exchange Notes to (a) Senior
Indebtedness and (b) any securities issued in exchange for Senior Indebtedness
and (ii) payments made from the trusts described under "--Legal Defeasance and
Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in such subordinated securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of, premium, if any, or interest on, or
of unreimbursed amounts under drawn letters of credit or in respect of bankers'
acceptances or fees relating to letters of credit or bankers' acceptances
constituting, Designated Senior Indebtedness occurs and is continuing beyond any
applicable period of grace (a "PAYMENT DEFAULT") or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness that
permits holders of the Designated Senior Indebtedness as to which such default
relates to accelerate its maturity (a "NON-PAYMENT DEFAULT") and the Trustee
receives a notice of such default (a "PAYMENT BLOCKAGE NOTICE") from a
representative of holders of such Designated Senior Indebtedness. Payments on
the Exchange Notes, including any missed payments, may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived or shall have ceased to exist or such Designated Senior Indebtedness
shall have been discharged or paid in full in cash equivalents and (b) in case
of a nonpayment default, the earlier of (x) the date on which such nonpayment
default is cured or waived, (y) 179 days after the date on which the applicable
Payment Blockage Notice is received (each such period, the "PAYMENT BLOCKAGE
PERIOD") or (z) the date such Payment Blockage Period shall be terminated by
written notice to the Trustee from the requisite holders of such Designated
Senior Indebtedness necessary to terminate such period or from their
representative. No new period of payment blockage may be commenced unless and
until 365 days have elapsed since the effectiveness of the immediately preceding
Payment Blockage Notice. However, if any Payment Blockage Notice within such
365-day period is given by or on behalf of any holders of Designated Senior
Indebtedness (other than the agent under the Senior Credit Facilities), the
agent under the Senior Credit Facilities may give another Payment Blockage
Notice within such period. In no event, however, may the total number of days
during which any Payment Blockage Period or Periods is in effect exceed 179 days
in the aggregate during any 365 consecutive day period. No nonpayment default
that existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been cured or waived for a period
of not less than 90 days.
If the Company fails to make any payment on the Exchange Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the Holders to accelerate the
maturity thereof.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Exchange Notes is accelerated because of
an Event of Default.
As a result of the subordination provisions described above, in the event of
insolvency, bankruptcy, administration, reorganization, receivership or similar
proceedings relating to the Company, Holders may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. In addition,
the Exchange Notes will be structurally subordinated to the liabilities of
Subsidiaries of the Company. At October 18, 1997, the Company had approximately
$125.0 million of Senior Indebtedness outstanding and the Company had additional
availability of $224.0 million (reduced by $1.0 million of outstanding letters
of credit) for borrowings under the Credit Facilities, all of which would be
Senior Indebtedness of the Company, and the Company's Subsidiaries had aggregate
outstanding liabilities of approximately $382.5 million, excluding guarantees of
the Indebtedness under the Credit Facilities. Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company and its
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Subsidiaries may incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness. See "--Certain Covenants--Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock."
"DESIGNATED SENIOR INDEBTEDNESS" means (i) Senior Indebtedness under the
Senior Credit Facilities and (ii) any other Senior Indebtedness permitted under
the Indenture the principal amount of which is $25.0 million or more and that
has been designated by the Company as Designated Senior Indebtedness.
"SENIOR INDEBTEDNESS" means (i) the Obligations under the Senior Credit
Facilities and (ii) any other Indebtedness permitted to be incurred by the
Company under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes, including, with respect to
clauses (i) and (ii), interest accruing subsequent to the filing of, or which
would have accrued but for the filing of, a petition for bankruptcy, whether or
not such interest is an allowable claim in such bankruptcy proceeding.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (1) any liability for federal, state, local or other taxes owed
or owing by the Company, (2) any obligation of the Company to any of its
Subsidiaries, (3) any accounts payable or trade liabilities arising in the
ordinary course of business (including instruments evidencing such liabilities)
other than obligations in respect of letters of credit under the Senior Credit
Facilities, (4) any Indebtedness that is incurred in violation of the Indenture,
(5) Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is without recourse to the
Company, (6) any Indebtedness, guarantee or obligation of the Company which is
subordinate or junior to any other Indebtedness, guarantee or obligation of the
Company, (7) Indebtedness evidenced by the Notes and (8) Capital Stock of the
Company.
"SUBORDINATED NOTE OBLIGATIONS" means any principal of, premium, if any, and
interest on the Notes payable pursuant to the terms of the Notes or upon
acceleration, together with and including any amounts received upon the exercise
of rights of rescission or other rights of action (including claims for damages)
or otherwise, to the extent relating to the purchase price of the Notes or
amounts corresponding to such principal, premium, if any, or interest on the
Notes.
The Exchange Notes will rank senior in right of payment to all Subordinated
Indebtedness of the Company. At the Issuance Date the Company had no
Subordinated Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to $150.0
million and will mature on July 1, 2007. Interest on the Exchange Notes will
accrue at the rate of 9 3/8% per annum and will be payable semi-annually in
arrears on January 1 and July 1, commencing on January 1, 1998, to Holders of
record on the immediately preceding December 15 and June 15. Interest on the
Exchange Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the Issuance Date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Exchange Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders at their respective
addresses set forth in the register of Holders; PROVIDED that all payments of
principal, premium, if any, and interest with respect to Exchange Notes
represented by one or more permanent global Exchange Notes registered in the
name of or held by The Depository Trust Company or its nominee will be made by
wire transfer of immediately available funds to the accounts specified by the
Holder or Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Exchange Notes will be issued in denominations
of $1,000 and integral multiples thereof.
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MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Exchange Notes.
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes will not be redeemable at the
Company's option prior to July 1, 2002. From and after July 1, 2002, the
Exchange Notes will be subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on July 1 of each of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------- -----------
<S> <C>
2002.................. 104.688%
2003.................. 103.125
2004.................. 101.563
2005 and thereafter... 100.000%
</TABLE>
In addition, at any time or from time to time, on or prior to July 1, 2000,
the Company may, at its option, redeem up to 40% of the aggregate principal
amount of Exchange Notes originally issued under the Indenture on the Issuance
Date at a redemption price equal to 109.375% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the redemption
date, with the net proceeds of one or more Equity Offerings; PROVIDED that at
least 60% of the aggregate principal amount of Exchange Notes originally issued
under the Indenture on the Issuance Date remains outstanding immediately after
the occurrence of each such redemption; PROVIDED FURTHER that each such
redemption occurs within 60 days of the date of closing of each such Equity
Offering. The Trustee shall select the Exchange Notes to be purchased in the
manner described under "Repurchase at the Option of Holders--Selection and
Notice."
At any time on or prior to July 1, 2002, the Exchange Notes may also be
redeemed as a whole at the option of the Company upon the occurrence of a Change
of Control or upon the acquisition, in one or a series of related transactions,
of 50% or more of the total Voting Stock of the Company by an Affiliate of KKR
or the sale, lease or transfer, in one or a series of related transactions, of
all or substantially all of the assets of the Company and its Subsidiaries,
taken as a whole, to an Affiliate of KKR, upon not less than 30 nor more than 60
days prior notice (but in no event more than 90 days after the occurrence of
such Change of Control or transfer event) mailed by first-class mail to each
Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued and
unpaid interest, if any, to, the date of redemption (the "Redemption Date")
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
"APPLICABLE PREMIUM" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at July 1, 2002 (such redemption price being described under "--Optional
Redemption") plus (2) all required interest payments due on such Note through
July 1, 2002, computed using a discount rate equal to the Treasury Rate plus 75
basis points, over (B) the principal amount of such Note.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the
period from the Redemption Date to July 1, 2002; PROVIDED,
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HOWEVER, that if the period from the Redemption Date to July 1, 2002 is not
equal to the constant maturity of a United States Treasury security for which a
weekly average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to July 1, 2002 is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL. The Indenture provides that, upon the occurrence of a
Change of Control, unless the Company has elected to redeem the Exchange Notes
in connection with such Change of Control at a price of 100% of the principal
amount thereof plus the Applicable Premium as described in "--Optional
Redemption," the Company will make an offer to purchase all or any part (equal
to $1,000 or an integral multiple thereof) of the Exchange Notes pursuant to the
offer described below (the "CHANGE OF CONTROL OFFER") at a price in cash (the
"CHANGE OF CONTROL PAYMENT") equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase. The
Indenture will provide that within 30 days following any Change of Control, the
Company will mail a notice to each Holder, with a copy to the Trustee, with the
following information: (1) a Change of Control Offer is being made pursuant to
the covenant entitled "Change of Control," and that all Exchange Notes properly
tendered pursuant to such Change of Control Offer will be accepted for payment;
(2) the purchase price and the purchase date, which will be no earlier than 30
days nor later than 60 days from the date such notice is mailed, except as may
be otherwise required by applicable law (the "CHANGE OF CONTROL PAYMENT DATE");
(3) any Exchange Note not properly tendered will remain outstanding and continue
to accrue interest; (4) unless the Company defaults in the payment of the Change
of Control Payment, all Exchange Notes accepted for payment pursuant to the
Change of Control Offer will cease to accrue interest on the Change of Control
Payment Date; (5) Holders electing to have any Exchange Notes purchased pursuant
to a Change of Control Offer will be required to surrender the Exchange Notes,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Exchange Notes completed, to the paying agent specified in the notice at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) Holders will be
entitled to withdraw their tendered Exchange Notes and their election to require
the Company to purchase such Exchange Notes, provided that the paying agent
receives, not later than the close of business on the last day of the Offer
Period (as defined in the Indenture), a telegram, telex, facsimile transmission
or letter setting forth the name of the Holder, the principal amount of Exchange
Notes tendered for purchase, and a statement that such Holder is withdrawing his
tendered Exchange Notes and his election to have such Exchange Notes purchased;
and (7) that Holders whose Exchange Notes are being purchased only in part will
be issued new Exchange Notes equal in principal amount to the unpurchased
portion of the Exchange Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple thereof.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding Senior Indebtedness or obtain the
requisite consents, if any, under any outstanding Senior Indebtedness in each
case necessary to permit the repurchase of the Exchange Notes required by this
covenant.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Exchange Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The Indenture provides that on the Change of Control Payment Date, the
Company will, to the extent permitted by law, (1) accept for payment all
Exchange Notes or portions thereof properly tendered
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pursuant to the Change of Control Offer, (2) deposit with the paying agent an
amount equal to the aggregate Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (3) deliver, or cause to be
delivered, to the Trustee for cancellation the Exchange Notes so accepted
together with an Officers' Certificate stating that such Exchange Notes or
portions thereof have been tendered to and purchased by the Company. The
Indenture will provide that the paying agent will promptly mail to each Holder
the Change of Control Payment for such Exchange Notes, and the Trustee will
promptly authenticate and mail to each Holder a new Exchange Note equal in
principal amount to any unpurchased portion of the Exchange Notes surrendered,
if any, PROVIDED, that each such new Exchange Note will be in a principal amount
of $1,000 or an integral multiple thereof. The Company will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
The Credit Facilities provide, and future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may, prohibit the Company from purchasing any Exchange Notes as a result of a
Change of Control and/or provide that certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing the Exchange Notes, the Company could seek the consent of its lenders
to the purchase of the Exchange Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing the Exchange Notes. In such case, the Company's failure to purchase
tendered Exchange Notes would constitute an Event of Default under the
Indenture, which would result in an Event of Default under the Credit
Facilities. In such circumstances, the subordination provisions in the Indenture
would restrict payments to the Holders.
The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
ASSET SALES. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, cause, make or suffer to exist an
Asset Sale, unless (x) the Company, or its Restricted Subsidiaries, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the fair market value (as determined in good faith by the Company) of the assets
sold or otherwise disposed of and (y) at least 75% of the consideration therefor
received by the Company, or such Restricted Subsidiary, as the case may be, is
in the form of cash or Cash Equivalents; PROVIDED that the amount of (a) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto) of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Notes), that are assumed by the transferee of any such assets, (b) any
securities received by the Company or such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received) within 180 days following the closing
of such Asset Sale and (c) any Designated Noncash Consideration received by the
Company or any of its Restricted Subsidiaries in such Asset Sale having an
aggregate fair market value, taken together with all other Designated Noncash
Consideration received pursuant to this clause (c) that is at that time
outstanding, not to exceed the greater of (x) $100 million or (y) 15% of Total
Assets at the time of the receipt of such Designated Noncash Consideration (with
the fair market value of each item of Designated Noncash Consideration being
measured at the time received and without giving effect to subsequent changes in
value), shall be deemed to be cash for purposes of this provision and for no
other purpose.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted
Subsidiary, at its option, may (i) apply the Net Proceeds from such Asset Sale
to permanently reduce (x) Obligations under the Senior Credit Facilities (and to
correspondingly reduce commitments with respect thereto), (y) other Senior
Indebtedness or Pari Passu Indebtedness (PROVIDED that if the Company shall so
reduce Obligations under Pari Passu Indebtedness, it will equally and ratably
reduce Obligations under the Notes if the Notes are then prepayable (the Notes
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become prepayable from and after July 1, 2002) or, if the Notes may not be then
prepaid, the Company shall make an offer (in accordance with the procedures set
forth below for an Asset Sale Offer) to all Holders to purchase at 100% of the
principal amount thereof, plus the amount of accrued but unpaid interest, if
any, on, the amount of Notes that would otherwise be prepaid) or (z)
Indebtedness of a Wholly Owned Restricted Subsidiary, (ii) apply the Net
Proceeds from such Asset Sale to an investment in any one or more businesses,
capital expenditures or acquisitions of other assets in each case, used or
useful in a Similar Business (including investments or purchases of non-capital
assets in connection with the construction or expansion of distribution
facilities), (iii) in the case of a sale of a store or stores, deem such Net
Proceeds to have been applied to the extent of any capital expenditures made to
construct or acquire a replacement store in the general vicinity of the store
sold within 365 days preceding the date of the Asset Sale; PROVIDED that Net
Proceeds were not previously excluded from the definition of Excess Proceeds as
a result of the same capital expenditures made to acquire or construct such
replacement store and/or (iv) apply the Net Proceeds from such Asset Sale to an
investment in properties or assets that replace the properties and assets that
are the subject of such Asset Sale. Pending the final application of any such
Net Proceeds, the Company or such Restricted Subsidiary may temporarily reduce
Indebtedness under a revolving credit facility, if any, or otherwise invest such
Net Proceeds in Cash Equivalents or Investment Grade Securities. The Indenture
provides that any Net Proceeds from the Asset Sale that are not invested as
provided and within the time period set forth in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $15.0 million, the Company shall make an offer
to all Holders (an "Asset Sale Offer") to purchase the maximum principal amount
of Notes, that is an integral multiple of $1,000, that may be purchased out of
the Excess Proceeds at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
fixed for the closing of such offer, in accordance with the procedures set forth
in the Indenture. The Company will commence an Asset Sale Offer with respect to
Excess Proceeds within ten Business Days after the date that Excess Proceeds
exceeds $15.0 million by mailing the notice required pursuant to the terms of
the Indenture, with a copy to the Trustee. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased in the manner described under the caption "Selection
and Notice" below. Upon completion of any such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
The Credit Facilities prohibit, and future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may prohibit, the Company from purchasing any Notes pursuant to this Asset Sales
covenant. In the event the Company is prohibited from purchasing the Notes, the
Company could seek the consent of its lenders to the purchase of the Notes or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing the Exchange Notes. In such case, the
Company's failure to purchase tendered Notes would constitute an Event of
Default under the Indenture. If, as a result thereof, a default occurs with
respect to any Senior Indebtedness, the subordination provisions in the
Indenture would likely restrict payments to the Holders.
SELECTION AND NOTICE. If less than all of the Notes are to be redeemed at
any time or if more Notes are tendered pursuant to an Asset Sale Offer than the
Company is required to purchase, selection of such Notes for redemption or
purchase, as the case may be, will be made by the Trustee in compliance with the
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requirements of the principal national securities exchange, if any, on which
such Notes are listed, or, if such Notes are not so listed, on a pro rata basis,
by lot or by such other method as the Trustee shall deem fair and appropriate
(and in such manner as complies with applicable legal requirements); provided
that no Exchange Notes of $1,000 or less shall be purchased or redeemed in part.
Notices of purchase or redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the purchase or
redemption date to each Holder to be purchased or redeemed at such Holder's
registered address. If any Note is to be purchased or redeemed in part only, any
notice of purchase or redemption that relates to such Note shall state the
portion of the principal amount thereof that has been or is to be purchased or
redeemed.
A new Note in principal amount equal to the unpurchased or unredeemed
portion of any Note purchased or redeemed in part will be issued in the name of
the Holder thereof upon cancellation of the original Note. On and after the
purchase or redemption date unless the Company defaults in payment of the
purchase or redemption price, interest shall cease to accrue on Notes or
portions thereof purchased or called for redemption.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests,
including any dividend or distribution payable in connection with any merger or
consolidation (other than (A) dividends or distributions by the Company payable
in Equity Interests (other than Disqualified Stock) of the Company or (B)
dividends or distributions by a Restricted Subsidiary so long as, in the case of
any dividend or distribution payable on or in respect of any class or series of
securities issued by a Subsidiary other than a Wholly Owned Subsidiary, the
Company or a Restricted Subsidiary receives at least its pro rata share of such
dividend or distribution in accordance with its Equity Interests in such class
or series of securities); (ii) purchase, redeem, defease or otherwise acquire or
retire for value any Equity Interests of the Company or any direct or indirect
parent of the Company; (iii) make any principal payment on, or redeem,
repurchase, defease or otherwise acquire or retire for value in each case, prior
to any scheduled repayment, or maturity, any Subordinated Indebtedness (other
than Indebtedness permitted under clauses (g) and (h) of the covenant described
under "--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"); or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of the first paragraph of
"--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issuance Date (including Restricted Payments
permitted by clauses (i), (ii) (with respect to the payment of dividends on
Refunding Capital Stock pursuant to clause (b) thereof), (iv) (only to the
extent that amounts paid pursuant to such clause are greater than amounts
that would have been paid pursuant to such clause if $5.0 million and $10.0
million were substituted in such clause for $10.0 million and $20.0 million,
respectively), (v), (viii), (ix) and (xiii) of the next succeeding
paragraph, but excluding all other Restricted Payments permitted by the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from the fiscal quarter that first begins after the Issuance Date to the end
of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
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Payment (or, in the case such Consolidated Net Income for such period is a
deficit, minus 100% of such deficit), PLUS (ii) 100% of the aggregate net
cash proceeds and the fair market value, as determined in good faith by the
Board of Directors, of marketable securities received by the Company since
immediately after the closing of the Recapitalization and the Financings
from the issue or sale of Equity Interests of the Company (including Retired
Capital Stock, but excluding cash proceeds and marketable securities
received from the sale of (A) Equity Interests to members of management,
directors or consultants of the Company and its Subsidiaries after the
Issuance Date to the extent such amounts have been applied to Restricted
Payments in accordance with clause (iv) of the next succeeding paragraph,
and (B) Designated Preferred Stock) or debt securities of the Company that
have been converted into such Equity Interests of the Company (other than
Refunding Capital Stock or Equity Interests or convertible debt securities
of the Company sold to a Restricted Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), PLUS (iii) 100% of the aggregate amount of cash and
marketable securities contributed to the capital of the Company following
the Issuance Date, PLUS (iv) 100% of the aggregate amount received in cash
and the fair market value of marketable securities (other than Restricted
Investments) received from (A) the sale or other disposition (other than to
the Company or a Restricted Subsidiary) of Restricted Investments made by
the Company and its Restricted Subsidiaries and repurchases and redemptions
of such Restricted Investments from the Company and its Restricted
Subsidiaries by such Person and repayments of loans or advances which
constitute Restricted Investments to the Company and its Restricted
Subsidiaries or (B) a dividend from, or the sale (other than to the Company
or a Restricted Subsidiary) of the stock of, an Unrestricted Subsidiary
(other than an Unrestricted Subsidiary the Investment in which was made by
the Company or a Restricted Subsidiary pursuant to clauses (vi), (x) or (xi)
below).
