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PROSPECTUS Filed Pursuant to Rule 424(b)(3)
Registration No. 333-84749
SAFEWAY INC.
COMMON STOCK
------------------------
On July 22, 1999, we agreed to acquire Randall's Food Markets, Inc., a
Texas corporation, by means of a merger, pursuant to which Randall's will be
merged into a wholly-owned subsidiary of Safeway. This prospectus relates to the
issuance of close-up shares of Safeway common stock to be issued to holders of
shares of Randall's common stock. Under the terms of the merger agreement,
holders of Randall's common stock will receive $25.05 in cash and .3204 shares
of Safeway common stock in exchange for each share of Randall's common stock,
subject to adjustment as described in the merger agreement.
The common stock of Safeway Inc. is listed on the New York Stock Exchange
under the symbol "SWY." On August 12, 1999, the last reported sale price of the
common stock on the New York Stock Exchange Composite Transactions Tape was
$48 15/16 per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SAFEWAY COMMON STOCK TO BE ISSUED IN
THE MERGER OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is August 13, 1999.
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TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 3
The Companies............................................. 3
What You Will Receive in the Merger....................... 3
Treatment of Randall's Stock Options...................... 4
Opinion of Financial Advisor.............................. 5
Interests of Members of Randall's Board of Directors and
Management in the Merger............................... 5
Accounting Treatment...................................... 6
Dissenters' Right of Appraisal............................ 6
Required Regulatory Approvals............................. 6
Material United States Federal Income Tax Consequences.... 6
Conditions to the Completion of the Merger................ 7
Termination............................................... 7
Voting Agreements......................................... 7
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
SAFEWAY................................................... 9
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
RANDALL'S................................................. 10
COMPARATIVE PER SHARE DATA.................................. 12
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION............. 13
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING
INFORMATION............................................... 14
THE MERGER.................................................. 15
Background of the Merger.................................. 15
Randall's Reasons for the Merger.......................... 19
Safeway's Reasons for the Merger.......................... 20
Financial Information Provided to Safeway by Randall's.... 20
Opinion of Financial Advisor.............................. 21
Interests of Members of Randall's Board of Directors and
Management in the Merger............................... 27
Accounting Treatment...................................... 31
Dissenters' Rights of Appraisal........................... 31
Required Regulatory Approvals............................. 33
Resale of Safeway Stock................................... 34
Material United States Federal Income Tax Consequences.... 34
THE MERGER AGREEMENT........................................ 37
Form of the Merger........................................ 37
Merger Consideration...................................... 37
Treatment of Randall's Options............................ 38
Conversion of Shares; Procedures for Exchange of
Certificates........................................... 38
Effective Time of the Merger.............................. 39
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Conditions to the Completion of the Merger................ 39
No Solicitation........................................... 40
Termination............................................... 42
Termination Fee........................................... 43
Employee Benefits......................................... 43
Indemnification and Insurance............................. 44
Expenses.................................................. 44
Conduct of Business Pending the Merger -- Randall's....... 44
Conduct of Business Pending the Merger -- Safeway......... 47
Representations and Warranties............................ 48
Amendment, Extension and Waiver........................... 49
THE VOTING AGREEMENTS....................................... 49
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT.................. 50
DESCRIPTION OF SAFEWAY CAPITAL STOCK........................ 52
General................................................... 52
Common Stock.............................................. 52
Preferred Stock........................................... 52
Dividends................................................. 52
Shares Eligible for Future Sale........................... 53
COMPARISON OF RIGHTS OF HOLDERS OF SAFEWAY COMMON STOCK AND
RANDALL'S COMMON STOCK.................................... 54
Securities That Have Voting Rights........................ 54
Preemptive Rights and Cumulative Voting................... 54
Election, Number, Classification and Removal of
Directors.............................................. 54
Voting Rights on Business Combinations; Transactions with
Interested Stockholders; Delaware General Corporation
Law Section 203 and Texas Business Corporation Act
Article 13............................................. 55
Right to Call Special Meetings............................ 56
Shareholder Action by Written Consent..................... 56
Amendment of Certificate/Articles of Incorporation and
Bylaws................................................. 56
Dissenters' Rights........................................ 57
EXPERTS..................................................... 58
LEGAL COUNSEL............................................... 58
WHERE YOU CAN FIND MORE INFORMATION......................... 59
ANNEXES
A AGREEMENT AND PLAN OF MERGER
B VOTING AGREEMENT WITH RFM ACQUISITION LLC
C VOTING AGREEMENT WITH ONSTEAD INTERESTS, LTD.