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) (a) the redemption, repurchase, retirement or other acquisition of
any Equity Interests (the "RETIRED CAPITAL STOCK") or Subordinated
Indebtedness of the Company in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of,
Equity Interests of the Company (other than any Disqualified Stock) (the
"REFUNDING CAPITAL STOCK"), and (b) the declaration and payment of dividends
on the Refunding Capital Stock in an aggregate amount per year no greater
than the aggregate amount of dividends per annum that was declarable and
payable on such Retired Capital Stock immediately prior to such retirement;
PROVIDED, HOWEVER, that at the time of the declaration of any such
dividends, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(iii) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Company so long as (A) the principal amount of such new Indebtedness does
not exceed the principal amount of the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired for value (PLUS the amount of any
premium required to be paid under the terms of the instrument governing the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired), (B) such Indebtedness is subordinated to the Senior Indebtedness
and the Notes at least to the same extent as such Subordinated Indebtedness
so purchased, exchanged, redeemed, repurchased, acquired or retired for
value, (C) such Indebtedness has a final scheduled maturity date equal to or
later than the final scheduled maturity date of the Subordinated
Indebtedness being so redeemed, repurchased, acquired or retired and (D)
such Indebtedness has a Weighted Average Life to Maturity equal to or
greater than the remaining Weighted Average Life to Maturity of the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired;
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(iv) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of common Equity Interests of the
Company held by any future, present or former employee, director or
consultant of the Company or any Subsidiary pursuant to any management
equity plan or stock option plan or any other management or employee benefit
plan or agreement; PROVIDED, HOWEVER, that the aggregate Restricted Payments
made under this clause (iv) does not exceed in any calendar year $10.0
million (with unused amounts in any calendar year being carried over to
succeeding calendar years subject to a maximum (without giving effect to the
following proviso) of $20.0 million in any calendar year); PROVIDED FURTHER
that such amount in any calendar year may be increased by an amount not to
exceed (A) the cash proceeds from the sale of Equity Interests of the
Company to members of management, directors or consultants of the Company
and its Subsidiaries that occurs after the Issuance Date (to the extent the
cash proceeds from the sale of such Equity Interest have not otherwise been
applied to the payment of Restricted Payments by virtue of the preceding
paragraph (c)) plus (B) the cash proceeds of key man life insurance policies
received by the Company and its Restricted Subsidiaries after the Issuance
Date less (C) the amount of any, Restricted Payments previously made
pursuant to clauses (A) and (B) of this subparagraph (iv); and PROVIDED
FURTHER that cancellation of Indebtedness owing to the Company from members
of management of the Company or any of its Restricted Subsidiaries in
connection with a repurchase of Equity Interests of the Company will not be
deemed to constitute a Restricted Payment for purposes of this covenant or
any other provision of the Indenture;
(v) (A) the declaration and payment of dividends to holders of any class
or series of Designated Preferred Stock (other than Disqualified Stock)
issued after the Issuance Date or (B) the declaration and payment of
dividends on Refunding Capital Stock in excess of the dividends declarable
and payable thereon pursuant to clause (ii); PROVIDED, HOWEVER, in either
case, that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Designated Preferred Stock or the declaration of such
dividends on Refunding Capital Stock, after giving effect to such issuance
or declaration on a pro forma basis, the Company and its Restricted
Subsidiaries would have had a Fixed Charge Coverage Ratio of at least 1.75
to 1.00;
(vi) Investments in Unrestricted Subsidiaries having an aggregate fair
market value, taken together with all other Investments made pursuant to
this clause (vi) that are at that time outstanding, not to exceed $25.0
million at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);
(vii) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(viii) the payment of dividends on the Company's Common Stock, following
the first public offering of the Company's Common Stock after the Issuance
Date, of up to 6% per annum of the net proceeds received by the Company in
such public offering, other than public offerings with respect to the
Company's Common Stock registered on Form S-8;
(ix) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of Equity Interests of the Company in
existence on the Issuance Date and which are not held by KKR or any of its
Affiliates on the Issuance Date (including any Equity Interests issued in
respect of such Equity Interests as a result of a stock split,
recapitalization, merger, combination, consolidation or otherwise), PROVIDED
that the aggregate Restricted Payments made under this clause (ix) shall not
exceed $105 million; PROVIDED FURTHER that the aggregate amount expended
under this clause (ix) shall not exceed $35 million in the fiscal year
ending June 27, 1998; or $70 million in the two fiscal years ending June 26,
1999; PROVIDED FURTHER that notwithstanding the foregoing provisos, the
Company shall be permitted to make Restricted Payments under this clause
(ix) only if after giving effect thereto, the Company would be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first sentence of the covenant
described under "--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock";
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(x) Investments in Unrestricted Subsidiaries that are made with Excluded
Contributions;
(xi) other Restricted Payments in an aggregate amount not to exceed
$20.0 million;
(xii) the payment of any amount in connection with the Recapitalization
and the Financings and the documents executed in connection therewith,
including, without limitation, payments in respect of the Putable Shares
Reserve Fund; and
(xiii) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of Equity Interests owned by the
Employee Stock Ownership Plan or the Key Employee Stock Ownership Plan;
PROVIDED HOWEVER, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (iii) through (ix) and clauses (xi)
and (xiii), no Default or Event or Default shall have occurred and be continuing
or would occur as a consequence thereof.
As of the Issuance Date, all of the Company's Subsidiaries were Restricted
Subsidiaries. The Company will not permit any Unrestricted Subsidiary to become
a Restricted Subsidiary except pursuant to the second to last sentence of the
definition of "Unrestricted Subsidiary." For purposes of designating any
Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid) in
the Subsidiary so designated will be deemed to be Restricted Payments in an
amount determined as set forth in the last sentence of the definition of
"Investments." Such designation will be permitted only if a Restricted Payment
in such amount would be permitted at such time (whether pursuant to the first
paragraph of this covenant or under clauses (vi) and (x) and (xi)) and if such
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
Unrestricted Subsidiaries will not be subject to any of the restrictive
covenants set forth in the Indenture.
LIMITATIONS ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED
STOCK. The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "INCUR" and
collectively, an "INCURRENCE") any Indebtedness (including Acquired
Indebtedness) and that the Company will not issue any shares of Disqualified
Stock and will not permit any of its Restricted Subsidiaries to issue any shares
of preferred stock; PROVIDED, HOWEVER, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock if the
Fixed Charge Coverage Ratio for the Company's and the Restricted Subsidiaries'
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 1.75 to 1.00, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, and the application of proceeds therefrom had occurred at the beginning of
such four-quarter period.
The foregoing limitations will not apply to:
(a) the incurrence by the Company of Indebtedness under Credit
Facilities and the issuance and creation of letters of credit and bankers'
acceptances thereunder (with letters of credit and bankers' acceptances
being deemed to have a principal amount equal to the face amount thereof) up
to an aggregate principal amount of $450 million outstanding at any one
time;
(b) the incurrence by the Company of Indebtedness represented by the
Notes;
(c) the Existing Indebtedness (other than Indebtedness described in
clauses (a) and (b));
(d) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries, to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
incurred pursuant to this clause
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(d) and including all Refinancing Indebtedness incurred to refund, refinance
or replace any other Indebtedness incurred pursuant to this clause (d), does
not exceed 20% of Total Assets;
(e) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(f) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; PROVIDED, HOWEVER, that (i) such Indebtedness is
not reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote to financial
statements and not otherwise reflected on the balance sheet will not be
deemed to be reflected on such balance sheet for purposes of this clause
(i)) and (ii) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including noncash
proceeds (the fair market value of such noncash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(g) Indebtedness of the Company to a Restricted Subsidiary; PROVIDED
that any such Indebtedness is made pursuant to an intercompany note and is
subordinated in right of payment to the Notes; PROVIDED further that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any other subsequent transfer of any such Indebtedness (except
to the Company or another Restricted Subsidiary) shall be deemed, in each
case to be an incurrence of such Indebtedness;
(h) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; PROVIDED that (i) any such Indebtedness is made
pursuant to an intercompany note and (ii) if a Guarantor incurs such
Indebtedness from a Restricted Subsidiary that is not a Guarantor such
Indebtedness is subordinated in right of payment to the Guarantee of such
Guarantor; PROVIDED FURTHER that any subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case to be an incurrence of such Indebtedness;
(i) Hedging Obligations that are incurred in the ordinary course of
business for the purpose of fixing or hedging interest rate risk with
respect to any Indebtedness that is permitted by the terms of the Indenture
to be outstanding;
(j) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(k) Indebtedness of any Guarantor in respect of such Guarantor's
Guarantee;
(l) Indebtedness of the Company and any of its Restricted Subsidiaries
not otherwise permitted hereunder in an aggregate principal amount, which
when aggregated with the principal amount of all other Indebtedness then
outstanding and incurred pursuant to this clause (l), does not exceed $150.0
million at any one time outstanding; PROVIDED, HOWEVER, that the aggregate
principal amount of such Indebtedness which may be incurred by Restricted
Subsidiaries does not exceed $100.0 million at any one time outstanding; (it
being understood that any Indebtedness incurred under this clause (l) shall
cease to be deemed incurred or outstanding for purposes of this clause (l)
but shall be deemed to be incurred for purposes of the first paragraph of
this covenant from and after the first date on which the
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Company could have incurred such Indebtedness under the first paragraph of
this covenant without reliance upon this clause (l));
(m) (i) any guarantee by the Company of Indebtedness or other
obligations of any of its Restricted Subsidiaries so long as the incurrence
of such Indebtedness incurred by such Restricted Subsidiary is permitted
under the terms of the Indenture and (ii) any Excluded Guarantee (as defined
below under "--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries") of a Restricted Subsidiary;
(n) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness which serves to refund, refinance or restructure any
Indebtedness incurred as permitted under the first paragraph of this
covenant and clauses (b) and (c) above, or any Indebtedness issued to so
refund, refinance or restructure such Indebtedness including additional
Indebtedness incurred to pay premiums and fees in connection therewith (the
"REFINANCING INDEBTEDNESS") prior to its respective maturity; PROVIDED,
HOWEVER, that such Refinancing Indebtedness (i) has a Weighted Average Life
to Maturity at the time such Refinancing Indebtedness is incurred which is
not less than the remaining Weighted Average Life to Maturity of
Indebtedness being refunded or refinanced, (ii) to the extent such
Refinancing Indebtedness refinances Indebtedness subordinated or PARI PASSU
to the Notes, such Refinancing Indebtedness is subordinated or PARI PASSU to
the Notes at least to the same extent as the Indebtedness being refinanced
or refunded and (iii) shall not include (x) Indebtedness of a Subsidiary
that refinances Indebtedness of the Company or (y) Indebtedness of the
Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary; and PROVIDED FURTHER that subclauses (i) and (ii)
of this clause (n) will not apply to any refunding or refinancing of any
Senior Indebtedness;
(o) Indebtedness or Disqualified Stock of Persons that are acquired by
the Company or any of its Restricted Subsidiaries or merged into a
Restricted Subsidiary in accordance with the terms of the Indenture;
PROVIDED that such Indebtedness or Disqualified Stock is not incurred in
contemplation of such acquisition or merger; and PROVIDED FURTHER that after
giving effect to such acquisition, either (i) the Company would be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first sentence of this covenant
or (ii) the Fixed Charge Coverage Ratio is greater than immediately prior to
such acquisition; and
(p) Contingent Obligations in the form of guarantees, whether by
operation of law or otherwise, of Indebtedness of joint ventures in
existence on the Issuance Date to which the Company or its Restricted
Subsidiaries is a party.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
permitted Indebtedness described in clauses (a) through (p) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any manner
that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof except as otherwise set forth in clause (l). Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
LIENS. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
Pari Passu Indebtedness or Subordinated Indebtedness on any asset or property of
the Company or such Restricted Subsidiary, or any income or profits therefrom,
or assign or convey any right to receive income therefrom, unless the Notes are
equally and ratably secured with the obligations so secured or until such time
as such obligations are no longer secured by a Lien.
The Indenture provides that no Guarantor will directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
Pari Passu Indebtedness or Subordinated Indebtedness of
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such Guarantor on any asset or property of such Guarantor or any income or
profits therefrom, or assign or convey any right to receive income therefrom,
unless the Guarantee of such Guarantor is equally and ratably secured with the
obligations so secured or until such time as such obligations are no longer
secured by a Lien.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. The
Indenture provides that the Company may not consolidate or merge with or into or
wind up into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to any Person
unless (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made is a corporation organized or existing under the laws of the
United States, any state thereof, the District of Columbia, or any territory
thereof (the Company or such Person, as the case may be, being herein called the
"SUCCESSOR COMPANY"); (ii) the Successor Company (if other than the Company)
expressly assumes all the obligations of the Company under the Indenture and the
Notes pursuant to a supplemental indenture or other documents or instruments in
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) immediately after giving
pro forma effect to such transaction, as if such transaction had occurred at the
beginning of the applicable four-quarter period, (A) the Successor Company would
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first sentence of the covenant
described under "--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock" or (B) the Fixed Charge Coverage Ratio for the Successor
Company and its Restricted Subsidiaries would be greater than such Ratio for the
Company and its Restricted Subsidiaries immediately prior to such transaction;
(v) each Guarantor, if any, unless it is the other party to the transactions
described above, in which case clause (ii) shall apply, shall have by
supplemental indenture confirmed that its Guarantee shall apply to such Person's
obligations under the Indenture and the Notes; and (vi) the Company shall have
delivered to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture. The Successor Company will succeed
to, and be substituted for, the Company under the Indenture and the Notes.
Notwithstanding the foregoing clause (iv), (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
State of the United States so long as the amount of Indebtedness of the Company
and its Restricted Subsidiaries is not increased thereby.
Each Guarantor, if any, shall not, and the Company will not permit a
Guarantor to, consolidate or merge with or into or wind up into (whether or not
such Guarantor is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any Person unless (i) such
Guarantor is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) or to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made is a corporation organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory thereof
(such Guarantor or such Person, as the case may be, being herein called the
"SUCCESSOR GUARANTOR"); (ii) the Successor Guarantor (if other than such
Guarantor) expressly assumes all the obligations of such Guarantor under the
Indenture and such Guarantor's Guarantee pursuant to a supplemental indenture or
other documents or instruments in form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
and (iv) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture. The Successor Guarantor will succeed to, and be substituted for, such
Guarantor under the Indenture and such Guarantor's Guarantee.
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TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, make any payment
to, or sell, lease, transfer or otherwise dispose of any of its properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an
"AFFILIATE TRANSACTION") involving aggregate payments or consideration in excess
of $5.0 million, unless (a) such Affiliate Transaction is on terms that are not
materially less favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person and (b) the
Company delivers to the Trustee with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, a resolution adopted by the majority of the Board of
Directors approving such Affiliate Transaction and set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (a)
above.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments permitted by the provisions of the Indenture described above
under the covenant "--Limitation on Restricted Payments"; (iii) the payment of
customary annual management, consulting and advisory fees and related expenses
to KKR and its Affiliates; (iv) the payment of reasonable and customary fees
paid to, and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any Restricted Subsidiary; (v) payments by the
Company or any of its Restricted Subsidiaries to KKR and its Affiliates made for
any financial advisory, financing, underwriting or placement services or in
respect of other investment banking activities, including, without limitation,
in connection with acquisitions or divestitures which payments are approved by a
majority of the Board of Directors of the Company in good faith; (vi)
transactions in which the Company or any of its Restricted Subsidiaries, as the
case may be, delivers to the Trustee a letter from an Independent Financial
Advisor stating that such transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view or meets the requirements of clause
(a) of the preceding paragraph; (vii) payments or loans to employees or
consultants which are approved by a majority of the Board of Directors of the
Company in good faith; (viii) any agreement as in effect as of the Issuance Date
or any amendment thereto (so long as any such amendment is not disadvantageous
to the Holders in any material respect) or any transaction contemplated thereby;
(ix) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any stockholders
agreement (including any registration rights agreement or purchase agreement
related thereto) to which it is a party as of the Issuance Date and any similar
agreements which it may enter into thereafter; PROVIDED, HOWEVER, that the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under any future amendment to any such existing
agreement or under any similar agreement entered into after the Issuance Date
shall only be permitted by this clause (ix) to the extent that the terms of any
such amendment or new agreement are not otherwise disadvantageous to the Holders
in any material respect; (x) the Recapitalization and the Financings and the
payment of all fees and expenses related to the Recapitalization and the
Financings; and (xi) transactions with customers, clients, suppliers, or
purchasers or sellers of goods or services, in each case in the ordinary course
of business and otherwise in compliance with the terms of the Indenture which
are fair to the Company or its Restricted Subsidiaries, in the reasonable
determination of the Board of Directors of the Company or the senior management
thereof, or are on terms at least as favorable as might reasonably have been
obtained at such time from an unaffiliated party.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to:
(a) (i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or
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measured by, its profits, or (ii) pay any Indebtedness owed to the Company
or any of its Restricted Subsidiaries;
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(c) sell, lease or transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries; except (in each case) for
such encumbrances or restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions in effect on the Issuance
Date, including, without limitation, pursuant to Existing Indebtedness or
the Senior Credit Facilities and their related documentation;
(2) the Indenture and the Notes;
(3) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed in
clause (c) above on the property so acquired;
(4) applicable law or any applicable rule, regulation or order;
(5) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person,
so acquired;
(6) contracts for the sale of assets, including, without limitation
customary restrictions with respect to a Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary;
(7) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "--Limitations on Incurrence of Indebtedness
and Issuance of Disqualified Stock" and "--Liens" that limit the right of
the debtor to dispose of the assets securing such Indebtedness;
(8) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(9) other Indebtedness of Restricted Subsidiaries permitted to be
incurred subsequent to the Issuance Date pursuant to the provisions of the
covenant described under "--Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock";
(10) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
(11) any Mortgage Financing or Mortgage Refinancing that imposes
restrictions on the real property securing such Indebtedness;
(12) customary provisions contained in leases and other agreements
entered into in the ordinary course of business; or
(13) any encumbrances or restrictions of the type referred to in clauses
(a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in
clauses (1) through (12) above, PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the
Company's Board of Directors, no more restrictive with respect to such
dividend and other payment restrictions than those contained in the dividend
or other payment restrictions prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding, replacement or
refinancing.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED
SUBSIDIARIES. (a) The Indenture provides that the Company will not permit any
Restricted Subsidiary to guarantee the payment of any Indebtedness
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of the Company or any Indebtedness of any other Restricted Subsidiary unless (i)
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee of payment of the Notes by
such Restricted Subsidiary except that with respect to a guarantee of
Indebtedness of the Company (A) if the Notes are subordinated in right of
payment to such Indebtedness, the Guarantee under the supplemental indenture
shall be subordinated to such Restricted Subsidiary's guarantee with respect to
such Indebtedness substantially to the same extent as the Notes are subordinated
to such Indebtedness under the Indenture and (B) if such Indebtedness is by its
express terms subordinated in right of payment to the Notes, any such guarantee
of such Restricted Subsidiary with respect to such Indebtedness shall be
subordinated in right of payment to such Restricted Subsidiary's Guarantee with
respect to the Notes substantially to the same extent as such Indebtedness is
subordinated to the Notes; (ii) such Restricted Subsidiary waives and will not
in any manner whatsoever claim or take the benefit or advantage of, any rights
of reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Guarantee; and (iii) such Restricted Subsidiary
shall deliver to the Trustee an opinion of counsel to the effect that (A) such
Guarantee of the Notes has been duly executed and authorized and (B) such
Guarantee of the Notes constitutes a valid, binding and enforceable obligation
of such Restricted Subsidiary, except insofar as enforcement thereof may be
limited by bankruptcy, insolvency or similar laws (including, without
limitation, all laws relating to fraudulent transfers) and except insofar as
enforcement thereof is subject to general principles of equity; PROVIDED that
this paragraph (a) shall not be applicable to any guarantee of any Restricted
Subsidiary (x) that (A) existed at the time such Person became a Restricted
Subsidiary of the Company and (B) was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary of the Company or
(y) that guarantees the payment of Obligations of the Company or any Restricted
Subsidiary under the Senior Credit Facilities or any other Senior Indebtedness
and any refunding, refinancing or replacement thereof, in whole or in part,
PROVIDED that such refunding, refinancing or replacement thereof constitutes
Senior Indebtedness and is not incurred pursuant to a registered offering of
securities under the Securities Act or a private placement of securities
(including under Rule 144A) pursuant to an exemption from the registration
requirements of the Securities Act, which private placement provides for
registration rights under the Securities Act (any guarantee excluded by
operations of this clause (y) being an "Excluded Guarantee").