D VOTING AGREEMENT WITH R. RANDALL ONSTEAD, JR.
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E AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
F OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
G ARTICLES 5.11-5.13 OF THE TEXAS BUSINESS CORPORATION
ACT
H ANNUAL REPORT ON FORM 10-K FOR SAFEWAY FOR THE FISCAL
YEAR ENDED JANUARY 2, 1999
I QUARTERLY REPORT ON FORM 10-Q FOR SAFEWAY FOR THE
QUARTER ENDED MARCH 27, 1999
J QUARTERLY REPORT ON FORM 10-Q FOR SAFEWAY FOR THE
QUARTER ENDED JUNE 19, 1999
K PROXY STATEMENT FOR SAFEWAY'S 1999 ANNUAL MEETING OF
STOCKHOLDERS
L ANNUAL REPORT ON FORM 10-K FOR RANDALL'S FOR THE YEAR
ENDED JUNE 27, 1998
M QUARTERLY REPORT ON FORM 10-Q FOR RANDALL'S FOR THE
SIXTEEN WEEK PERIOD ENDED OCTOBER 17, 1998
N QUARTERLY REPORT ON FORM 10-Q FOR RANDALL'S FOR THE
TWELVE WEEK PERIOD ENDED JANUARY 9, 1999
O QUARTERLY REPORT ON FORM 10-Q FOR RANDALL'S FOR THE
TWELVE WEEK PERIOD ENDED APRIL 3, 1999
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE PROPOSED TRANSACTION?
A: Safeway will acquire Randall's by merging Randall's into a wholly-owned
subsidiary of Safeway.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Holders of Randall's common stock will receive $25.05 in cash and .3204
shares of Safeway common stock for each share of Randall's common stock.
Safeway will not issue fractional shares. Randall's shareholders who would
otherwise be entitled to receive a fractional share of Safeway common stock
will instead receive cash based on the market value of the fractional share
of Safeway common stock.
Q: WILL THE AMOUNT OF CASH AND SHARES PAID IN THE MERGER CHANGE BETWEEN NOW AND
THE TIME THE MERGER IS COMPLETED?
A: It is possible that the amount of cash may be decreased and the fraction of
the share of Safeway common stock may be increased so that Safeway and
Randall's each can receive an opinion of counsel that the merger will
constitute a reorganization for purposes of the Internal Revenue Code. If,
on the day before the closing of the merger, the closing price of a share of
Safeway common stock on the New York Stock Exchange is less than
approximately $56.616, then, the amount of cash will be decreased and the
fraction of the shares of Safeway common stock will be increased. Even if
the amounts of cash and shares are adjusted, the total value of the cash and
shares paid in the merger, based upon the closing price of the Safeway
common stock on the day prior to the closing of the merger, would not change
as a result of the adjustment. Based on the closing price of Safeway stock
on the New York Stock Exchange on August 12, 1999 of $48 15/16 per share,
and assuming that none of the Randall's shareholders exercise their
dissenters' rights, the merger consideration would be adjusted so that each
share of Randall's common stock would be converted into the right to receive
$23.62 in cash and approximately .3496 shares of Safeway common stock.
Safeway and Randall's will not be able to determine whether any adjustment
is necessary until the close of the trading day before the closing of the
merger.
Q: CAN THE VALUE OF THE TRANSACTION CHANGE BETWEEN NOW AND THE TIME THE MERGER
IS COMPLETED?
A: Yes. The value of the Safeway share portion of the consideration can change.
The market value of the merger consideration, and of the Safeway shares you
will receive in the merger, will increase or decrease as the price of
Safeway shares increases or decreases. Changes in the business, operations
or prospects of Safeway, general market and economic conditions, or other
factors may affect the price of Safeway shares. Most of these factors are
beyond our control. We urge you to obtain a current market quotation for
Safeway shares.
Q: ARE RANDALL'S SHAREHOLDERS ENTITLED TO DISSENT?
A: Yes. Holders of Randall's common stock are entitled to dissenters' rights in
connection with the merger by properly complying with the requirements of
the Texas
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Business Corporation Act. We have attached to this prospectus the full text
of the applicable provisions of Texas law as Annex G.