(b) Notwithstanding the foregoing and the other provisions of the Indenture,
any Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture) or (ii) the release or discharge of the
guarantee which resulted in the creation of such Guarantee, except a discharge
or release by or as a result of payment under such guarantee.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The Indenture
provides that the Company will not, and will not permit any Guarantor to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
that is subordinate in right of payment to any Indebtedness of the Company or
any Indebtedness of any Guarantor, as the case may be, unless such Indebtedness
is either (a) PARI PASSU in right of payment with the Notes or such Guarantor's
Guarantee, as the case may be or (b) subordinate in right of payment to the
Notes, or such Guarantor's Guarantee, as the case may be, in the same manner and
at least to the same extent as the Notes are subordinate to Senior Indebtedness
or such Guarantor's Guarantee is subordinate to such Guarantor's Senior
Indebtedness, as the case may be.
REPORTS AND OTHER INFORMATION. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
or otherwise report on an annual and quarterly basis on forms PROVIDED for such
annual and quarterly reporting pursuant to rules and regulations promulgated by
the Securities and Exchange Commission (the "COMMISSION"), the Indenture
requires the Company to file with the Commission (and provide the Trustee and
Holders with copies thereof, without cost to each Holder, within 15 days after
it files them with the Commission), (a) within 90 days after the
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end of each fiscal year, annual reports on Form 10-K (or any successor or
comparable form) containing the information required to be contained therein (or
required in such successor or comparable form); (b) within 45 days after the end
of each of the first three fiscal quarters of each fiscal year, reports on Form
10-Q (or any successor or comparable form); (c) promptly from time to time after
the occurrence of an event required to be therein reported, such other reports
on Form 8-K (or any successor or comparable form); and (d) any other
information, documents and other reports which the Company would be required to
file with the Commission if it were subject to Section 13 or 15(d) of the
Exchange Act; PROVIDED, HOWEVER, the Company shall not be so obligated to file
such reports with the Commission if the Commission does not permit such filing,
in which event the Company will make available such information to prospective
purchasers of Notes, in addition to providing such information to the Trustee
and the Holders, in each case within 15 days after the time the Company would be
required to file such information with the Commission, if it were subject to
Sections 13 or 15(d) of the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute Events of Default under the Indenture:
(i) default in payment when due and payable, upon redemption,
acceleration or otherwise, of principal of, or premium on, if any, the Notes
whether or not such payment shall be prohibited by the subordination
provisions relating to the Notes;
(ii) default for 30 days or more in the payment when due of interest on
or with respect to the Notes whether or not such payment shall be prohibited
by the subordination provisions relating to the Notes;
(iii) failure by the Company or any Guarantor for 30 days after receipt
of written notice given by the Trustee or the holders of at least 30% in
principal amount of the Notes then outstanding to comply with any of its
other agreements in the Indenture or the Notes;
(iv) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries (other than Indebtedness owed to the Company or a Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or is created
after the Issuance Date, if both (A) such default either (1) results from
the failure to pay any such Indebtedness at its stated final maturity (after
giving effect to any applicable grace periods) or (2) relates to an
obligation other than the obligation to pay principal of any such
Indebtedness at its stated final maturity and results in the holder or
holders of such Indebtedness causing such Indebtedness to become due prior
to its stated maturity and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at stated final maturity (after giving effect
to any applicable grace periods), or the maturity of which has been so
accelerated, aggregate $20.0 million or more at any one time outstanding;
(v) failure by the Company or any of its Significant Subsidiaries to pay
final judgments aggregating in excess of $20.0 million, which final
judgments remain unpaid, undischarged and unstayed for a period of more than
60 days after such judgment becomes final, and in the event such judgment is
covered by insurance, an enforcement proceeding has been commenced by any
creditor upon such judgment or decree which is not promptly stayed;
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; or
(vii) the Guarantee of any Significant Subsidiary shall for any reason
cease to be in full force and effect or be declared null and void or any
responsible officer of the Company or any Guarantor that is a Significant
Subsidiary denies that it has any further liability under its Guarantee or
gives notice to
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such effect (other than by reason of the termination of the Indenture or the
release of any such Guarantee in accordance with the Indenture).
If any Event of Default (other than of a type specified in clause (vi)
above) occurs and is continuing under the Indenture, the Trustee or the Holders
of at least 30% in principal amount of the then outstanding Notes may declare
the principal, premium, if any, interest and any other monetary obligations on
all the then outstanding Notes to be due and payable immediately; PROVIDED,
HOWEVER, that, so long as any Indebtedness permitted to be incurred pursuant to
the Senior Credit Facilities shall be outstanding, no such acceleration shall be
effective until the earlier of (i) acceleration of any such Indebtedness under
the Senior Credit Facilities or (ii) five business days after the giving of
written notice to the Company and the administrative agent under the Senior
Credit Facilities of such acceleration. Upon the effectiveness of such
declaration, such principal and interest will be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising under
clause (vi) of the first paragraph of this section, all outstanding Notes will
become due and payable without further action or notice. Holders may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Indenture provides that the Trustee may withhold from Holders notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal, premium, if any, or interest) if it
determines that withholding notice is in their interest. In addition, the
Trustee shall have no obligation to accelerate the Notes if in the best judgment
of the Trustee acceleration is not in the best interest of the Holders of such
Notes.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the then outstanding Notes issued thereunder by notice to the Trustee
may on behalf of the Holders of all of such Notes waive any existing Default or
Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, premium, if any, or
the principal of any such Note held by a non-consenting Holder. In the event of
any Event of Default specified in clause (iv) above, such Event of Default and
all consequences thereof (including without limitation any acceleration or
resulting payment default) shall be annulled, waived and rescinded,
automatically and without any action by the Trustee or the Holders, if within 20
days after such Event of Default arose (x) the Indebtedness or guarantee that is
the basis for such Event of Default has been discharged, or (y) the holders
thereof have rescinded or waived the acceleration, notice or action (as the case
may be) giving rise to such Event of Default, or (z) if the default that is the
basis for such Event of Default has been cured.
The Indenture provides that the Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required, within five Business Days, upon becoming aware of any
Default or Event of Default or any default under any document, instrument or
agreement representing Indebtedness of the Company or any Guarantor, to deliver
to the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, shall have any liability for any obligations of the Company or
the Guarantors under the Exchange Notes, the Guarantees or the Indenture or for
any claim based on, in respect of, or by reason of such obligations or their
creation. Each Holder by accepting an Exchange Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Exchange Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The obligations of the Company and the Guarantors, if any, under the
Indenture will terminate (other than certain obligations) and will be released
upon payment in full of all of the Notes. The Company may, at its option and at
any time, elect to have all of its obligations discharged with respect to the
outstanding
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Notes and have each Guarantor's obligation discharged with respect to its
Guarantee ("LEGAL DEFEASANCE") and cure all then existing Events of Default
except for (i) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due solely out of the trust created pursuant to the Indenture,
(ii) the Company's obligations with respect to Notes concerning issuing
temporary Notes, registration of such Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and each Guarantor released with respect to certain
covenants that are described in the Indenture ("COVENANT DEFEASANCE") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment on other
indebtedness, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Notes:
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest due on
the outstanding Notes on the stated maturity date or on the applicable
redemption date, as the case may be, of such principal, premium, if any, or
interest on the outstanding Notes;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that, subject to customary assumptions
and exclusions, (A) the Company has received from, or there has been
published by, the United States Internal Revenue Service a ruling or (B)
since the Issuance Date, there has been a change in the applicable U.S.
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, subject to
customary assumptions and exclusions, the Holders will not recognize income,
gain or loss for U.S. federal income tax purposes as a result of such Legal
Defeasance and will be subject to U.S. federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders will not recognize income, gain or
loss for U.S. federal income tax purposes as a result of such Covenant
Defeasance and will be subject to such tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing with respect to certain Events of Default on the date of such
deposit or with respect to certain bankruptcy or insolvency Events of
Default on the 91st day after such date of deposit;
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(v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the Indenture) to which, the Company or
any Guarantor is a party or by which the Company or any Guarantor is bound;
(vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, as of the date of such opinion and subject to
customary assumptions and exclusions following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. federal or state law, and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of
the Holders;
(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of defeating, hindering, delaying or defrauding any creditors of the
Company or any Guarantor or others; and
(viii) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel in the United States (which opinion of
counsel may be subject to customary assumptions and exclusions) each stating
that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all Notes issued thereunder, when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust) have been delivered to the Trustee for cancellation; or (b)
(i) all such Notes not theretofore delivered to such Trustee for cancellation
have become due and payable by reason of the making of a notice of redemption or
otherwise or will become due and payable within one year and the Company or any
Guarantor has irrevocably deposited or caused to be deposited with such Trustee
as trust funds in trust solely for the benefit of the Holders, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient without consideration of any reinvestment of
interest to pay and discharge the entire indebtedness on such Notes not
theretofore delivered to the Trustee for cancellation for principal, premium, if
any, and accrued interest to the date of maturity or redemption; (ii) no Default
or Event of Default with respect to the Indenture or the Notes shall have
occurred and be continuing on the date of such deposit or shall occur as a
result of such deposit and such deposit will not result in a breach or violation
of, or constitute a default under, any other instrument to which the Company or
any Guarantor is a party or by which the Company or any Guarantor is bound;
(iii) the Company or any Guarantor has paid or caused to be paid all sums
payable by it under such Indenture; and (iv) the Company has delivered
irrevocable instructions to the Trustee under such Indenture to apply the
deposited money toward the payment of such Notes at maturity or the redemption
date, as the case may be. In addition, the Company must deliver an Officers'
Certificate and an opinion of counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder will be treated as the owner of it for all purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, any
Guarantee and the Notes issued thereunder may be amended or supplemented with
the consent of the Holders of at least a majority in principal amount of the
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing default or compliance with any provision of the Indenture or
the Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a purchase of or tender offer or exchange offer for Notes).
The Indenture provides that without the consent of each Holder affected, an
amendment or waiver may not (with respect to any Notes held by a non-consenting
Holder): (i) reduce the principal amount of Notes whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any such Note or alter or waive the provisions with respect to
the redemption of the Notes (other than provisions relating to the covenants
described above under the caption "-- Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of such Notes and a waiver of the payment default that resulted from such
acceleration), or in respect of a covenant or provision contained in the
Indenture or any Guarantee which cannot be amended or modified without the
consent of all Holders, (v) make any Note payable in money other than that
stated in such Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders to receive
payments of principal of or premium, if any, or interest on the Notes, (vii)
make any change in the foregoing amendment and waiver provisions, (viii) impair
the right of any Holder to receive payment of principal of, or interest on such
Holder's Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such Holder's Notes or (ix)
make any change in the subordination provisions of the Indenture that would
adversely affect the Holders.
The Indenture provides that, notwithstanding the foregoing, without the
consent of any Holder, the Company, any Guarantor (with respect to a Guarantee
or the Indenture to which it is a party) and the Trustee may amend or supplement
the Indenture, any Guarantee or the Notes (i) to cure any ambiguity, defect or
inconsistency, (ii) to provide for uncertificated Notes in addition to or in
place of certificated Notes, (iii) to comply with the covenant relating to
mergers, consolidations and sales of assets, (iv) to provide for the assumption
of the Company's or any Guarantor's obligations to Holders, (v) to make any
change that would provide any additional rights or benefits to the Holders or
that does not adversely affect the legal rights under the Indenture of any such
Holder, (vi) to add covenants for the benefit of the Holders or to surrender any
right or power conferred upon the Company, (vii) to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act, (viii) to evidence and provide for the acceptance
and appointment under the Indenture of a successor Trustee pursuant to the
requirements thereof, or (ix) to add a Guarantor under the Indenture.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
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The Indenture provides that the Holders of a majority in principal amount of
the outstanding Notes issued thereunder will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. The Indenture provides
that in case an Event of Default shall occur (which shall not be cured), the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of his own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of such Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
GOVERNING LAW
The Indenture, the Notes and the Guarantees, if any, are and will be,
subject to certain exceptions, governed by and construed in accordance with the
internal laws of the State of New York, without regard to the choice of law
rules thereof.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of the Indenture, unless otherwise specifically indicated, the term
"consolidated" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"ASSET SALE" means (i) the sale, conveyance, transfer or other disposition
(whether in a single transaction or a series of related transactions) of
property or assets (including by way of a sale and leaseback) of the Company or
any Restricted Subsidiary (each referred to in this definition as a
"DISPOSITION") or (ii) the issuance or sale of Equity Interests of any
Restricted Subsidiary (whether in a single transaction or a series of related
transactions), in each case, other than:
(a) a disposition of Cash Equivalents or Investment Grade Securities or
obsolete equipment in the ordinary course of business or inventory or goods
held for sale in the ordinary course of business;
(b) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above
under "--Merger, Consolidation or Sale of All or Substantially All Assets"
or any disposition that constitutes a Change of Control pursuant to the
Indenture;
(c) any Restricted Payment that is permitted to be made, and is made,
under the first paragraph of the covenant described above under
"--Limitation on Restricted Payments";
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(d) any disposition of assets with an aggregate fair market value of
less than $1.0 million;
(e) any disposition of property or assets by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Restricted Subsidiary;
(f) any exchange of like property pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended, for use in a Similar Business;
(g) the lease, assignment or a lease or sub-lease of any real or
personal property in the ordinary course of business;
(h) any financing transaction with respect to property built or acquired
by the Company or any Restricted Subsidiary including, without limitation,
sale-leasebacks and asset securitizations;
(i) up to $10.0 million in the aggregate from (A) any disposition of
undeveloped land owned by the Company or its Restricted Subsidiaries on the
Issuance Date which the Company in good faith determines it will not use in
its consolidated operations and (B) the sale of interests in joint ventures
to which the Company or one of its Restricted Subsidiaries is a party on the
Issuance Date;
(j) foreclosures on assets; and
(k) any sale of Equity Interests in, or Indebtedness or other securities
of, an Unrestricted Subsidiary.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CAPITALIZED LEASE OBLIGATION"means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500.0 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness or preferred stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(i) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of the
Company and its Subsidiaries, taken as a whole; or
(ii) the Company becomes aware of (by way of a report or any
other filing pursuant to Section 13(d) of the Exchange Act, proxy,
vote, written notice or otherwise) the acquisition by any Person or
group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of
the
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Exchange Act, or any successor provision), including any group acting
for the purpose of acquiring, holding or disposing of securities
(within the meaning of Rule 13d-5(b)(1) under the Exchange Act),
other than the Permitted Holders and their Related Parties, in a
single transaction or in a related series of transactions, by way of
merger, consolidation or other business combination or purchase of
beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act, or any successor provision) of 50% or more of the total
Voting Stock of the Company.
"CONSOLIDATED DEPRECIATION AND AMORTIZATION EXPENSE" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense and other noncash charges (excluding any noncash item that represents an
accrual, reserve or amortization of a cash expenditure for a future period) of
such Person and its Restricted Subsidiaries for such period on a consolidated
basis and otherwise determined in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the sum,
without duplication, of: (a) consolidated interest expense of such Person and
its Restricted Subsidiaries for such period (including amortization of original
issue discount, non-cash interest payments, the interest component of
Capitalized Lease Obligations, and net payments (if any) pursuant to Hedging
Obligations, excluding amortization of deferred financing fees) and (b)
consolidated capitalized interest of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income, of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, and otherwise determined in accordance
with GAAP; PROVIDED, HOWEVER, that (i) any net after-tax extraordinary gains or
losses (less all fees and expenses relating thereto) shall be excluded, (ii) the
Net Income for such period shall not include the cumulative effect of a change
in accounting principles during such period, (iii) any net after-tax income
(loss) from discontinued operations and any net after-tax gains or losses on
disposal of discontinued operations shall be excluded, (iv) any net after-tax
gains or losses (less all fees and expenses relating thereto) attributable to
asset dispositions other than in the ordinary course of business (as determined
in good faith by the Board of Directors of the Company) shall be excluded, (v)
the Net Income for such period of any Person that is not a Subsidiary, or is an
Unrestricted Subsidiary, or that is accounted for by the equity method of
accounting, shall be included only to the extent of the amount of dividends or
distributions or other payments paid in cash (or to the extent converted into
cash) to the referent Person or a Wholly Owned Restricted Subsidiary thereof in
respect of such period, (vi) the Net Income of any Person acquired in a pooling
of interests transaction shall not be included for any period prior to the date
of such acquisition, (vii) the Net Income for such period of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of its Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or indirectly,
by the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule, or governmental regulation applicable to
that Restricted Subsidiary or its stockholders, unless such restriction with
respect to the payment of dividends or in similar distributions has been legally
waived and (viii) non-recurring expenses which are not capitalized and which are
incurred in connection with the expansion of the Company's self-distribution
capabilities shall be excluded.
"CONTINGENT OBLIGATIONS" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("PRIMARY OBLIGATIONS") of any other Person (the
"PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner
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of any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation against loss in respect thereof.
"CREDIT FACILITIES" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facilities) or
commercial paper facilities with banks or other institutional lenders or
indentures providing for revolving credit loans, term loans, letters of credit
or other long-term indebtedness, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"DESIGNATED PREFERRED STOCK" means preferred stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in paragraph
(c) of the "--Limitation on Restricted Payments" covenant.
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock of
such Person which, by its terms (or by the terms of any security into which it
is convertible or for which it is putable or exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable (other than as a
result of a Change of Control or Asset Sale), pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof
(other than as a result of a Change of Control or Asset Sale), in whole or in
part, in each case prior to the date 91 days after the maturity date of the
Notes; PROVIDED, HOWEVER, that if such Capital Stock is issued to any plan for
the benefit of employees of the Company or its Subsidiaries or by any such plan
to such employees, such Capital Stock shall not constitute Disqualified Stock
solely because it may be required to be repurchased by the Company in order to
satisfy applicable statutory or regulatory obligations.
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period plus (a) provision for taxes based on
income or profits of such Person for such period deducted in computing
Consolidated Net Income, plus (b) Consolidated Interest Expense of such Person
for such period to the extent the same was deducted in calculating such
Consolidated Net Income, plus (c) Consolidated Depreciation and Amortization
Expense of such Person for such period to the extent such depreciation and
amortization were deducted in computing Consolidated Net Income, plus (d) any
expenses or charges related to any Equity Offering, Permitted Investment or
Indebtedness permitted to be incurred by the Indenture (including such expenses
or charges related to the Recapitalization and the Financings) and deducted in
such period in computing Consolidated Net Income, plus (e) the amount of any
restructuring charge (including, without limitation, charges incurred in
connection with the closing or exchange of stores, which are accrued prior to
June 27, 1998) deducted in such period in computing Consolidated Net Income,
plus (f) without duplication, any other non-cash charges reducing Consolidated
Net Income for such period (excluding any such charge which requires an accrual
of a cash reserve for anticipated cash charges for any future period), plus (g)
the amount of any minority interest expense deducted in calculating Consolidated
Net Income, less, without duplication (h) non-cash items increasing Consolidated
Net Income of such Person for such period (excluding any items which represent
the reversal of any accrual of, or cash reserve for, anticipated cash charges in
any prior period).
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"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than (i)
public offerings with respect to the Company's Common Stock registered on Form
S-8 and (ii) any such public or private sale that constitutes an Excluded
Contribution.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"EXCLUDED CONTRIBUTION" means the net cash proceeds received by the Company
from (a) contributions to its common equity capital and (b) the sale (other than
to a Subsidiary or to any Company or Subsidiary management equity plan or stock
option plan or any other management or employee benefit plan or agreement) of
Capital Stock (other than Disqualified Stock) of the Company, in each case
designated as Excluded Contributions pursuant to an Officers' Certificate
executed by the principal executive officer and the principal financial officer
of the Company on the date such capital contributions are made or the date such
Equity Interests are sold, as the case may be, the cash proceeds of which are
excluded from the calculation set forth in paragraph (c) under "--Limitation on
Restricted Payments."
"EXISTING INDEBTEDNESS" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issuance Date, plus interest accruing thereon,
after application of the net proceeds of the sale of the Old Notes as described
in this Prospectus.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
(other than in the case of revolving credit borrowings, in which case interest
expense shall be computed based upon the average daily balance of such
Indebtedness during the applicable period) or issues or redeems Disqualified
Stock or preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"CALCULATION DATE"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of Disqualified Stock or
preferred stock, as if the same had occurred at the beginning of the applicable
four-quarter period. For purposes of making the computation referred to above,
Investments, acquisitions, dispositions, mergers, consolidations and
discontinued operations (as determined in accordance with GAAP) that have been
made by the Company or any of its Restricted Subsidiaries during the
four-quarter reference period or subsequent to such reference period and on or
prior to or simultaneously with the Calculation Date shall be calculated on a
pro forma basis assuming that all such Investments, acquisitions, dispositions,
mergers, consolidations and discontinued operations (and the reduction of any
associated fixed charge obligations and the change in EBITDA resulting
therefrom) had occurred on the first day of the four-quarter reference period.
If since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Investment,
acquisition, disposition, merger, consolidation or discontinued operation that
would have required adjustment pursuant to this definition, then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect thereto for
such period as if such Investment, acquisition, disposition, merger,
consolidation or discontinued operation had occurred at the beginning of the
applicable four-quarter period. For purposes of this definition, whenever pro
forma effect is to be given to a transaction, the pro forma calculations shall
be made in good faith by a responsible financial or accounting officer of the
Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest on such Indebtedness shall be calculated as
if the rate in effect on the Calculation Date had been the applicable rate for
the entire period (taking into account any Hedging Obligations applicable to
such Indebtedness). Interest on a Capitalized Lease Obligation shall be deemed
to accrue at an interest rate reasonably determined by a responsible financial
or accounting officer of the Company to be the rate of
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interest implicit in such Capitalized Lease Obligation in accordance with GAAP.
For purposes of making the computation referred to above, interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period. Interest on Indebtedness that may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have been
based upon the rate actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate.
"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(a) Consolidated Interest Expense of such Person for such period and (b) all
cash dividend payments (excluding items eliminated in consolidation) on any
series of preferred stock of such Person.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date. For the purposes of the
Indenture, the term "consolidated" with respect to any Person shall mean such
Person consolidated with its Restricted Subsidiaries, and shall not include any
Unrestricted Subsidiary.
"GOVERNMENT SECURITIES" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Securities
or a specific payment of principal of or interest on any such Government
Securities held by such custodian for the account of the holder of such
depository receipt; PROVIDED that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the Government Securities or the specific payment of principal of or interest on
the Government Securities evidenced by such depository receipt.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"GUARANTEE" means any guarantee of the obligations of the Company under the
Indenture and the Notes by any Person in accordance with the provisions of the
Indenture. When used as a verb, "Guarantee" shall have a corresponding meaning.
No Guarantees will be issued in connection with the initial offering and sale of
the Notes.
"GUARANTOR" means any Person that incurs a Guarantee; PROVIDED that upon the
release and discharge of such Person from its Guarantee in accordance with the
Indenture, such Person shall cease to be a Guarantor. No Guarantees will be
issued in connection with the initial offering of the Notes.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"HOLDER" means a holder of the Notes.
"INDEBTEDNESS" means, with respect to any Person, (a) any indebtedness of
such Person, whether or not contingent (i) in respect of borrowed money, (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or bankers' acceptances (or, without double counting, reimbursement
agreements in respect thereof), (iii) representing the balance deferred and
unpaid of the purchase price of
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any property (including Capitalized Lease Obligations), except any such balance
that constitutes a trade payable or similar obligation to a trade creditor, in
each case accrued in the ordinary course of business or (iv) representing any
Hedging Obligations, if and to the extent of any of the foregoing Indebtedness
(other than letters of credit and Hedging Obligations) that would appear as a
liability upon a balance sheet (excluding the footnotes thereto) of such Person
prepared in accordance with GAAP, (b) to the extent not otherwise included, any
obligation by such Person to be liable for, or to pay, as obligor, guarantor or
otherwise, on the Indebtedness of another Person (other than by endorsement of
negotiable instruments for collection in the ordinary course of business) and
(c) to the extent not otherwise included, Indebtedness of another Person secured
by a Lien on any asset owned by such Person (whether or not such Indebtedness is
assumed by such Person); PROVIDED, HOWEVER, that Contingent Obligations incurred
in the ordinary course of business shall be deemed not to constitute
Indebtedness.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal, investment
banking firm or consultant to Persons engaged in Similar Businesses of
nationally recognized standing that is, in the judgment of the Company's Board
of Directors, qualified to perform the task for which it has been engaged.
"INVESTMENT GRADE SECURITIES" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding advances to customers,
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities issued by any other Person
and investments that are required by GAAP to be classified on the balance sheet
of the Company in the same manner as the other investments included in this
definition to the extent such transactions involve the transfer of cash or other
property. For purposes of the definition of "Unrestricted Subsidiary" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments," (i) "Investments" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of a Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"ISSUANCE DATE" means the closing date for the sale and original issuance of
the Old Notes under the Indenture.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction); PROVIDED that in
no event shall an operating lease be deemed to constitute a Lien.
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"MANAGEMENT GROUP" means the group consisting of all or certain Officers of
the Company on the Issuance Date whether or not such person remains in that
capacity.
"MOODY'S" means Moody's Investors Service, Inc.
"MORTGAGE FINANCING" means the incurrence by the Company or a Subsidiary of
the Company of any Indebtedness secured by a mortgage or other Lien on real
property acquired or improved by the Company or any Subsidiary of the Company
after the date of the Indenture.
"MORTGAGE REFINANCING" means the incurrence by the Company or a Subsidiary
of the Company of any Indebtedness secured by a mortgage or other Lien on real
property subject to a mortgage or other Lien existing on the date of the
Indenture or created or incurred subsequent to the date of the Indenture as
permitted by the terms of the Indenture and owned by the Company or any
Subsidiary of the Company.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
Designated Noncash Consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions),
any relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of principal, premium (if any) and interest on Indebtedness
required (other than required by clause (i) of the second paragraph of "--
Repurchase at the Option of Holders--Asset Sales") to be paid as a result of
such transaction and any deduction of appropriate amounts to be provided by the
Company as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such transaction and retained by the Company after
such sale or other disposition thereof, including, without limitation, pension
and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and banker's acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness.
"OFFICER" means the Chairman of the Board, the President, any Executive Vice
President, Senior Vice President or Vice President, the Treasurer or the
Secretary of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Company
by two officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company that meets the requirements set forth in the
Indenture.
"PARI PASSU INDEBTEDNESS" means (a) with respect to the Notes, Indebtedness
which ranks pari passu in right of payment to the Notes and (b) with respect to
any Guarantee, Indebtedness which ranks PARI PASSU in right of payment to such
Guarantee.
"PERMITTED HOLDERS" means KKR and any of its Affiliates and the Management
Group.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or any
Restricted Subsidiary; (b) any Investment in cash and Cash Equivalents or
Investment Grade Securities; (c) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person that is engaged in a Similar Business if
as a result of such Investment (i) such Person becomes a Restricted Subsidiary
or (ii) such Person, in one transaction or a series of related transactions, is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary; (d) any Investment in securities or other assets not
constituting cash or Cash Equivalents and received in connection with an Asset
Sale made pursuant to the provisions of "-- Repurchase at the Option of
Holders--Asset Sales" or any other disposition of assets not constituting an
Asset Sale; (e) any Investment existing on the Issuance Date; (f) advances to
employees not in excess of
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$10.0 million outstanding at any one time, in the aggregate; (g) any Investment
acquired by the Company or any of its Restricted Subsidiaries (i) in exchange
for any other Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in connection with or as a result of a bankruptcy,
workout, reorganization or recapitalization of the issuer of such other
Investment or accounts receivable or (ii) as a result of a foreclosure by the
Company or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured Investment in
default; (h) Hedging Obligations permitted under clause (i) of the "Limitation
of Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant; (i)
loans and advances to officers, directors and employees for business-related
travel expenses, moving expenses and other similar expenses, in each case
incurred in the ordinary course of business; (j) any Investment in a Similar
Business (other than an Investment in an Unrestricted Subsidiary) having an
aggregate fair market value, taken together with all other Investments made
pursuant to this clause (j) that are at that time outstanding, not to exceed the
greater of (x) $75.0 million or (y) 15% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value); (k)
Investments the payment for which consists of Equity Interests of the Company
(exclusive of Disqualified Stock); PROVIDED, HOWEVER, that such Equity Interests
will not increase the amount available for Restricted Payments under clause (c)
of the "Limitation on Restricted Payments" covenant; (l) additional Investments
having an aggregate fair market value, taken together with all other Investments
made pursuant to this clause (l) that are at that time outstanding, not to
exceed the greater of (x) $30.0 million or (y) 5% of Total Assets at the time of
such Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value); (m) any
Investment by Restricted Subsidiaries in Wholly Owned Restricted Subsidiaries
and Investments by Subsidiaries that are not Restricted Subsidiaries in other
Subsidiaries that are not Restricted Subsidiaries; (n) guarantees (including
Guarantees) of Indebtedness permitted under the covenant "--Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock;" and (o) any
transaction to the extent it constitutes an investment that is permitted and
made in accordance with the provisions of the second paragraph of the covenant
described under "Certain Covenants--Transactions with Affiliates" (except
transactions described in clauses (ii), (vi), (vii) and (xi) of such paragraph).
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"PREFERRED STOCK" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"RELATED PARTIES" means any Person controlled by a Permitted Holder,
including any partnership or limited liability company of which a Permitted
Holder or its Affiliates is the general partner or managing member, as the case
may be.
"REPURCHASE OFFER" means an offer made by the Company to purchase all or any
portion of a Holder's Notes pursuant to the provisions described under the
covenants entitled "--Repurchase at the Option of Holders-Change of Control" or
"--Repurchase at the Option of Holders--Asset Sales."
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" means, at any time, any direct or indirect
Subsidiary of the Company that is not then an Unrestricted Subsidiary; PROVIDED,
HOWEVER,that upon the occurrence of an Unrestricted Subsidiary ceasing to be an
Unrestricted Subsidiary, such Subsidiary shall be included in the definition of
"Restricted Subsidiary."
"S&P" means Standard and Poor's Ratings Group.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
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"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"SENIOR CREDIT FACILITIES" means that certain term loan credit facility and
revolving credit facility described in this Prospectus among the Company and the
lenders from time to time party thereto, including any collateral documents,
instruments and agreements executed in connection therewith, and any amendments,
supplements, modifications, extensions, renewals, restatements or refundings
thereof and any indentures or credit facilities or commercial paper facilities
with banks or other institutional lenders that replace, refund or refinance any
part of the loans, notes, other credit facilities or commitments thereunder,
including any such replacement, refunding or refinancing facility or indenture
that increases the amount borrowable thereunder or alters the maturity thereof,
PROVIDED, HOWEVER, that in connection with any facilities which refund, replace
or refinance the original term loan and revolving credit facilities there shall
not be more than one facility at any one time that is identified as the Senior
Credit Facilities and, if at any time there is more than one facility which
would constitute the Senior Credit Facilities, the Company will designate to the
Trustee which one of such facilities will be the Senior Credit Facilities for
purposes of the Indenture.
"SIMILAR BUSINESS" means the supermarket and retail food sale business and
any activity or business incidental, directly related or similar thereto, or any
line of business engaged in by the Company or its Subsidiaries on the Issuance
Date or any business activity that is a reasonable extension, development or
expansion thereof or ancillary thereto.
"SUBORDINATED INDEBTEDNESS" means (a) with respect to the Notes, any
Indebtedness of the Company which is by its terms subordinated in right of
payment to the Notes and (b) with respect to any Guarantee, any Indebtedness of
the applicable Guarantor which is by its terms subordinated in right of payment
to such Guarantee.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership, joint venture
or limited liability company) of which more than 50% of the total voting power
of shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time of determination owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person or a
combination thereof and (ii) any partnership, joint venture, limited liability
company or similar entity of which (x) more than 50% of the capital accounts,
distribution rights, total equity and voting interests or general or limited
partnership interests, as applicable, are owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person or a combination thereof whether in the form of membership, general,
special or limited partnership or otherwise and (y) such Person or any Wholly
Owned Restricted Subsidiary of such Person is a controlling general partner or
otherwise controls such entity.
"TOTAL ASSETS" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company, as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company (including any existing Subsidiary and any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary or any of its Subsidiaries owns any Equity Interests of, or
owns, or holds any Lien on, any property of, the Company or any Subsidiary of
the Company (other than any Subsidiary of the Subsidiary to be so designated),
PROVIDED that (a) any Unrestricted Subsidiary must be an entity of which shares
of the capital stock or other equity interests (including partnership interests)
entitled to cast at least a majority of the votes that may be cast by all shares
or equity interests having ordinary voting power for the election of directors
or other governing body are owned, directly or indirectly, by the Company, (b)
the Company certifies that such designation
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complies with the covenants described under "--Certain Covenants--Limitation on
Restricted Payments" and (c) each of (I) the Subsidiary to be so designated and
(II) its Subsidiaries has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable with respect to any Indebtedness pursuant to which the
lender has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; PROVIDED that, immediately after giving effect to
such designation, (i) the Company could incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test described under
"--Certain Covenants--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock" or (ii) the Fixed Charge Coverage Ratio for the Company and
its Restricted Subsidiaries would be greater than such ratio for the Company and
its Restricted Subsidiaries immediately prior to such designation, in each case
on a pro forma basis taking into account such designation. Any such designation
by the Board of Directors shall be notified by the Company to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
EXCHANGE OFFER; REGISTRATION RIGHTS
EXCHANGE OFFER. The Company and the Initial Purchasers entered into the
Registration Rights Agreement on the Issuance Date, pursuant to which the
Company agreed, for the benefit of the holders of the Old Notes, that it will,
at its own expense, (i) file the Exchange Offer Registration Statement with the
Commission with respect to the Exchange Offer to exchange the Old Notes for
Exchange Notes having substantially identical terms in all material respects to
the Old Notes (except that the Exchange Notes will not contain terms with
respect to transfer restrictions or interest rate increases as described herein)
within 100 calendar days after the Issuance Date, (ii) use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective by the
Commission under the Securities Act within 200 calendar days after the Issuance
Date and (iii) use its best efforts to consummate the Exchange Offer within 230
calendar days after the Issuance Date. Upon the Exchange Offer Registration
Statement being declared effective, the Company will offer the Exchange Notes in
exchange for surrender of the Old Notes. The Company will keep the Exchange
Offer open for at least 20 business days (or longer if required by applicable
law) after the date that notice of the Exchange Offer is mailed to the Holders.
For each Old Note surrendered to the Company pursuant to the Exchange Offer, the
Holder who surrendered such Old Note will receive an Exchange Note having a
principal amount equal to that of the surrendered Old Note. Interest on each
Exchange Note will accrue from the last interest payment date on which interest
was paid on the Old Note surrendered in exchange therefor or, if no interest has
been paid on such Old Note, from the Issuance Date. Under existing
interpretations of the staff of the Commission contained in several no-action
letters to third parties, the Exchange Notes would generally be freely
transferable after the Exchange Offer without further registration under the
Securities Act (subject to certain representations required to be made by each
Holder, as set forth below). However, any purchaser of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange
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Notes (i) will not be able to rely on the interpretations of the staff of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Old Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements. In addition, in connection with any resales of Exchange Notes, any
broker-dealer (a "Participating Broker-Dealer") which acquired the Old Notes for
its own account as a result of market making or other trading activities must
deliver a prospectus meeting the requirements of the Securities Act. The
Commission has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the Exchange Notes (other
than a resale of an unsold allotment from the original sale of the Old Notes)
with the prospectus contained in the Exchange Offer Registration Statement. The
Company will agree to make available for a period of up to 90 days after
consummation of the Exchange Offer a prospectus meeting the requirements of the
Securities Act to any Participating Broker- Dealer and any other persons, if
any, with similar prospectus delivery requirements, for use in connection with
any resale of Exchange Notes. A Participating Broker-Dealer or any other person
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations thereunder).
Each holder of the Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it will
be acquired in the ordinary course of its business, (ii) it has no arrangement
or understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes, (iii) it is not an
"affiliate" (as defined in Rule 405 under the Securities Act) of the Company or,
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable and (iv) it
is not acting on behalf of any person who could not truthfully make the
foregoing representations.
SHELF REGISTRATION. In the event that (i) any changes in law or the
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the Exchange
Offer is not consummated within 230 calendar days after the Issuance Date, (iii)
under certain circumstances, if the Initial Purchasers shall so request or (iv)
any holder of the Old Notes (other than the Initial Purchasers) is not eligible
to participate in the Exchange Offer, the Company will upon receipt of notice
within specified time periods of one or more of the preceding events, at its
expense, use its best efforts (a) to file and cause to become effective by the
230th calendar day after the Issuance Date a Shelf Registration Statement (or in
the case of a Shelf Registration Statement required to be filed in response to a
change in law or applicable interpretations of the Staff of the Commission, if
later, within 45 days after publication of the change in law or interpretations
but in no event before 100 calendar days after the Issuance Date) and (b) to
keep effective the Shelf Registration Statement until the earlier of two years
from the Issuance Date (or one year from the date the Shelf Registration
Statement is declared effective if such Shelf Registration Statement is filed
upon the request of any Initial Purchaser pursuant to clause (iii) above) or
such shorter period ending when all Old Notes covered by the Shelf Registration
Statement have been sold in the manner set forth and as contemplated in the
Shelf Registration Statement or when the Old Notes become eligible for resale
pursuant to Rule 144 under the Securities Act without volume restrictions, if
any. The Company, will, in the event of the filing of the Shelf Registration
Statement, provide to each holder of the Old Notes copies of the prospectus
which is a part of the Shelf Registration Statement, notify each such holder of
the Old Notes when the Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of the
Old Notes. A holder of the Old Notes that sells its Old Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification rights and obligations thereunder). In
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<PAGE>
addition, each holder of the Old Notes will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and to benefit from the provisions regarding
any increase in interest applicable to the Old Notes set forth in the following
paragraph.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration statements
will be filed, or, if filed, that they will become effective. In the event that
(a) the Exchange Offer Registration Statement has not been filed with the
Commission on or prior to the 100th calendar day following the Issuance Date,
(b) the Exchange Offer Registration Statement is not declared effective on or
prior to the 200th calendar day following the Issuance Date, or (c) the Exchange
Offer is not consummated or a Shelf Registration Statement is not declared
effective on or prior to the 230th calendar day following the Issuance Date, the
interest rate borne by the Old Notes shall be increased by one-quarter of one
percent per annum following such
100-day period in the case of clause (a) above, following such 200-day period in
the case of clause (b) above, or following such 230-day period in the case of
clause (c) above (or in the case of a Shelf Registration Statement required to
be filed in response to a change in law or applicable interpretations of the
Staff of the Commission, if later, within a 45-day period after publication of
the change in law or interpretations but in no event before 100 calendar days
after the Issuance Date), which rate will be increased by an additional
one-quarter of one percent per annum for each 90-day period that any additional
interest continues to accrue; PROVIDED that the aggregate increase in such
annual interest rate may in no event exceed one percent. Upon (x) the filing of
the Exchange Offer Registration Statement after the 100-day period described in
clause (a) above, (y) the effectiveness of the Exchange Offer Registration
Statement after the 200-day period described in clause (b) above, or (z) the
consummation of the Exchange Offer or the effectiveness of a Shelf Registration
Statement, as the case may be, after the 230-day period described in clause (c)
above (or in the case of a Shelf Registration Statement required to be filed in
response to a change in law or applicable interpretations of the Staff of the
Commission, if later, following such 45-day period after publication of the
change in law or interpretations but in no event before 100 calendar days after
the Issuance Date), the interest rate borne by the Old Notes from the date of
such effectiveness, consummation or that the applicable registration statement
again becomes effective and usable, as the case may be, will be reduced to the
original interest rate if the Company is otherwise in compliance with this
paragraph; PROVIDED, HOWEVER, that if, after any such reduction in interest
rate, a different event specified in clause (a), (b) or (c) above occurs, the
interest rate may again be increased and thereafter decreased pursuant to the
foregoing provisions. Notwithstanding the foregoing, the Company may issue a
notice that the Shelf Registration Statement is unusable pending the
announcement of a material corporate transaction and may issue any notice
suspending use of the Shelf Registration Statement required under applicable
securities laws to be issued and, in the event that the aggregate number of days
in any consecutive twelve-month period for which all such notices are issued and
effective exceeds 30 days in the aggregate, then the interest rate borne by the
Old Notes will be increased by one quarter of one percent per annum following
the date that such Shelf Registration Statement ceases to be usable beyond the
30-day period permitted above, which rate shall be increased by an additional
one quarter of one percent per annum at the beginning of each subsequent 90-day
period that such additional interest continues to accrue; PROVIDED that the
aggregate increase in such annual interest rate may in no event exceed one
percent per annum. Upon the Company declaring that the Shelf Registration
Statement is usable after the period of time described in the preceding
sentence, the interest rate borne by the Old Notes will be reduced to the
original interest rate if the Company is otherwise in compliance with this
paragraph.