Q: WHEN DO SAFEWAY AND RANDALL'S EXPECT TO COMPLETE THE MERGER?
A: The companies are working towards completing the merger as quickly as
possible and expect that the merger will become effective shortly following
the Randall's shareholders' meeting.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT SAFEWAY AND RANDALL'S?
A: You may obtain more information from the various sources described under
"Where You Can Find More Information" on page 59.
Q: WILL MY RIGHTS AS A SHAREHOLDER CHANGE AS A RESULT OF THE MERGER?
A: Yes. Currently, Randall's shareholder rights are governed by Texas law and
Randall's articles of incorporation and bylaws, whereas Safeway shareholder
rights are governed by Delaware law and Safeway's charter and bylaws. For a
summary of the material differences between the rights of Randall's
shareholders and the rights of Safeway shareholders, see page 54 of this
prospectus.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you a transmittal form and
written instructions for exchanging your share certificates for cash and
Safeway common stock.
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SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the terms of the merger, you
should read carefully this entire document and the documents to which we have
referred you. See "Where You Can Find More Information" on page 59 of this
prospectus. Each item in this summary includes a page reference directing you to
a more complete description of that item.
References in this prospectus to "Randall's" refer to Randall's Food
Markets, Inc., including, unless the context otherwise requires, its
subsidiaries, references to "Safeway" refer to Safeway Inc., including, unless
the context otherwise requires, its subsidiaries, and references to "Merger Sub"
refer to SI Merger Sub, Inc.
THE COMPANIES
RANDALL'S FOOD MARKETS, INC.
3663 Briarpark
Houston, Texas 77042
(713) 268-3500
Randall's is the second largest supermarket operator in its principal
markets, with 117 stores located in major Texas metropolitan areas including
Houston (46 stores), Dallas/Fort Worth (59 stores), and Austin (12 stores).
SAFEWAY INC.
5918 Stoneridge Mall Road
Pleasanton, California, 94588
(925) 467-3000
Safeway is one of the largest food and drug retailers in North America,
with 1,528 stores at June 19, 1999. Safeway's U.S. retail operations are located
principally in northern California, southern California, Oregon, Washington,
Alaska, Colorado, Arizona, the Chicago metropolitan area and the Mid-Atlantic
region. Safeway's Canadian retail operations are located primarily in British
Columbia, Alberta and Manitoba/Saskatchewan. In support of its retail
operations, Safeway has an extensive network of distribution, manufacturing and
food processing facilities. Safeway has made a number of acquisitions in the
last two years: the acquisition of The Vons Companies, Inc. in 1997, Dominick's
Supermarkets, Inc. in late 1998 and Carr-Gottstein Foods Co. in 1999. Safeway
also holds a 49% interest in Casa Ley, S.A. de C.V. which, as of June 19, 1999,
operated 83 food and general merchandise stores in western Mexico.
SI Merger Sub, Inc. is a Texas corporation and an indirect wholly-owned
subsidiary of Safeway. Merger Sub was organized at the direction of Safeway to
effect the merger and has not conducted any business other than in connection
with the merger. The address and phone number of Merger Sub are the same as
Safeway's address and phone number.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 37)
As a result of the merger, each share of Randall's common stock outstanding
immediately before the effective time of the merger, other than shares for which
dissenters' rights have been exercised and shares held by Safeway or Randall's
or any of their wholly-owned subsidiaries, will be converted into the right to
receive $25.05 in cash and .3204 shares of Safeway common stock. We refer to the
.3204 number as the "exchange ratio" in this
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prospectus, and the cash payment and shares of Safeway common stock together as
the "merger consideration" in this prospectus. If all conditions to the merger
are satisfied or waived except for the condition that Safeway and Randall's each
receive an opinion of counsel that the merger constitutes a reorganization for
purposes of the Internal Revenue Code, the merger consideration will be adjusted
to decrease the cash payment and increase the exchange ratio so that the merger
consideration will consist of
- cash and Safeway common stock with an aggregate value equal to the
aggregate value of the merger consideration, before any adjustment, based
on the closing price of Safeway common stock on the New York Stock
Exchange on the trading day before the closing date, and
- the minimum number of shares of Safeway common stock necessary in order
for the conditions related to the delivery of tax opinions to be
satisfied.