The summary herein of material provisions of the Registration Rights
Agreement is subject to, and is qualified in its entirety by, all the provisions
of the Registration Rights Agreement. The Registration Rights Agreement is an
exhibit to the Registration Statement of which this Prospectus is a part.
114
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. A broker-dealer may not participate in the Exchange
Offer with respect to Old Notes acquired other than as a result of market-making
activities or other trading activities. To the extent any such broker-dealer
participates in the Exchange Offer and so notifies the Company, or causes the
Company to be so notified in writing, the Company has agreed for a period of 90
days after the date of this Prospectus, it will make this Prospectus, as amended
or supplemented, available to such broker-dealer for use in connection with any
such resale, and will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. In addition, until April 9, 1998
(90 days after the date of this Prospectus), all dealers effecting transactions
in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at prevailing market prices at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers or any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act, and any profit on any such resale of Exchange Notes and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer of
Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
or which may impose upon the Company disclosure obligations that may have a
material adverse effect on the Company (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
the Prospectus until the Company has notified such broker-dealer that delivery
of the Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
115
<PAGE>
BOOK ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. The Exchange Notes initially will be represented by a single,
permanent global Exchange Note, in definitive, fully registered form without
interest coupons (the "Global Exchange Note") and will be deposited with the
Trustee as custodian for The Depository Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants (the "Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants").
So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Exchange
Note for all purposes under the Indenture. No beneficial owner of an interest in
the Global Exchange Note will be able to transfer that interest except in
accordance with DTC's procedures, in addition to those provided for under the
Indenture with respect to the Exchange Notes.
Payments of the principal of, premium (if any), and interest on, the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records,
relating to or payments made on account of beneficial ownership interests in the
Global Exchange Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest (including liquidated damages) on the
Global Exchange Note, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Exchange Note as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Exchange Note held through such Participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
Participants.
Transfers between Participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Exchange Notes to
persons in states which require physical delivery of the Exchange Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
Participants to whose account the DTC interests in the Global Exchange Note are
credited and only in respect of such portion of the aggregate principal amount
of Exchange Notes as to which such Participant or Participants has or have given
such direction. However, if there is an Event of
116
<PAGE>
Default under the Indenture, DTC will exchange the Global Exchange Note for
Certificated Securities, which it will distribute to its Participants.
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Exchange Note to the
accounts of persons who have accounts with such depositary. Such accounts
initially will be designated by or on behalf of the Initial Purchasers.
Ownership of beneficial interests in the Global Exchange Note will be limited to
Participants or persons who hold interests through Participants. Ownership of
beneficial interests in the Global Exchange Note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of Participants (with respect to interests of persons other than Participants).
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Exchange Note among Participants, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its Participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, Certificated Securities will be issued in exchange for
the Global Exchange Note.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Simpson Thacher
& Bartlett (a partnership which includes professional corporations), New York,
New York and, with regard to the laws of the State of Texas, Vinson & Elkins
L.L.P. Certain partners of Simpson Thacher & Bartlett and related persons have
an indirect interest, through KKR 1996 Fund L.P., in less than 1% of the Common
Stock.
EXPERTS
The consolidated balance sheet as of June 28, 1997 and the related
consolidated statements of operations, redeemable stock and stockholders' equity
and cash flows for fiscal year 1997 of Randall's Food Markets, Inc. included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing. The consolidated balance sheet as of June 29, 1996 and
the related consolidated statements of operations, redeemable stock and
stockholders' equity and cash flows for fiscal years 1996 and 1995 of Randall's
Food Markets, Inc. included in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
CHANGE IN ACCOUNTANTS
On May 30, 1997, the Company dismissed its certified public accountants,
Arthur Andersen LLP, and replaced them with Deloitte & Touche LLP. Arthur
Andersen LLP's report dual-dated September 19, 1996 and April 5, 1997 on the
Company's financial statements as of and for the years ended June 29, 1996 and
June 24, 1995 did not contain an adverse opinion or a disclaimer of opinion;
however, it included an emphasis of a matter paragraph discussing the Company's
violations of certain debt covenants. In connection with this Registration
Statement, Arthur Andersen LLP reissued their report referred to above to
eliminate the reference to this emphasis of a matter. During the Company's two
fiscal years ended June 29, 1996 and June 24, 1995 and the subsequent interim
period through May 30, 1997, there were no disagreements with Arthur Andersen
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
117
<PAGE>
INDEX
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
1994 Option Grant................................................................................... 55
1997 Plan........................................................................................... 56
1997 Plan Grant..................................................................................... 57
1997 Plan Options................................................................................... 57
1997 Plan Purchase Stock............................................................................ 57
Acquired Indebtedness............................................................................... 102
Administrative Agent................................................................................ 66
Affiliate........................................................................................... 102
Afffiliate Transaction.............................................................................. 94
Albertsons.......................................................................................... 46
APB................................................................................................. F-10
Applicable Premium.................................................................................. 83
Asset Sale.......................................................................................... 102
Asset Sale Offer.................................................................................... 86
Business Day........................................................................................ 84
Calculation Date.................................................................................... 106
Capital Stock....................................................................................... 103
Capitalized Lease Obligation........................................................................ 103
Cash Equivalents.................................................................................... 103
Change of Control................................................................................... 103
Change of Control Offer............................................................................. 84
Change of Control Payment........................................................................... 84
Change of Control Payment Date...................................................................... 84
Charter Amendment................................................................................... 20
Class A Preferred Stock............................................................................. 4
Closing............................................................................................. 4
Coastal............................................................................................. 63
Commission.......................................................................................... front page
Common Stock........................................................................................ 4
Company............................................................................................. front page
Consent Decree...................................................................................... 50, F-21
Consolidated Depreciation and Amortization Expense.................................................. 104
Consolidated Interest Expense....................................................................... 104
Consolidated Net Income............................................................................. 104
Consulting Period................................................................................... 58
Contingent Obligation............................................................................... 104
Convertible Preferred Stock......................................................................... 4
Covenant Defeasance................................................................................. 99
Credit Facilities................................................................................... 4, 105
Cullum.............................................................................................. 40
Cullum Acquisition.................................................................................. 40
Debt Prepayment..................................................................................... 4
Default............................................................................................. 105
Depositor........................................................................................... 74
Designated Noncash Consideration.................................................................... 105
Designated Preferred Stock.......................................................................... 105
Designated Senior Indebtedness...................................................................... 82
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ---------------------------------------------------------------------------------------------------- ------------
Disqualified Stock.................................................................................. 105
<S> <C>
DTC................................................................................................. 116
EBITDA.............................................................................................. 12, 105
EEOC................................................................................................ 50, F-21
Effective Date...................................................................................... 58
Eligible Institution................................................................................ 72
Employee Stock Ownership Plan....................................................................... F-16
Employment Agreements............................................................................... 58
EPS................................................................................................. F-10
Equity Interests.................................................................................... 106
Equity Investment................................................................................... 4
Equity Offering..................................................................................... 106
ESOP................................................................................................ 20, F-16
ESOP Shares......................................................................................... 20
Event of Default.................................................................................... 97
Excess Proceeds..................................................................................... 86
Exchange Act........................................................................................ i, 106
Exchange Agent...................................................................................... 7
Exchange Date....................................................................................... front page
Exchange Notes...................................................................................... front page
Exchange Offer...................................................................................... front page
Excluded Contribution............................................................................... 106
Excluded Guarantee.................................................................................. 96
Existing Indebtedness............................................................................... 106
Expiration Date..................................................................................... front page
FASB................................................................................................ F-10
Fee Properties...................................................................................... 47
FIFO................................................................................................ F-8
Financings.......................................................................................... 4
first quarter 1997.................................................................................. 29
first quarter 1998.................................................................................. 1
fiscal year 1993.................................................................................... 26
fiscal year 1994.................................................................................... 26
fiscal year 1995.................................................................................... 11
fiscal year 1996.................................................................................... 11
fiscal year 1997.................................................................................... 1
fiscal year 1998.................................................................................... 3
Fixed Charge Coverage Ratio......................................................................... 106
Fixed Charges....................................................................................... 107
Fleming............................................................................................. 50
Former Cullum Shareholders.......................................................................... 64
Former Cullum Shareholders Agreement................................................................ 64
GAAP................................................................................................ 12, 107
Global Exchange Note................................................................................ 116
Government Securities............................................................................... 107
Gowens Agreement.................................................................................... 60
Guarantee........................................................................................... 107
Guarantor........................................................................................... 107
H.E.B............................................................................................... 46
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ---------------------------------------------------------------------------------------------------- ------------
Hedging Obligations................................................................................. 107
<S> <C>
Holder.............................................................................................. 107
Indebtedness........................................................................................ 107
Indenture........................................................................................... 6
Independent Financial Advisor....................................................................... 108
Indirect Participants............................................................................... 116
Initial Period...................................................................................... 58
Initial Purchasers.................................................................................. 6
Interest Payment Date............................................................................... 7
Investment Grade Securities......................................................................... 108
Investments......................................................................................... 108
IRS................................................................................................. F-9
Issuance Date....................................................................................... 108
Joint Venture Properties............................................................................ 47
Key SOP............................................................................................. 57, F-17
KKR................................................................................................. 3
Kroger.............................................................................................. 46
Leased Properties................................................................................... 47
Legal Defeasance.................................................................................... 99
Lenders............................................................................................. 66
Leverage Ratio...................................................................................... 66
LIBOR............................................................................................... F-12
Lien................................................................................................ 108
LIFO................................................................................................ F-8
Make-Whole Premium.................................................................................. 4
Management Group.................................................................................... 109
Minyard............................................................................................. 46
Moody's............................................................................................. 109
Mortgage Financing.................................................................................. 109
Mortgage Refinancing................................................................................ 109
MSP................................................................................................. 17, F-17
Named Executive Officers............................................................................ 53
NDEQ................................................................................................ 18
Nebraska Fund....................................................................................... 18
Net Income.......................................................................................... 109
Net Proceeds........................................................................................ 109
Non-ESOP Shares..................................................................................... 20
Non-Payment Default................................................................................. 81
Non-Severance Termination........................................................................... 59
Note Purchase Agreement............................................................................. 22
Notes............................................................................................... front page
Notice of Guaranteed Delivery....................................................................... 72
Obligations......................................................................................... 109
Officer............................................................................................. 109
Officers' Certificate............................................................................... 109
Old Indebtedness.................................................................................... 22
Old Notes........................................................................................... front page
Pari Passu Indebtedness............................................................................. 109
Participants........................................................................................ 116
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ---------------------------------------------------------------------------------------------------- ------------
Participating Broker-Dealer......................................................................... 113
<S> <C>
Payment Default..................................................................................... 81
Payment Blockage Notice............................................................................. 81
Payment Blockage Period............................................................................. 81
Permitted Holders................................................................................... 109
Permitted Investments............................................................................... 109
Person.............................................................................................. 110
PORTAL.............................................................................................. front page
Preferred Stock..................................................................................... 110
Preferred Stock Redemption.......................................................................... 4
Primary Obligations................................................................................. 104
Primary Obligor..................................................................................... 104
Pro Forma Financial Statement....................................................................... 24
Putable Shares...................................................................................... 20
Qualified Shareholders.............................................................................. 64
Randall's........................................................................................... front page
Redemption Date..................................................................................... 83
Refinancing Indebtedness............................................................................ 92
Refunding Capital Stock............................................................................. 88
Registration Rights Agreement....................................................................... 5
Registration Statement.............................................................................. i
Related Parties..................................................................................... 110
Repurchase Offer.................................................................................... 110
Restricted Investment............................................................................... 110
Restricted Payments................................................................................. 87
Restricted Subsidiary............................................................................... 110
Retired Capital Stock............................................................................... 88
Revolving Credit Facility........................................................................... 4
RFM Acquisition..................................................................................... 4, F-10
RFM Drag Along...................................................................................... 21
RFM Option.......................................................................................... 4
RFM Registration Rights Agreement................................................................... 63
RFM Tag Along....................................................................................... 21
S & P............................................................................................... 110
Savings Plan........................................................................................ 58
front page,
Securities Act...................................................................................... 110
Senior Credit Facilities............................................................................ 111
Senior Indebtedness................................................................................. 82
Senior Notes........................................................................................ 22
Serial Preferred Stock.............................................................................. 64
Series A Senior Notes............................................................................... 22
Series B-1 Senior Notes............................................................................. 22
Series B-2 Senior Notes............................................................................. 22
Settlement Agreement................................................................................ 49
Severance and Release Agreement..................................................................... 60
SFAS................................................................................................ 35, F-10
Shareholder Proposal................................................................................ 20
Shareholders Agreement.............................................................................. 21
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ---------------------------------------------------------------------------------------------------- ------------
Significant Subsidiary.............................................................................. 111
<S> <C>
Similar Business.................................................................................... 111
Soffe............................................................................................... 63
Special Meeting..................................................................................... 20
Stock Plan.......................................................................................... 55
Subordinated Indebtedness........................................................................... 111
Subordinated Note Obligations....................................................................... 82
Subscription Agreement.............................................................................. F-13
Subsidiary.......................................................................................... 111
Successor Company................................................................................... 93
Successor Guarantor................................................................................. 93
TBCA................................................................................................ II-1
TCB Credit Facility................................................................................. 22
Tender Offer........................................................................................ 4
Term Loan Facility.................................................................................. 4
Texas Commerce...................................................................................... 22
Total Assets........................................................................................ 111
Transferor.......................................................................................... 73
Treasury Rate....................................................................................... 83
Trust Indenture Act................................................................................. 80
Uniform Guarantees.................................................................................. 63
Unrestricted Subsidiary............................................................................. 111
UTY................................................................................................. 63
Voting Stock........................................................................................ 112
Weighted Average Life to Maturity................................................................... 112
Wholly Owned Restricted Subsidiary.................................................................. 112
Wholly Owned Subsidiary............................................................................. 112
</TABLE>
I-5
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEPENDENT AUDITORS' REPORTS.............................................................................. F-2
Consolidated Balance Sheets As of June 28, 1997, June 29, 1996 and October 18, 1997 (Unaudited)............ F-4
Consolidated Statements of Operations for the Fiscal Years Ended June 28, 1997, June 29, 1996 and June 24,
1995 and for the Unaudited 16 weeks ended October 18, 1997, and October 19, 1996......................... F-5
Consolidated Statements of Redeemable Stock and Stockholders' Equity for the Fiscal Years Ended June 28,
1997, June 29, 1996 and June 24, 1995 and for the Unaudited 16 weeks ended October 18, 1997.............. F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 28, 1997, June 29, 1996 and June 24,
1995 and for the Unaudited 16 weeks ended October 18, 1997, and October 19, 1996......................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Randall's Food Markets, Inc.:
We have audited the accompanying consolidated balance sheet of Randall's
Food Markets, Inc. and subsidiaries (the "Company") as of June 28, 1997, and the
related consolidated statements of operations, redeemable stock and
stockholders' equity, and cash flows for the fiscal year ended June 28, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Randall's Food Markets, Inc.
and subsidiaries as of June 28, 1997, and the results of their operations and
their cash flows for the fiscal year ended June 28, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 15, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Randall's Food Markets, Inc.:
We have audited the accompanying consolidated balance sheet of Randall's
Food Markets, Inc. and subsidiaries (the "Company") as of June 29, 1996, and the
related consolidated statements of operations, redeemable stock and
stockholders' equity, and cash flows for the fiscal years ended June 29, 1996
and June 24, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our auditor's report dual-dated September 19, 1996 and April 5, 1997, our
opinion was modified with an emphasis-of-a-matter paragraph discussing the
Company's violations of certain debt covenants. As discussed in Notes 2 and 5,
the Company received an Equity Investment and refinanced all such debt on June
27, 1997.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Randall's Food Markets, Inc.
and subsidiaries as of June 29, 1996, and the results of their operations and
their cash flows for the fiscal years ended June 29, 1996 and June 24, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 19, 1996 (except with respect
to the matter discussed in the eighth
paragraph of Note 5, as to which the
date is June 27, 1997)
F-3
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997, JUNE 29, 1996, AND OCTOBER 18, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
OCTOBER 18, --------- ---------
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 42,528 $ 23,115 $ 31,686
Receivables, net........................................................... 41,831 44,664 27,464
Merchandise inventories.................................................... 177,970 164,174 167,792
Deferred tax assets........................................................ 21,108 21,109 9,631
Prepaid expenses and other................................................. 10,737 9,703 5,209
------------ --------- ---------
Total current assets................................................. 294,174 262,765 241,782
PROPERTY AND EQUIPMENT, net.................................................. 324,008 336,548 329,051
GOODWILL, net................................................................ 222,386 224,350 230,730
OTHER ASSETS, net............................................................ 38,489 38,711 21,702
------------ --------- ---------
TOTAL........................................................................ $ 879,057 $ 862,374 $ 823,265
------------ --------- ---------
------------ --------- ---------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt....................................... $ 789 $ 774 $ 29,586
Current maturities of obligations under capital leases..................... 4,041 4,166 2,464
Accounts payable........................................................... 116,902 112,026 88,718
Accrued expenses and other................................................. 140,297 131,736 85,119
Accrued income taxes....................................................... 6,611 2,634 6,000
------------ --------- ---------
Total current liabilities............................................ 268,640 251,336 211,887
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities.................................. 276,582 279,729 322,686
Obligations under capital leases, net of current maturities................ 75,353 77,479 83,246
Deferred income tax liability.............................................. 11,067 11,067 13,324
Other liabilities.......................................................... 25,603 24,400 24,427
------------ --------- ---------
Total liabilities.................................................... 657,245 644,011 655,570
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
REDEEMABLE CLASS A PREFERRED STOCK, $10.00 par value, 8,250 shares
authorized, issued and outstanding......................................... -- -- 825
8% CONVERTIBLE PREFERRED STOCK, $10.00 par value, 5,000,000 shares
authorized, 292,043 shares issued and 278,201 shares outstanding........... -- -- 11,613
REDEEMABLE COMMON STOCK, $10.50, $12.11 and $18.15 redemption value,
respectively, 413,022, 413,022 and 1,025,181 shares issued and outstanding,
respectively............................................................... 4,337 5,002 18,607
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value, 75,000,000, 75,000,000 and 25,000,000 shares
authorized, respectively, 29,800,261, 29,714,261 and 15,984,819 shares
issued, respectively, and 29,800,261, 29,714,261 and 15,984,819 shares
outstanding, respectively................................................ 7,347 7,326 3,996
Additional paid in capital................................................. 170,442 169,823 37,629
Retained earnings.......................................................... 40,619 36,212 95,025
Restricted common stock.................................................... (891) -- --
Treasury stock, 3,500 shares at $12.11..................................... (42) -- --
------------ --------- ---------
Total stockholders' equity........................................... 217,475 213,361 136,650
------------ --------- ---------
TOTAL........................................................................ $ 879,057 $ 862,374 $ 823,265
------------ --------- ---------
------------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
AND FOR THE UNAUDITED 16 WEEKS ENDED OCTOBER 18, 1997, AND OCTOBER 19, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
------------------------
OCTOBER 18, OCTOBER 19, JUNE 28, JUNE 29, JUNE 24,
1997 1996 1997 1996 1995
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES.................................... $ 719,377 $ 683,705 $ 2,344,983 $ 2,368,645 $ 2,328,247
COST OF SALES................................ 522,237 500,924 1,713,345 1,737,987 1,728,698
----------- ----------- ------------ ------------ ------------
Gross profit......................... 197,140 182,781 631,638 630,658 599,549
----------- ----------- ------------ ------------ ------------
OPERATING EXPENSES:
Store operating, selling and
administrative expenses................ 163,979 154,908 558,065 507,894 501,634
Depreciation and amortization............ 15,117 13,314 48,875 45,814 47,447
Litigation and severance/benefits........ -- -- 14,012 1,000 --
Estimated store closing costs............ -- -- 29,790 1,215 --
----------- ----------- ------------ ------------ ------------
Total operating expenses............. 179,096 168,222 650,742 555,923 549,081
----------- ----------- ------------ ------------ ------------
OPERATING INCOME (LOSS)...................... 18,044 14,559 (19,104) 74,735 50,468
INTEREST EXPENSE, net........................ 10,522 11,162 36,828 38,981 43,411
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM......................... 7,522 3,397 (55,932) 35,754 7,057
BENEFIT (PROVISION) FOR INCOME TAXES......... (3,780) (2,188) 15,215 (16,316) (7,020)
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM...... 3,742 1,209 (40,717) 19,438 37
EXTRAORDINARY ITEM--Loss on early
extinguishment of debt (Net of taxes of
$6,006).................................... -- -- (9,798) -- --
----------- ----------- ------------ ------------ ------------
NET INCOME (LOSS)............................ $ 3,742 $ 1,209 $ (50,515) $ 19,438 $ 37
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
AND FOR THE UNAUDITED 16 WEEKS ENDED OCTOBER 18, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEEMABLE STOCK STOCKHOLDERS' EQUITY
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
8%
CLASS A CONVERTIBLE ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 25, 1994.......................................... $ 825 $ 6,045 $ 9,227 $ 3,723 $ 28,920
Issuance of common stock...................................... 262 9,348
Issuance of restricted stock..................................
Earned portion of restricted stock compensation...............
Reversal of contingent shares of Tom Thumb acquisition........ (128) (1,154)
Accretion to redemption value................................. 986 1,794
Reduction of deferred cost of Employee Stock Option Plan......
Net income....................................................
----- ----------- ----------- ----------- -----------
BALANCE, JUNE 24, 1995.......................................... 825 6,903 11,021 3,985 37,114
Preferred stock dividends.....................................
Issuance of common stock...................................... 11 608
Reversal of contingent shares of Tom Thumb acquisition........ (10) (93)
Accretion to redemption value................................. 4,720 7,586
Earned portion of restricted stock compensation...............
Net income....................................................
----- ----------- ----------- ----------- -----------
BALANCE, JUNE 29, 1996.......................................... 825 11,613 18,607 3,996 37,629
Preferred stock dividends.....................................
Issuance of restricted stock.................................. 34 2,405
Issuance of common stock...................................... 4,645 220,355
Accretion to redemption value................................. (3,865) (5,404)
Earned portion of restricted stock compensation............... 29
Purchase of treasury stock....................................
Retirement of treasury stock.................................. (158) (10) (906)
Purchase and retirement of ESOP and Non-ESOP shares........... (1,346) (84,810)
Redemption of common stock.................................... (93) (4,407)
Redemption of putable common stock............................ (2,426)
Redemption of preferred stock................................. (825) (7,748)
Cancellation of putable rights................................ (5,617) 100
Impairment of loan to ESOP.................................... (472)
Net loss......................................................
----- ----------- ----------- ----------- -----------
BALANCE, JUNE 28, 1997.......................................... 5,002 7,326 169,823
Issuance of restricted stock (unaudited)...................... 21 882
Accretion to redemption value (unaudited)..................... (665)
Earned Portion or restricted stock compensation (unaudited)...
Purchase of treasury stock (unaudited)........................
Impairment of loan to ESOP (unaudited)........................ (263)
Net income (unaudited)........................................
----- ----------- ----------- ----------- -----------
BALANCE, OCTOBER 18, 1997 (unaudited)........................... $ $ $ 4,337 $ 7,347 $ 170,442
----- ----------- ----------- ----------- -----------
----- ----------- ----------- ----------- -----------
<CAPTION>
<S> <C> <C> <C> <C>
DEFERRED
COSTS OF
RETAINED RESTRICTED TREASURY EMPLOYEE STOCK
EARNINGS STOCK STOCK OWNERSHIP PLAN
----------- ----------- ----------- ---------------
BALANCE, JUNE 25, 1994.......................................... $ 96,522 $ (1,000)
Issuance of common stock......................................
Issuance of restricted stock.................................. $ (250)
Earned portion of restricted stock compensation............... 125
Reversal of contingent shares of Tom Thumb acquisition........
Accretion to redemption value................................. (2,780)
Reduction of deferred cost of Employee Stock Option Plan...... 1,000
Net income.................................................... 37
----------- ----------- ----- -------
BALANCE, JUNE 24, 1995.......................................... 93,779 (125)
Preferred stock dividends..................................... (5,886)
Issuance of common stock......................................
Reversal of contingent shares of Tom Thumb acquisition........
Accretion to redemption value................................. (12,306)
Earned portion of restricted stock compensation............... 125
Net income.................................................... 19,438
----------- ----------- ----- -------
BALANCE, JUNE 29, 1996.......................................... 95,025
Preferred stock dividends..................................... (2,407)
Issuance of restricted stock.................................. (2,439)
Issuance of common stock......................................
Accretion to redemption value................................. 9,269
Earned portion of restricted stock compensation............... 2,439
Purchase of treasury stock.................................... $ (919)
Retirement of treasury stock.................................. 155 919
Purchase and retirement of ESOP and Non-ESOP shares...........
Redemption of common stock....................................
Redemption of putable common stock............................ (780)
Redemption of preferred stock................................. (20,052)
Cancellation of putable rights................................ 5,517
Impairment of loan to ESOP....................................
Net loss...................................................... (50,515)
----------- ----------- ----- -------
BALANCE, JUNE 28, 1997.......................................... 36,212
Issuance of restricted stock (unaudited)...................... (903)
Accretion to redemption value (unaudited)..................... 665
Earned Portion or restricted stock compensation (unaudited)... 12
Purchase of treasury stock (unaudited)........................ (42)
Impairment of loan to ESOP (unaudited)........................
Net income (unaudited)........................................ 3,742
----------- ----------- ----- -------
BALANCE, OCTOBER 18, 1997 (unaudited)........................... $ 40,619 $ (891) $ (42) $
----------- ----------- ----- -------
----------- ----------- ----- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
AND FOR THE UNAUDITED 16 WEEKS ENDED OCTOBER 18, 1997, AND OCTOBER 19, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
------------------------
OCTOBER 18, OCTOBER 19, JUNE 28, JUNE 29, JUNE 24,
1997 1996 1997 1996 1995
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss):.................................... $ 3,742 $ 1,209 $ (50,515) $ 19,438 $ 37
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 15,117 13,314 48,874 45,814 47,447
Amortization of debt issuance costs................. 622 111 662 360 503
LIFO reserve........................................ 680 665 3,434 2,092 1,067
Loss on early extinguishment of debt................ -- -- 15,804 -- --
Settlement of ESOP litigation....................... -- -- 10,500 -- --
Severance/benefits.................................. -- -- 3,594 -- --
Loss (gain) from sale of assets..................... (425) (292) (905) 793 (1,046)
Store closing costs................................. -- -- 32,790 -- --
Earned portion of restricted stock compensation..... 12 -- 2,468 125 125
Equity in earnings of unconsolidated joint
ventures.......................................... (41) (23) (137) (69) (51)
Deferred tax (benefit)/provision.................... -- (1,625) (13,735) (9,552) 2,812
(Increase) decrease in receivables.................. (7,430) (59) (2,291) (1,777) 3,746
(Increase) decrease in merchandise inventories...... (14,476) (9,447) 184 (10,005) (650)
(Increase) decrease in prepaid expenses and other... (1,034) (2,518) (1,216) (2,798) 2,423
Increase in note receivable from ESOP............... -- -- (2,250) (1,500) --
(Increase) decrease in federal income tax
receivable........................................ 10,000 -- (16,409) -- --
(Increase) decrease in other assets................. (258) 1,804 (15,963) (1,423) 802
Increase (decrease) in accounts payable............. 12,331 12,060 23,308 7,163 (8,129)
Increase (decrease) in accrued expenses and other... 8,560 4,034 (18,994) 10,453 13,244
Increase (decrease) in accrued income taxes......... 3,977 (365) (3,366) 2,549 825
Increase (decrease) in other long-term
liabilities....................................... 1,203 1,835 2,555 2,183 (9,647)
----------- ----------- --------- ----------- -----------
Net cash provided by operating activities......... 32,579 20,703 18,392 63,846 53,508
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... (22,025) (37,085) (104,455) (66,131) (59,850)
Proceeds from sale of assets.......................... 12,226 8,985 55,434 30,317 59,332
Contributions to joint ventures....................... (132) -- (138) (13) (12)
Proceeds from sale of joint ventures.................. 954 -- 524 1,808 --
Distributions from joint ventures..................... 263 -- 167 237 422
----------- ----------- --------- ----------- -----------
Net cash used in investing activities............. (8,714) (28,100) (48,468) (33,782) (108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt.................................... (3,132) (5,227) (399,524) (50,711) (61,408)
Cost of early extinguishment of debt.................. -- -- (15,804) -- --
Proceeds from issuance of debt........................ -- 15,000 178,000 27,000 --
Proceeds from issuance of senior subordinated notes... -- -- 149,755 -- --
Additions to (reductions in) obligations under capital
leases.............................................. (1,278) (934) 5,390 (2,251) (2,283)
Proceeds from issuance of common stock................ -- -- 225,000 619 9,360
Redemption of common stock............................ -- -- (89,363) -- --
Redemption of preferred stock......................... -- -- (28,645) -- --
Purchase of treasury stock............................ (42) -- (919) -- --
Preferred dividends paid.............................. -- (600) (2,385) (5,886) --
----------- ----------- --------- ----------- -----------
Net cash provided by (used in) financing
activities...................................... (4,452) 8,239 21,505 (31,229) (54,331)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 19,413 842 (8,571) (1,165) (931)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 23,115 31,686 31,686 32,851 33,782
----------- ----------- --------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 42,528 $ 32,528 $ 23,115 $ 31,686 $ 32,851
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CONCENTRATION RISK--The consolidated financial statements
include the accounts of Randall's Food Markets, Inc., a Texas corporation, and
its wholly owned subsidiaries, Randalls Food and Drugs, Inc. (d.b.a. Randalls
Food and Pharmacy or Randalls and Tom Thumb Food and Pharmacy or Tom Thumb) and
Randalls Properties, Inc. (collectively referred to as the Company).
The Company operates in a highly competitive marketplace with its retail
grocery stores concentrated in north, central and southeast Texas. The debt
agreements relating to debt outstanding until June 27, 1997 contained numerous
financial and operating covenants for which waivers had been obtained for
certain matters of non-compliance (see Note 5). In connection with the Equity
Investment described in Note 2, such debt was refinanced. The Company is also
subject to certain litigation and administrative matters (see Note 10).
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES--All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
INTERIM FINANCIAL STATEMENTS--The consolidated financial statements as of
October 18, 1997 and for the 16 weeks ended October 18, 1997 and October 19,
1996, are unaudited. In management's opinion, these unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments consisting only of
normal recurring adjustments necessary for the fair statement of the financial
data for such periods. The unaudited results for the 16 weeks ended October 18,
1997, are not necessarily indicative of the results expected for the full fiscal
year ending June 27, 1998.
STATEMENTS OF CASH FLOWS--The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. The statements of cash flows provide information about changes
in cash and cash equivalents and excludes the effects of noncash transactions.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company's most significant
financial instruments are long-term debt obligations which are reflected in the
accompanying financial statements at approximately $281 million and $352 million
at June 28, 1997, and June 29, 1996, respectively, which management believes
approximates fair value at those dates. The fair value of debt was estimated by
discounting the future cash flows using rates currently available for debt of
similar terms and maturity. Management believes the fair values of all other
financial instruments are not materially different from their carrying values.
RECEIVABLES--Receivables consist of federal income tax receivable and
amounts due from charge customers, vendor promotions, manufacturer coupons and
returned checks and are net of an allowance for uncollectible amounts totaling
$3.1 million and $1 million at June 28, 1997 and June 29, 1996, respectively.
FISCAL YEAR--The Company's fiscal year ends on the last Saturday in June of
each calendar year, resulting in either a 52- or 53-week fiscal year. There are
53 weeks in the fiscal year ended June 29, 1996.
MERCHANDISE INVENTORIES--The Company uses the last-in first-out ("LIFO")
method of costing for all of its inventories in fiscal years 1997 and 1996 and
for a significant portion of its inventories in fiscal year 1995. The effect in
1996 of converting the remaining inventories to LIFO was not material to the
consolidated financial statements.
At June 24, 1995, inventories consisted of approximately $129 million costed
under the LIFO method and approximately $31 million costed under the first-in
first-out ("FIFO") method. If the FIFO method
F-8
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
had been used for costing all inventories, the valuation assigned to inventories
would have been approximately $19.0 million and $15.5 million higher as of June
28, 1997 and June 29, 1996, respectively.
In 1997 the Internal Revenue Service ("IRS") approved the Company's
application for a change from several LIFO methods to one LIFO method, effective
at the beginning of fiscal year 1996. At June 28, 1997 and June 29, 1996,
inventories have been recorded in accordance with the change requested. The
Company selected the new LIFO method to achieve valuation consistencies between
internal divisions that had previously used multiple LIFO methods. Management
believes that the use of a common LIFO method simplifies the calculation and
makes the inventories comparable. The effect in fiscal year 1996 of changing to
the new LIFO method was to decrease net income by approximately $580,000.
DEPRECIATION AND AMORTIZATION--Property and equipment are stated at cost.
The Company uses the straight-line method of accounting to provide for
depreciation over the estimated useful lives of buildings and improvements (20
years) and fixtures, leaseholds and equipment (3 to 10 years). Properties held
under capital leases are amortized over the lease terms. Maintenance, repairs
and minor replacements are charged to expense as incurred; major replacements
and betterments are capitalized. The net book value of assets sold, retired or
otherwise disposed of is removed from the accounts at the time of disposition,
and any resulting gain or loss is reflected in operations for that period.
Goodwill associated with the August 1992 Tom Thumb acquisition of $256
million is being amortized on a straight-line basis over 40 years. Goodwill was
reduced by approximately $103,000 in fiscal year 1996 and $1.2 million in fiscal
year 1995 as amounts recorded for shares contingently issuable for the Tom Thumb
acquisition were reversed upon resolution of a contingency. The accumulated
amortization was $31.8 million and $25.4 million at June 28, 1997 and June 29,
1996, respectively. The Company utilizes undiscounted estimated cash flows to
evaluate any possible impairment of goodwill.
ACCRUED EXPENSES AND OTHER--Accrued expenses and other as of June 28, 1997
and June 29, 1996, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Payroll and related benefits $ 39,875 32,322
Rent 7,527 6,439
Property taxes 6,480 4,083
Insurance and related costs 17,957 14,439
Deferred income, current 3,288 1,439
Legal and other contingencies 6,947 11,212
Accrual for planned store closings 34,005 1,215
Accrued transaction costs 5,800 --
Other 9,857 13,970
---------- ---------
$ 131,736 $ 85,119
---------- ---------
---------- ---------
</TABLE>
COST OF SALES--Cost of sales includes cost of merchandise sold and warehouse
salaries and benefits.
STORE OPENING AND CLOSING COSTS--The costs associated with opening new store
locations are expensed in the period the store is opened. Estimated costs
associated with closing a store are recognized in the period the Company
determines to close the store. For fiscal year 1997, the Company recorded a
charge of $32.8 million which includes $3.7 million relating to stores that were
closed or sold in fiscal year 1997 and $29.1 million related to 20 stores that
the Compny had decided, as of June 28, 1997, to close, replace or sell. These
costs include estimated inventory losses of $3.0 million included in cost of
sales, lease termination
F-9
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
costs of $11.7 million and the write-off of certain store assets of $18.1
million included in estimated store closing costs. At fiscal year end 1997, 2 of
the 20 stores accrued for were closed. Management's plan provides for various
closing dates from June 1997 to June 1999.
ACCOUNTING FOR JOINT VENTURES--The Company accounts for its investment in
joint ventures under the Equity Method.
NEW PRONOUNCEMENTS--In March 1995 the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," effective for financial statements for fiscal years beginning
after December 15, 1995. This statement requires losses to be recognized for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flow estimates to be generated by those assets are
less than the assets' carrying amount. The Company has adopted this standard for
fiscal year 1997, effective June 30, 1996. The adoption of this standard did not
have a significant impact on the consolidated financial position or operating
results of the Company because the SFAS No. 121 methodology of accounting is not
materially different than the Company's previously existing policy.
In October 1995 the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. This statement defines a fair value-based method of
accounting for employee stock options or similar equity instruments. As the
statement permits, the Company will continue to account for these types of
instruments using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion ("APB") 25, "Accounting for Stock Issued to
Employees." The adoption of this statement did not have a material affect on
reported amounts for net income (loss) and earnings (loss) per share in fiscal
years 1997 and 1996.
In February 1997 the FASB issued SFAS 128, "Earnings Per Share". SFAS 128,
which is effective for the Company for the year ended June 27, 1998, specifies
the computation, presentation and disclosure requirements of earnings per share
("EPS") and supersedes APB 15. SFAS 128 requires a dual presentation of basic
and diluted EPS. Basic EPS, which excludes the impact of common share
equivalents, replaces primary EPS. Diluted EPS, which utilizes the average
market price per share as opposed to the greater of the average market price per
share or ending market price per share when applying the treasury stock method
in determining common share equivalents, replaces fully diluted EPS. Also in
February 1997, the FASB issued SFAS 129, "Disclosure of Information About
Capital Structure," which establishes standards for disclosing information about
an entity's capital structure. This statement is effective for the Company for
the year ended June 27, 1998. Management is evaluating what, if any, additional
disclosures may be required upon the implementation of SFAS 128 and 129.
RECLASSIFICATIONS--Certain reclassifications have been made to amounts
related to the years ended June 29, 1996 and June 24, 1995 to conform with the
current year's presentation.
2. EQUITY INVESTMENT
The Company and its majority stockholder entered into a subscription
agreement dated April 1, 1997 (the "Subscription Agreement"), with RFM
Acquisition LLC ("RFM Acquisition"). RFM Acquisition is a Delaware limited
liability company formed at the direction of Kohlberg Kravis Roberts & Co., L.P.
(KKR). Following approval of the stockholders of the Company at a special
meeting held in June 1997, RFM Acquisition paid a total of $225 million to the
Company (the Equity Investment), including $210 million as consideration for the
Company's issuance to RFM Acquisition of 18,579,686 shares of common stock and
$15 million as consideration for a 25-year option to purchase 3,606,881 shares
of common stock at $12.11
F-10
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
2. EQUITY INVESTMENT (CONTINUED)
per share, subject to adjustments in the event of stock dividends, subdivisions
and combinations, distributions to common stock holders of securities such as
debt or preferred stock, sales of common stock of the Company below fair market
value and the issuance of convertible securities with an exercise price below
fair market value. Subsequent to this transaction, approximately 63 percent of
the common stock of the Company is owned by RFM Acquisition.
3. PROPERTY AND EQUIPMENT
Property and equipment at June 28, 1997 and June 29, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land.................................................................................... $ 51,115 $ 51,429
Buildings and improvements.............................................................. 42,399 49,004
Fixtures, leaseholds and equipment...................................................... 374,022 317,921
Property held under capital leases...................................................... 91,921 95,081
Construction-in-progress................................................................ 22,560 36,449
----------- -----------
582,017 549,884
Accumulated depreciation................................................................ (245,469) (220,833)
----------- -----------
Property and equipment, net............................................................. $ 336,548 $ 329,051
----------- -----------
----------- -----------
</TABLE>
4. JOINT VENTURES
The Company participates as a general partner in various joint ventures for
the purpose of developing shopping centers in which store facilities are
located. The Company's ownership interests range from 50 percent to 83.3
percent. Joint ventures that are greater than 50 percent owned are consolidated
in the accompanying consolidated financial statements from the date that the
majority interest was acquired. The following represents the activity in
investments in unconsolidated joint ventures for the years ended June 28, 1997,
June 29, 1996 and June 24, 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ (3,208) $ (5,188) $ (4,829)
Equity in earnings of unconsolidated joint ventures 137 69 51
Contributions made 138 13 12
Distributions received (524) (237) (422)
Sales of certain joint ventures (167) 2,135 --
--------- --------- ---------
Balance at end of period $ (3,624) $ (3,208) $ (5,188)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The balance for investments in unconsolidated joint ventures is included in
other assets. The unconsolidated joint ventures have debt outstanding at June
28, 1997 and June 29, 1996 of approximately $20.6 million and $20.5 million,
respectively, that is nonrecourse. The debt outstanding at June 28, 1997 and
June 29, 1996 represents 100 percent of the joint ventures debt.