So long as the value of the stock portion of the merger consideration, on the
trading day immediately before the closing date, represents at least 42% of the
aggregate value of the merger consideration, including cash paid for fractional
shares and cash paid or to be paid to dissenters, no adjustment will be made to
the exchange ratio or the cash portion of the merger consideration. Based on the
closing price of Safeway stock on the New York Stock Exchange on August 12, 1999
of $48 15/16 per share, and assuming that none of the Randall's shareholders
exercise their dissenters' rights, the merger consideration would be adjusted so
that each share of Randall's common stock would be converted into the right to
receive $23.62 in cash and approximately .3496 shares of Safeway common stock.
TREATMENT OF RANDALL'S OPTIONS (PAGE 29)
Pursuant to the merger agreement, each outstanding Randall's stock option
will either become an option to purchase Safeway common stock or be canceled in
exchange for cash and Safeway common stock. Subject to the approval of Randall's
shareholders with respect to some options all options will become immediately
exercisable as a result of the merger. Randall's options that will be converted
into Safeway stock options will become options to purchase a number of shares of
Safeway common stock equal to
(1) the per share value of one share of Safeway common stock,
determined using the closing price of Safeway common stock on the New York
Stock Exchange on the trading day before the merger is completed, divided
into
(2) the product of (a) the per share value of the per share merger
consideration, based on the closing price of Safeway common stock,
determined as described above, multiplied by (b) the total number of shares
of Randall's common stock subject to the Randall's stock option that is to
be converted.
The exercise price of the new Safeway stock option will be equal to (1) the
product of (A) the per share exercise price of Randall's common stock subject to
the original Randall's stock option and (B) the closing price of Safeway common
stock, determined as described above, divided by (2) the per share value of the
merger consideration, based on the closing price of Safeway common stock,
determined as described above, with the exercise price of the new Safeway option
rounded down to the nearest cent.
Each Randall's stock option that is not converted into a Safeway stock
option will be canceled and exchanged for a payment equal in value to the
product of (x) the total number of shares of Randall's common stock subject to
the Randall's stock option and (y) the excess of $41.75 over the exercise price
per share of the Randall's common stock subject to the Randall's stock option.
This payment, less applicable withholding taxes, will
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be made in Safeway common stock and cash in the same proportion as Safeway
common stock and cash is paid to shareholders of Randall's in the merger.
OPINION OF FINANCIAL ADVISOR (PAGE 21)
Randall's' financial advisor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, has given a written opinion to the board of directors of Randall's
that, as of July 22, 1999, the merger consideration to be received by Randall's
shareholders pursuant to the merger is fair from a financial point of view to
the holders of such shares, other than Safeway and its affiliates.
INTERESTS OF MEMBERS OF RANDALL'S BOARD OF DIRECTORS AND MANAGEMENT IN THE
MERGER (PAGE 27)
RFM Acquisition LLC, an affiliate of Kohlberg Kravis Roberts & Co. which we
will refer to as KKR, owns 18,579,686 shares of Randall's common stock,
representing approximately 62% of the outstanding shares of Randall's common
stock, and an option to purchase an additional 3,606,881 shares of Randall's
common stock at an exercise price of $12.11 per share. Five of the eight members
of the Randall's board of directors are affiliated with KKR. KKR will receive
the same merger consideration on the same terms as other Randall's shareholders
for its shares. KKR will sell its option based on the same per share merger
consideration to be paid to other Randall's shareholders for their shares less
the exercise price.
RFM Acquisition LLC, Onstead Interests, Ltd., an entity controlled by
Robert R. Onstead, a director and Chairman Emeritus of Randall's, and R. Randall
Onstead, Jr., the Chief Executive Officer and Chairman of the board of directors
of Randall's, have entered into voting agreements with Safeway relating to the
merger. See "-- Voting Agreements" below.
Another affiliate of KKR owns approximately 6% of the issued and
outstanding shares of Safeway common stock. Four of the nine members of the
Safeway board of directors are affiliated with KKR, and three of those directors
also serve as directors of Randall's. The special committee of the Safeway board
of directors that approved the merger was comprised of three directors who are
not affiliated with KKR.