During fiscal year 1995, the Company's three consolidated joint ventures
sold substantially all of their assets and retired the related debt which
resulted in an insignificant gain. During fiscal year 1996, the Company sold its
interest in two unconsolidated joint ventures for approximately $1.8 million.
The Company continues to operate stores at each of these locations which are
accounted for as sale leaseback transactions. A gain of approximately $3.9
million related to these transactions was deferred and is being
F-11
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
4. JOINT VENTURES (CONTINUED)
recognized over the remaining lease terms. During fiscal 1997, the Company sold
its interest in one unconsolidated joint venture and is recognizing the sale on
a cash basis. As of June 28, 1997, approximately $167,000 had been recognized.
Additional cash receipts will be recorded as a reduction of the asset and
subsequently, a gain or loss, as appropriate. The Company does not operate a
store at this location.
The Company paid to the joint ventures approximately $3.4 million, $4.1
million and $4.8 million in fiscal years 1997, 1996 and 1995, respectively, in
rent, common area maintenance and other lease-related costs for shopping centers
owned by the joint ventures.
5. LONG-TERM DEBT
At June 28, 1997 and June 29, 1996, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Senior subordinated notes--
Unsecured, with interest at 9.375% payable semiannually, principal matures on July 1,
2007.................................................................................. $ 150,000 $ --
Discount on senior subordinated notes................................................... (245) --
Notes payable to banks:
Principal due in annual installments beginning June 27, 1998 and interest due in
quarterly installments, final installment due June 27, 2006 , interest at the London
Interbank Offered Rate ("LIBOR") plus an adjustable margin rate (1.5%), interest at
7.187% at June 28, 1997............................................................... 125,000 169,500
Principal due June 27, 2004, interest due in quarterly installments, principal balance
not to exceed $225 million, interest at LIBOR plus an adjustable margin rate at 6.9%
at June 29, 1996...................................................................... -- 40,000
Principal due June 22, 2004, interest due in quarterly installments beginning September
30, 1997, interest at Alternate Base Rate plus an adjustable margin rate (0%),
interest at 8.5% at June 28, 1997..................................................... 3,000 --
Other................................................................................... -- 955
---------- ----------
Total notes payable to banks........................................................ 128,000 210,455
---------- ----------
Notes payable to insurance companies:
Principal was due in annual installments beginning December 1998, note paid in full in
June 1997............................................................................. -- 135,500
Principal and interest due in monthly installments, final installment due in 2005,
interest from 8.3% to 9.0%............................................................ 2,748 6,317
---------- ----------
Total notes payable to insurance companies.......................................... 2,748 141,817
---------- ----------
Total long-term debt...................................................................... 280,503 352,272
Less--current maturities of long-term debt................................................ 774 29,586
---------- ----------
Long-term debt, net of current maturities................................................. $ 279,729 $ 322,686
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
Aggregate principal payments applicable to existing long-term debt
outstanding as of June 28, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
FISCAL YEAR ENDING
- ------------------------------------------------------------------------------------------------------
1998.............................................................................................. $ 774
1999.............................................................................................. 774
2000.............................................................................................. 774
2001.............................................................................................. 774
2002.............................................................................................. 774
Thereafter.......................................................................................... 276,633
----------
Total............................................................................................. $ 280,503
----------
----------
</TABLE>
The senior subordinated notes (the "Notes") are redeemable, in whole or in
part, at specified redemption prices together with accrued and unpaid interest,
if any, to the date of redemption. In addition, at any time on or prior to July
1, 2000, the Company may redeem up to $60 million of the original aggregate
principal amount of the Notes at a redemption price equal to 109.375% of the
aggregate principal amount to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption, provided that at least $90 million
of the original aggregate principal amount of the Notes remains outstanding
immediately after each such redemption.
Upon the occurrence of a change of control or certain transfer events, the
Company will have the option, at any time prior to July 1, 2002, to redeem the
Notes, in whole but not in part, at a redemption price equal to 100% of the
aggregate principal amount thereof plus a premium, together with accrued and
unpaid interest, if any, to the date of redemption.
The Notes are unsecured and are subordinated in right of payment to all
existing and future senior indebtedness of the Company.
The indenture under which the Notes were sold contains covenants that limit
the ability of the Company to (i) pay dividends or make certain other restricted
payments; (ii) incur additional indebtedness and issue disqualified stock and
preferred stock; (iii) create liens on assets; (iv) merge, consolidate or sell
all or substantially all assets; (v) enter into certain transactions with
affiliates; (vi) restrict dividends or other payments by subsidiaries to the
Company or its subsidiaries; (vii) permit guarantees of indebtedness by
subsidiaries of the Company; and (viii) incur other senior subordinated
indebtedness. At June 28, 1997, the Company was in compliance with all such
covenants.
Pursuant to a registration rights agreement entered into between the Company
and the purchasers of the Notes, the Company agreed to file a registration
statement with the Securities and Exchange Commission with respect to an offer
to exchange the senior subordinated notes for Series B senior subordinated notes
of the Company having substantially identical terms in all material respects.
The Notes are subject to the payment of additional interest if the Company does
not comply with its obligations under the registration rights agreement within
specified time periods.
In November 1993 the Company entered into a credit agreement with various
banks and a note purchase agreement with certain insurance companies. The banks
provided a term loan commitment for $225 million, and the insurance companies
provided three series of private placement debt for a total of $135.5 million.
In March 1997 the Company obtained waivers for certain debt covenants for the
period from January 12, 1997, through April 5, 1997. The Company refinanced all
such debt in conjunction with the equity investment described in Note 2. On June
27, 1997, the Company paid in full the notes payable to
F-13
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
the insurance companies and the term loan to the banks. In connection with this
early extinguishment of debt, a make whole premium, including accrued interest,
of approximately $14.9 million was paid to the insurance companies. This payment
is shown as an extraordinary item of $8.5 million, which is net of taxes of $6.0
million, in the accompanying statement of operations for the year ended June 28,
1997.
As part of the credit agreement dated June 27, 1997, a revolving credit
commitment for $225 million, a swingline credit commitment for $25 million and a
letter of credit limit of $25 million were established, with the outstanding
revolving credit loans, swingline borrowings and the letters of credit loans not
to exceed $225 million. As of June 28, 1997, the Company had no borrowings under
the revolver, $3 million of borrowings under the swingline and $1.8 million of
letters of credit outstanding. As of June 29, 1996, the Company had
approximately $40 million under the revolver and $5.1 million of letters of
credit outstanding, and approximately $39.9 million was available under these
facilities. There are no scheduled reductions to the amounts available to the
Company prior to June 27, 2004. There is an annual credit commitment fee of 0.25
percent charged on the unused portion of the revolver.
The bank debt agreements contain covenants, the more significant of which
require the Company to maintain certain debt ratios which are calculated based
on EBITDA (earnings before interest, taxes, depreciation and amortization). The
Company is also restricted as to maximum lease expense and the capital
expenditures it can make. At June 28, 1997, the Company was in compliance with
all such covenants.
Cash interest paid during fiscal years 1997, 1996 and 1995 was $29.4
million, $39.2 million and $40.1 million, respectively and was $2.5 million and
$5.0 million for the 16 weeks ended October 18, 1997 and October 19, 1996,
respectively. Interest capitalized associated with construction was $556,000,
$115,000 and $513,000 in fiscal years 1997, 1996 and 1995, respectively.
6. INCOME TAXES
The Company files a consolidated federal income tax return. Deferred income
taxes are provided to recognize temporary differences between financial and tax
reporting.
The provision for income taxes for the years ended June 28, 1997, June 29,
1996 and June 24, 1995, is summarized below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Current (benefit) provision...................................................... $ (7,486) $ 25,868 $ 4,208
Deferred (benefit) provision..................................................... (13,735) (9,552) 2,812
---------- --------- ---------
Total tax (benefit) provision.................................................... (21,221) 16,316 7,020
Less: tax (benefit) on extraordinary item........................................ 6,006 -- --
---------- --------- ---------
Total tax (benefit) provision, net of extraordinary item..................... $ (15,215) $ 16,316 $ 7,020
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-14
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets result from differences in the basis of
assets and liabilities for income tax and financial reporting purposes. The
cumulative tax effect of these items at June 28, 1997 and June 29, 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Assets:
Deferred income......................................................................... $ (8,422) $ (6,390)
Employee benefits....................................................................... (11,723) (12,996)
Insurance............................................................................... (6,824) (5,703)
Alternative minimum tax credit carryforward............................................. -- (418)
Closed store accruals................................................................... (12,922) --
Other................................................................................... (5,137) (6,370)
---------- ----------
Total gross deferred tax assets..................................................... (45,028) (31,877)
---------- ----------
Liabilities:
Property and equipment.................................................................. 11,035 13,246
Tax benefit lease....................................................................... 5,206 6,250
LIFO.................................................................................... 13,051 12,197
Other................................................................................... 5,694 3,877
---------- ----------
Total gross deferred tax liabilities................................................ 34,986 35,570
Net deferred income tax (asset) liability................................................. (10,042) 3,693
Current deferred income tax asset......................................................... (21,109) (9,631)
---------- ----------
Long-term deferred income tax liability................................................... $ 11,067 $ 13,324
---------- ----------
---------- ----------
</TABLE>
The actual (benefit) provision for income taxes from continuing operations
differs from the U.S. federal corporate tax rate as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Taxes at federal statutory tax rate.............................................. $ (25,108) $ 12,514 $ 2,470
Increase (decrease) in income taxes resulting from:
Goodwill....................................................................... 2,233 2,271 2,266
State taxes based on income.................................................... (2,152) 1,899 1,136
Nondeductible transaction costs................................................ 2,800 -- --
Previously overprovided taxes and other, net................................... 1,006 (368) 1,148
---------- --------- ---------
Total tax (benefit) provision................................................ $ (21,221) $ 16,316 $ 7,020
---------- --------- ---------
---------- --------- ---------
</TABLE>
Income taxes paid were approximately $17.7 million, $23.3 million and $3.3
million in fiscal years 1997, 1996 and 1995, respectively, and were $0.0 and
$6.4 million for the 16 weeks ended October 18, 1997 and October 19, 1996,
respectively.
F-15
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
7. BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN--The Company has a defined benefit pension plan
which is a noncontributory plan for all full-time hourly employees who are at
least 21 years of age and have completed one year of continuous employment
consisting of at least 1,000 hours of service as of year end. The Company makes
annual contributions to the plan equal to the amounts actuarially required to
fund current pension costs.
Net periodic pension costs for the years ended June 28, 1997, June 29, 1996
and June 24, 1995 include the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost/benefits earned during the year................... $ 1,796 $ 1,677 $ 1,889
Interest cost on projected benefit obligation.................. 1,354 1,180 1,076
Actual return on assets........................................ (1,969) (1,601) (1,354)
Amortization of unrecognized net transition asset and net
losses....................................................... 672 537 844
Change in assumed discount rate................................ -- -- (273)
--------- --------- ---------
Net periodic pension expense................................... $ 1,851 $ 1,793 $ 2,182
--------- --------- ---------
--------- --------- ---------
The following table sets forth the plan's funded status and the amount recognized in the
Company's consolidated balance sheets at June 28, 1997, June 29, 1996 and June 24, 1995 (in
thousands):
Actuarial present value of benefit obligations:
Vested....................................................... $ 13,023 $ 11,075 $ 9,850
--------- --------- ---------
--------- --------- ---------
Accumulated.................................................. $ 14,847 $ 12,801 $ 11,502
--------- --------- ---------
--------- --------- ---------
Projected.................................................... $ (18,814) $ (15,454) $ (14,438)
Plan assets at fair value.................................... 17,491 15,765 11,539
--------- --------- ---------
Excess of plan assets (estimated benefit obligations).......... (1,323) 311 (2,899)
Unrecognized net loss.......................................... 5 223 2,416
--------- --------- ---------
Accrued pension asset (liability) recognized in the
accompanying consolidated balance sheets..................... $ (1,318) $ 534 $ (483)
--------- --------- ---------
--------- --------- ---------
Contributions by the Company to the plan....................... $ 705 $ 2,810 $ 3,718
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used in determining the actuarial present value of plan benefits
reflect a weighted average discount rate of 8.0 percent, 7.9 percent and 8.0
percent for fiscal years 1997, 1996 and 1995, respectively, and an investment
rate of return of 9.0 percent for fiscal years 1997, 1996 and 1995. The assumed
rate of salary increase averaged 5.0 percent for fiscal year 1997 and averaged
6.0 percent for fiscal years 1996 and 1995.
EMPLOYEE STOCK OWNERSHIP PLAN--On April 1, 1997 the Employee Stock Ownership
Plan ("ESOP") was amended and restated to become Randall's ESOP/401k Savings
Plan. The ESOP/401k Savings Plan is for all full-time employees who are at least
21 years of age and have completed one year of continuous service. Participants
in the ESOP/401k may elect to contribute up to 5 percent of their compensation,
which will be matched 100 percent by the Company. Participants in the ESOP/401k
may make voluntary contributions
F-16
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
7. BENEFIT PLANS (CONTINUED)
up to an additional 10 percent of their compensation, unmatched by the Company.
The Company also has a Key Employee Stock Purchase Plan ("KeySop") to provide
specified benefits to eligible managers and highly compensated employees. The
Company's cash contributions to the ESOP/401k for fiscal years 1997, 1996 and
1995 totaled approximately $3.3 million, $3.4 million and $2.4 million,
respectively. The Company's cash contributions to the KeySop were $0 for fiscal
year 1997, $3,500 for fiscal year 1996 and $94,000 for fiscal year 1995.
The Company loaned $2.25 million and $1.5 million to the ESOP in 1997 and
1996, respectively. The notes receivable are included in prepaid expenses and
other in fiscal year end 1997 and other assets in fiscal year end 1996. The
notes receivable are secured by 244,482 shares of the Company's common stock. At
fiscal year-end 1997, the value of the common stock was not adequate to secure
the fair value of the note. Due to the impairment of the note, a $472,000
reduction in equity was recorded. The notes receivable do not bear interest and
mature in April 1998. No shares of the Company's common stock were purchased by
the ESOP during fiscal year 1997.
During fiscal year 1996, the ESOP purchased 43,000 shares of the Company's
common stock for approximately $619,000 and, during fiscal year 1995, the ESOP
purchased 1,007,998 shares for total consideration of approximately $9.2
million.
The Company was a defendant in a lawsuit related to the ESOP. As further
discussed in Note 10, a settlement was reached that provides for cash payments
and changes in the operation of the ESOP, including the addition of a 401(k)
feature offering a variety of professionally managed mutual fund investments and
the cessation of additional investments by the ESOP in the Company's common
stock. Court approval of the settlement was granted in June 1997.
TOM THUMB PROFIT-SHARING AND RETIREMENT PLANS--In fiscal year 1994, the
Cullum Companies, Inc. and Affiliated Companies Profit Sharing Plan was
terminated by the Board of Directors, and the participants were given the
opportunity to transfer their balances into the Company's ESOP.
The Board of Directors of Tom Thumb terminated a management security plan
("MSP") and a senior corporate officer plan effective December 31, 1992. With
respect to the participants who retired prior to the termination of the plans,
the present value of the remaining obligation (approximately $5.5 million) is
recorded, net of the current portion of $1.1 million, as other long-term
liabilities as of June 28, 1997, based on a discount rate of 8.56 percent. As
further discussed in Note 10, certain MSP participants who received payments in
connection with the MSP's termination have instituted a claim against the
Company.
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
PREFERRED STOCK--The Class A Redeemable preferred stock, which was redeemed
in June 1997, had a par value of $10 per share, and 8,250 shares authorized,
issued and outstanding in 1996 and 1995. This class of stock was nonvoting and
dividends accrued at $10.50 per year per share. These dividends were payable
quarterly and before dividends were declared or paid on the common stock. The
liquidation value was $100 per share plus all accrued and unpaid dividends.
The 8 percent convertible preferred stock, which was redeemed in June 1997,
had a par value of $10 per share, with 5,000,000 shares authorized and 292,043
shares issued at June 29, 1996. There were 212,043 shares outstanding at June
24, 1995, and there were 80,000 contingent shares related to the Tom Thumb
acquisition. During fiscal year 1995, the contingent shares were reduced to
67,185 shares, based on the anticipated resolution of the contingency, and
goodwill was reduced $1.2 million for the amount assigned to the 12,815 shares.
During fiscal year 1996, a total of 66,158 shares of convertible preferred stock
was issued upon resolution of these contingencies, and goodwill was reduced
$103,000 for the amount assigned
F-17
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
to the remaining 1,027 shares. At June 29, 1996, 278,201 shares of 8 percent
convertible preferred stock were outstanding. This class of stock was nonvoting
and dividends accrued at $8 per year per share. These dividends were payable
quarterly before dividends were declared or paid on the common stock. Upon
resolution of the contingency and issuance of the shares, dividends were paid on
the issued shares as if they had been issued on August 24, 1992. The liquidation
value was $100 per share plus all accrued and unpaid dividends. The excess of
the liquidation value over the redemption value is recorded as a charge to
retained earnings. Each convertible preferred share is convertible at the rate
of 2.3 shares of common stock for each full convertible share. Shares were
redeemable at the liquidation value at the option of the Company and were
required to be either redeemed or converted by October 15, 1999. All of the
preferred stockholders had agreed in principle not to require the redemption on
October 15, 1999 it would cause the Company to be in default of its loan
agreements.
In connection with the equity investment described in Note 2, the Class A
preferred stock and the 8 percent convertible preferred stock were redeemed at
liquidation value for a total of $28.7 million.
COMMON STOCK--In connection with the acquisition of Tom Thumb, certain
shares of common stock are subject to an agreement between the Company and
certain stockholders, whereby the stockholders have the right to sell such
shares to the Company at the most recently appraised fair value beginning
October 15, 1997 and each October 15 up to and including October 15, 2001. At
June 28, 1997, there were 60,028 shares of common stock subject to this
agreement and outstanding.
The Company also has 935,038 shares of redeemable common stock, not
associated with the acquisition, subject to an agreement between the Company and
certain stockholders whereby the stockholders have the option to sell such
shares to the Company at the most recently appraised fair value if first refused
by the other existing stockholders. During fiscal year 1997, certain
stockholders canceled their redeemable rights on 571,411 shares of redeemable
common stock and one stockholder redeemed 10,500 shares at a purchase price of
$15 per share for $157,500. At June 28, 1997, 352,994 shares of redeemable
common stock (not associated with the Tom Thumb acquisition) remained
outstanding.
During fiscal year 1997, the Company purchased an additional 53,027 shares
of its common stock from certain stockholders for approximately $919,023. These
treasury shares were purchased at the then estimated fair values. At the end of
fiscal year 1997, all treasury shares had been retired.
In connection with the equity investment described in Note 2, 5,585,186
shares of Common Stock were redeemed at $16.00 per share for aggregate
consideration of $89.4 million as of June 28, 1997.
STOCK OPTION AND RESTRICTED STOCK PLAN--The Company has adopted the
Randall's Food Markets, Inc. Stock Option and Restricted Stock Plan which
provides for the issuance of incentive stock options, nonqualified stock options
and restricted stock to the Company's key employees and directors. A total of
1,500,000 shares of the Company's common stock, subject to an antidilution
adjustment, may be issued under this plan as determined by the Executive
Committee of the Board of Directors. All options granted through June 29, 1996,
were exercisable for a ten-year period. At June 28, 1997, approximately 710,243
shares of common stock are available for future issuances of options or
restricted stock under this plan.
During December 1994, the Company granted options to purchase $1,300,000 of
the Company's common stock to certain employees. The number of shares which may
be issued to the employees is based on the estimated fair value of the common
stock at each vesting date. These options vest at $300,000 of total value on
December 31, 1995, 1996 and 1997, and $200,000 of total value on December 31,
1998 and 1999. At June 28, 1997, an additional 25,209 shares vested with an
exercise price of $11.90. At June 29, 1996, 31,088 shares vested with an
exercise price of $9.65. The unvested portion of the grant would be
F-18
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
issuable into approximately 58,000 shares of common stock based on the most
recent estimated fair value. The difference between the exercise price and the
estimated fair value at the measurement dates was not significant. Also during
December 1994, the Company granted 25,907 shares of restricted stock. The
$250,000 estimated aggregate fair value of the restricted stock is being
recognized as compensation expense over two years, the period in which the
restrictions lapse.
During fiscal year 1996, the Company granted certain employees options to
purchase 37,500 shares of the Company's common stock at an exercise price of
$10.75 per share, the estimated fair value of the stock at the grant date. The
options were fully vested at the date of grant and are exercisable at June 29,
1996. During fiscal year 1997, the difference between the exercise price and the
then estimated fair value of 17,500 of these options was paid to departing
employees and was charged as compensation expense.
Stock option activity under the Company's plans for the three years ended
June 28, 1997, June 29, 1996 and June 24, 1995 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
---------------------------- ---------------------------- ----------------------------
Stock options outstanding,
beginning of year.............. 137,634 11.16 128,951 10.44 -- --
Change in Option Value.......... 19,100 (28,817)
Changes during the year:
Granted (per share):
1997, at $18.15............. 523,355 18.15
1996, at $10.75 37,500 10.75
1995, $9.65 to $10.75 128,951 10.44
Exercised/forfeited (per
share):
1997, at $18.15............. (27,545) 15.28
1996, at $10.75............. (17,500)
---------
Stock options outstanding, end
of year........................ 635,044 16.63 137,634 12.71 128,951 10.44
---------
Stock options exercisable, end
of year........................ 96,296 11.58 93,795 10.69 31,086 9.65
Weighted Average--fair value of
options granted during the
year........................... $ 8.88 $ 4.96 $ 4.88
</TABLE>
F-19
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
8. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at June 28, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
RANGE OF AT JUNE 28, REMAINING EXERCISE AT JUNE 28, EXERCISE
EXERCISE PRICES 1997 CONTRACTUAL LIFE PRICE 1997 PRICE
- --------------------------------- ----------- ---------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$9.65 to $12.30.................. 119,233 7.6 years $ 10.58 76,295 $ 10.68
$15.00 to $18.15................. 515,811 9.2 years $ 18.03 20,001 $ 15.00
----------- -----------
$9.65 to $18.15.................. 635,044 8.9 years $ 16.63 96,296 $ 11.58
----------- -----------
----------- -----------
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for fiscal
years 1995, 1996 and 1997, respectively: risk-free interest rates of 7.84, 6.18
and 6.72 percent; dividend yield of 0.0 percent for all years, expected lives of
10 years for all options; and volatility of 0.0 percent for all years. For
options granted during fiscal year 1995, we assumed both the fair market value
of the stock and the exercise price of the option to be $9.65.
In fiscal year 1997, the Company granted certain employees 139,382 shares of
restricted stock, of which 5,000 have been forfeited. The $2.4 million estimated
aggregate fair value of the restricted stock was recognized as compensation
expense in the fiscal year ended June 28, 1997. In addition, these employees
were granted options to purchase 523,355 shares, of which 27,545 have been
forfeited, of the Company's common stock at $18.15, the then estimated fair
value. These options become exercisable on September 30, 2000 and expire on
September 30, 2006.
As a result of the Equity Investment discussed in Note 2, the Company issued
to KKR a 25-year option to purchase 3,606,881 shares of common stock at $12.11
per share, subject to adjustments.
9. LEASE COMMITMENTS
LEASES--Minimum rental commitments for future periods are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR ENDING TOTAL LEASES LEASES
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
1998 $ 56,746 $ 45,678 $ 11,068
1999 56,683 45,671 11,012
2000 55,443 44,577 10,866
2001 55,350 44,484 10,866
2002 53,014 43,388 9,626
Thereafter 577,908 464,023 113,885
---------- ---------- ----------
$ 855,144 $ 687,821 167,323
---------- ----------
---------- ----------
Amount representing interest 85,678
----------
Present value of net minimum lease payments including current maturities
of $4,166: $ 81,645
----------
----------
</TABLE>
F-20
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
9. LEASE COMMITMENTS (CONTINUED)
The Company leases substantially all of its store facilities and some equipment.
Included in the above operating lease commitments are future minimum rentals to
the joint ventures discussed in Note 4 aggregating approximately $36.1 million.
The store leases generally cover an initial term of 20 to 30 years with renewal
options for 5 to 15 additional years. Most leases require the payment of fixed
minimum rentals as well as payment of property taxes and insurance, or a
percentage of sales, whichever is greater.
Included in store operating, selling and administrative expense for the
fiscal years ended June 28, 1997, June 29, 1996 and June 24, 1995 is rent
expense comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Minimum rental................................................................... $ 47,073 $ 42,998 $ 35,859
Percentage rental................................................................ 939 713 1,281
--------- --------- ---------
$ 48,012 $ 43,711 $ 37,140
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LITIGATION--On November 28, 1995, two individuals filed a lawsuit on behalf
of the ESOP and certain participants and former participants in and
beneficiaries of the ESOP. The lawsuit alleged that the Company, certain
employees thereof and certain entities which engaged in a variety of services
relating to the ESOP, including Arthur Andersen LLP, had violated various
federal and state laws in connection with the operation of the ESOP, including
transactions by the ESOP involving the common stock. During fiscal year 1997,
the plaintiffs' representatives, the Company and the other defendants agreed to
settle the litigation, although the defendants continue to deny all charges of
wrongdoing or liability against them.
The Company and other defendants elected to settle the suit for $16.5
million, of which the Company was liable for $11.3 million plus $0.2 million in
administrative expenses. Net of insurance proceeds, the Company paid $10.5
million in the aggregate in connection with the settlement and has increased its
existing litigation reserves by $9.5 million during the year ended June 28, 1997
to fully reserve for such matter. In addition, the settlement provides for
certain changes in the operation of the ESOP, including the addition of a 401(k)
feature offering a variety of professionally managed mutual fund investments and
the cessation of additional investments by the ESOP in the Company's common
stock. The U.S. District Court granted preliminary approval of the settlement on
April 2, 1997 and final approval on June 18, 1997. Upon approval of the
settlement, the litigation was dismissed with prejudice and the Company and the
other defendants were released from further liability relating to the litigation
by all the members of the plaintiffs' class.
The Company has received the approval of the Equal Employment Opportunity
Commission (the "EEOC") and the federal district court of a consent decree (the
"Consent Decree") settling a charge by the EEOC Commissioner filed in 1989 that
the Company violated Title VII of the Civil Rights Act of 1964, as amended.
Under the terms of the Consent Decree, the Company is required to pay
$2,255,000, representing back pay and interest, into a fund to be divided among
entry level claimants, and $245,000 into a fund to be divided among grocery
department management trainee claimants. The Company bears the costs of
administering the settlement, which the Company estimates to be approximately
$750,000. The Consent Decree includes certain requirements to properly notify
potential claimants and certain enhanced reporting requirements. The Consent
Decree is effective for a two-year period, except that the obligations to
distribute back pay, offer employment, retain information and make reports
extend beyond the two-year term. The Company has accrued $3,250,000 in full
settlement of this matter.
F-21
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Following the Tom Thumb acquisition, the Company terminated the MSP and in
respect of such terminations paid participants the greater of (i) the amount of
such participant's deferral and (ii) the present value of the participant's
accrued benefit (prorated for the years of service compared to the years
required to reach the age of 65). Thirty of the former MSP participants have
instituted a claim against the Company on behalf of all persons who were
participants in the MSP on its date of termination (which is alleged by
plaintiffs to be approximately 250 persons). On May 7, 1997, the plaintiffs
filed an amended 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. 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 has scheduled a pre-trial conference with the
parties for January 22. 1998. The trial is scheduled to commence during the 1998
calendar year. 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 does not anticipate an
unfavorable outcome based on management's independent analysis of the facts
relating to such litigation.
Other than the matter relating to the termination of the MSP, the Company
believes it is not a party to any pending legal proceedings, including ordinary
litigation incidental to the conduct of its business and the ownership of its
property, the adverse determination of which would have a materially adverse
effect on the Company, its operations, its financial condition or its cash
flows.
INSURANCE--The Company maintains a self-insurance program covering portions
of workers' compensation (employee safety program) and general and automobile
liability costs. The amounts in excess of the self-insured levels are fully
insured. Self-insurance accruals are based on claims filed and an estimate for
significant claims incurred but not reported.
ARBITRATION--The Company has initiated a legal action against Fleming, one
of its long-time suppliers. In the action, the Company alleges, among other
things, that Fleming violated the terms of a supply agreement signed in 1993.
Under the terms of the supply agreement, the Company was to purchase groceries
and other items at Fleming's cost, plus a small markup. Among the violations
alleged by the Company are claims that Fleming wrongfully manipulated its
costing procedures, which resulted in overcharges, and then unilaterally changed
the overall pricing formula. Additionally, the Company alleged that Fleming
failed to provide supporting documentation for purchases as required under the
contract. Since 1993 when the supply agreement was signed, the Company has
purchased approximately $2.0 billion in products from Fleming. Based on the
supporting documents provided to the Company by Fleming to
F-22
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE 16 WEEKS ENDED OCTOBER 18, 1997, IS UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
date, the Company will be seeking a substantial amount of damages from Fleming
and termination of the supply agreement. Fleming has filed an answer denying
each allegation and a counterclaim alleging that the Company failed to purchase
the quantities required by the supply agreement.
COMMITMENTS--The Company purchases a significant portion of its products
from Fleming and has signed a purchase commitment to buy certain levels of the
products from Fleming. If certain levels of purchases are not achieved, the
Company can incur certain penalties, none of which are material at this time.
The Company entered into severance and employment agreements with certain
officers and employees. Management has determined the expected severance
payments and postemployment benefits to approximate $4.5 million, which has been
accrued and reflected in the accompanying consolidated financial statements as
of June 28, 1997.
In connection with the Company's capital expenditure program, as of June 28,
1997, the Company had commitments to make $19.5 million in capital expenditures.
The Company is continually evaluating possible additional site locations and
related financing opportunities.
******
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... i
Prospectus Summary.............................. 1
Risk Factors.................................... 13
The Recapitalization............................ 20
Use of Proceeds................................. 22
Capitalization.................................. 23
Pro Forma Consolidated Condensed Financial
Statement..................................... 24
Selected Historical Consolidated Condensed
Financial and Other Data...................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 28
Business........................................ 37
Management...................................... 51
Principal Shareholders.......................... 61
Certain Relationships and Related
Transactions.................................. 63
Description of Capital Stock.................... 64
Description of Credit Facilities................ 66
The Exchange Offer.............................. 69
Description of the Exchange Notes............... 80
Exchange Offer; Registration Rights............. 112
Plan of Distribution............................ 115
Book Entry; Delivery and Form................... 116
Legal Matters................................... 117
Experts......................................... 117
Index........................................... I-1
Index to Consolidated Financial Statements...... F-1
</TABLE>
-------------------------------------------
PROSPECTUS
----------------------------
$150,000,000
[LOGO]
RANDALL'S FOOD MARKETS, INC.
OFFER TO EXCHANGE $150,000,000 OF ITS
9 3/8% SERIES B SENIOR SUBORDINATED NOTES
DUE 2007, WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT, FOR $150,000,000 OF ITS
OUTSTANDING 9 3/8% SENIOR SUBORDINATED
NOTES DUE 2007.
JANUARY 9, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1.B of the Texas Business Corporation Act, as amended (the
"TBCA"), grants to a corporation the power to indemnify a person who was, is or
is threatened to be made a named defendant or respondent in a proceeding because
the person is or was a director of the corporation against judgments, penalties
(including excise and similar taxes), fines, settlements and reasonable expenses
actually incurred in connection therewith, only if it is determined that the
person (1) conducted himself in good faith; (2) reasonably believed that (a) in
the case of conduct in his official capacity as a director of the corporation,
his conduct was in the corporation's best interests, and (b) in all other cases,
his conduct was at least not opposed to the corporation's best interests; and
(3) in the case of any criminal proceeding, he had no reasonable cause to
believe that his conduct was unlawful. Article 2.02-1.C limits the allowable
indemnification by providing that, except to the extent permitted by Article
2.02-1.E, a director may not be indemnified in respect of a proceeding in which
the person was found liable (1) on the basis that he improperly received a
personal benefit, whether or not the benefit resulted from an action taken in
his official capacity, or (2) to the corporation. Article 2.02-1.E provides that
if a director is found liable to the corporation or is found liable on the basis
that he received a personal benefit, the permissible indemnification (1) is
limited to reasonable expenses actually incurred by the person in connection
with the proceeding, and (2) shall not be made in respect of any proceeding in
which the person shall have been found liable for willful or intentional
misconduct in the performance of his duty to the corporation. Finally, Article
2.02-1.H provides that a corporation shall indemnify a director against
reasonable expenses incurred by him in connection with a proceeding in which he
is a named defendant or respondent because he is or was a director if he has
been wholly successful, on the merits or otherwise, in defense of the
proceeding.
With respect to the officers of a corporation, Article 2.02-1.O of the TBCA
provides that a corporation may indemnify and advance expenses to an officer of
the corporation to the same extent that it may indemnify and advance expenses to
directors under Article 2.02-I. Further, Article 2.02-1.O provides that an
officer of a corporation shall be indemnified as, and to the same extent,
provided by Article 2.02-1.H for a director.
The Articles of Incorporation and Bylaws of the Registrant provide for
indemnification of officers and directors as and to the fullest extent permitted
by the TBCA. In addition, the Registrant maintains officers' and directors'
insurance covering certain liabilities that may be incurred by officers and
directors in the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereto, which, individually or in
II-1
<PAGE>
the aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed to be underwriters, in addition to the information
called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 5 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 9, 1998.
RANDALL'S FOOD MARKETS, INC.
BY: *
-----------------------------------------
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Amendment No. 5 to
the Registration Statement has been signed on the 9th day of January, 1998 by
the following persons in the capacities indicated:
SIGNATURE TITLE
- ------------------------------ ---------------------------
* Chief Executive Officer and
- ------------------------------ Director (Principal
R. Randall Onstead, Jr. Executive Officer)
Senior Vice President of
/s/ LEE E. STRAUS Finance, Secretary and
- ------------------------------ Treasurer (Principal
Lee E. Straus Financial Officer)
* Vice President, Corporate
- ------------------------------ Controller (Principal
Curtis D. McClellan Accounting Officer)
* Director
- ------------------------------
Henry R. Kravis
* Director
- ------------------------------
George R. Roberts
* Director
- ------------------------------
Paul E. Raether
* Director
- ------------------------------
James H. Greene, Jr.
* Director
- ------------------------------
Nils P. Brous
* Director
- ------------------------------
Robert R. Onstead
Director
- ------------------------------
A. Benton Cocanougher
*BY: /s/ LEE E. STRAUS
.........................
ATTORNEY-IN-FACT
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
*2.1 Subscription Agreement dated as of April 1, 1997, among Randall's Food Markets, Inc. ("Randall's"),
Robert R. Onstead and RFM Acquisition LLC ("RFM Acquisition").
*2.2 Letter Agreement dated as of April 1, 1997 between Randall's and RFM Acquisition relating to
certain indemnification obligations of Randall's.
*2.3 Letter Agreement dated as of June 18, 1997 between Randall's and RFM Acquisition relating to
certain indemnification obligations of Randall's.
*3.1 Amended and Restated Articles of Incorporation of Randall's.
*3.2 By-Laws of Randall's.
*4.1 Indenture dated as of June 27, 1997 between Randall's and Marine Midland Bank, as Trustee (the
'Indenture').
*4.2 Form of 9 3/8% Senior Subordinated Note due 2007 (included in Exhibit 4.1).
*4.3 Form of 9 3/8% Series B Senior Subordinated Note due 2007 (included in Exhibit 4.1).
*4.4 Registration Rights Agreement dated as of June 27, 1997 among Randall's, BT Securities Corporation,
Chase Securities Inc., Goldman, Sachs & Co. and PaineWebber Incorporated.
*4.5 First Supplemental Indenture to the Indenture, dated as of September 8, 1997 between Randall's and
Marine Midland Bank, as Trustee.
*5.1 Opinion of Simpson Thacher & Bartlett.
*5.2 Opinion of Vinson & Elkins L.L.P.
*10.1 Settlement Agreement among Randall's and the other parties named therein relating to the Randall's
Food Markets, Inc. Employee Stock Ownership Plan.
*10.2 Voting, Repurchase and Shareholders Agreement, dated as of April 1, 1997, between RFM Acquisition
and the shareholders party thereto.
*10.3 Credit Agreement, dated as of June 27, 1997, among Randall's, the several lenders from time to time
parties thereto, and The Chase Manhattan Bank, as administrative agent.
*10.4 Registration Rights Agreement, dated as of June 27, 1997, between RFM Acquisition and Randall's.
*10.5 Employment Agreement of Robert R. Onstead.
*10.6 Employment Agreement of R. Randall Onstead, Jr.
*10.7 Employment Agreement of Ron W. Barclay.
*10.8 Termination Agreement of Bob L. Gowens.
*10.9 Registration Rights and Repurchase Agreement dated as of August 24, 1992 among Randall's, the
Morgan Stanley Leveraged Equity Fund II, L.P. and certain other shareholders parties thereto.
*10.10 Shareholder Agreement dated March 29, 1984 among Randall's and John N. Frewin, Rosemary Frewin
Gambino and certain other shareholders parties thereto.
*10.11 Shareholder Agreement dated April 8, 1985 among Randall's and John N. Frewin, Rosemary Frewin
Gambino and certain other shareholders parties thereto.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
*10.12 Randall's Food Markets, Inc. Corporate Incentive Plan.
*10.13(a) Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.13(b) First Amendment to Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.13(c) Second Amendment to Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.13(d) Third Amendment to Randall's Food Markets, Inc. Key Employee Stock Purchase Plan.
*10.14 Supply Agreement dated as of August 20, 1993 between Fleming Foods of Texas, Inc. and Randall's.
*10.15 Form of 1997 Stock Purchase and Option Plan for Key employees of Randall's Food Markets, Inc. and
Subsidiaries (the "1997 Plan").
*10.16 Form of Management Stockholder's Agreement to be executed by certain employees of Randall's in
connection with the 1997 Plan.
*10.17 Form of Non-Qualified Stock Option Agreement to be executed by certain employees of Randall's in
connection with the 1997 Plan.
*10.18 Form of Sale Participation Agreement to be executed by certain employees of Randall's in connection
with the 1997 Plan.
*10.19 Form of Pledge Agreement to be executed by certain employees of Randall's in connection with the
1997 Plan.
*10.20 Agreement dated December 31, 1980 between Topco Associates, Inc. (Cooperative) and Randall's.
*12 Computation of Ratio of Earnings to Fixed Charges.
*16 Letter regarding change in certifying accountant.
*21 Subsidiaries.
*23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5.1
hereto).
**23.2 Consent of Deloitte & Touche LLP, independent certified public accountants.
**23.3 Consent of Arthur Andersen LLP, independent certified public accountants.
*23.4 Consent of Vinson & Elkins LLP (included as part of its opinion filed as Exhibit 5.2 hereto).
*24 Powers of Attorney.
*25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Marine Midland Bank, as
Trustee.
*27 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
* Previously filed.
** Filed herewith.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 5 of Randall's Food Markets, Inc.
Registration Statement on Form S-4 (File No. 333-35457) of our report dated
August 15, 1997, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/__DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
January 7, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Amendment No. 5 to Form S-4 Registration Statement No. 333-35457 of our report
dated September 19, 1996, (except with respect to the matter discussed in the
eighth paragraph of Note 5, as to which the date is June 27, 1997), with respect
to the consolidated balance sheet of Randall's Food Markets, Inc. and
subsidiaries as of June 29, 1996; and the related consolidated statements of
operations, redeemable stock and stockholders' equity and cash flows for the
years ended June 29, 1996 and June 24, 1995, and to all references to our firm
included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
January 7, 1998