In considering the recommendations of Randall's board of directors,
shareholders should be aware that some members of Randall's management and board
of directors have interests in the merger that are in addition to the interests
of Randall's shareholders generally. These interests include:
- some Randall's officers and directors are parties to severance and
employment agreements with Randall's which provide for enhanced benefits
in the event of termination of employment under specified circumstances
following the merger; these enhanced severance arrangements are subject
to the approval of Randall's shareholders;
- subject to the approval by Randall's shareholders with respect to some
options, all stock options held by directors and employees of Randall's
will become immediately exercisable in full;
- KKR will receive an $8.5 million fee upon completion of the merger for
its advisory services in connection with the merger;
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- in consideration for RFM Acquisition LLC, Onstead Interests, Ltd. and R.
Randall Onstead, Jr. entering into agreements to, among other things,
vote in favor of the approval of the merger agreement, Randall's has
agreed to indemnify each of those shareholders against any liabilities
which they may incur arising out of a claim that that person, in his or
its capacity as shareholder, has breached a fiduciary obligation to other
Randall's shareholders by entering into or performing his or its
obligations under those agreements; and
- Safeway has granted RFM Acquisition LLC registration rights with respect
to the shares of Safeway common stock it will acquire in the merger.
ACCOUNTING TREATMENT (PAGE 31)
The merger will be accounted for as a purchase, with Safeway as acquiror,
in accordance with generally accepted accounting principles. Under this method
of accounting, the purchase price will be allocated to assets acquired and
liabilities assumed based on their estimated fair values with any excess
allocated to goodwill. Safeway's income will not include income of Randall's
prior to the effective time of the merger.
DISSENTERS' RIGHTS OF APPRAISAL (PAGE 31)
Any shareholder of record of Randall's may exercise dissenters' rights in
connection with the merger by properly complying with the requirements of
Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act. We have
included the full text of these Articles in Annex G to this prospectus.
REQUIRED REGULATORY APPROVALS (PAGE 33)
United States antitrust laws prohibit Safeway and Randall's from completing
the merger until they and KKR have furnished information to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and a
required waiting period has expired or been terminated. Safeway, Randall's and
KKR each filed the required notification and report forms with the Antitrust
Division and FTC on August 6, 1999.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (PAGE 34)
We expect the merger to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986. Assuming the merger is so
treated, for federal income tax purposes, upon the exchange of Randall's common
stock for a combination of Safeway common stock and cash in the merger, a holder
of Randall's common stock generally will recognize capital gain, but not any
loss, in an amount equal to the lesser of
- the amount of gain realized by the holder or
- the amount of cash received by the holder.
No gain or loss will be recognized by Safeway, Merger Sub or Randall's as a
result of the merger.
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your tax
advisor for a full understanding of the tax consequences of the merger to you.
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CONDITIONS TO THE COMPLETION OF THE MERGER (PAGE 39)
The completion of the merger depends on meeting a number of conditions,
including
- the approval of the merger agreement by the holders of a majority of
Randall's outstanding shares of common stock;
- the absence of any new law or any injunction that effectively prohibits
the merger;
- the termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act;
- the effectiveness of the registration statement of which this prospectus
is a part relating to the shares of Safeway common stock to be issued in
the merger; and
- the receipt of legal opinions regarding material tax consequences of the
merger.
TERMINATION (PAGE 42)
The merger agreement may be terminated before the effective time of the
merger
(1) by mutual written consent of Safeway and Randall's;
(2) by either Safeway or Randall's if
- the merger is not completed on or before December 31, 1999;
- any governmental entity prohibits the merger; or
- Randall's shareholders do not approve the merger agreement at a
meeting of Randall's shareholders;
(3) by Safeway if the Randall's board
- withdraws or modifies in any adverse manner its recommendation
that the Randall's shareholders approve the merger agreement or
- recommends a superior proposal to acquire Randall's; and
(4) by Randall's, if the Randall's board approves a superior proposal to
acquire Randall's.
If the merger agreement is terminated because of the reasons described in (3) or
(4), or if either Randall's or Safeway terminates the merger agreement because
the required vote of Randall's shareholders is not obtained at a meeting of
Randall's shareholders and, under specified circumstances, Randall's enters into
a business combination within the following 12 months, Randall's must pay
Safeway a termination fee of $45 million.
VOTING AGREEMENTS (PAGE 49)
Concurrently with the execution of the merger agreement, Safeway entered
into voting agreements with RFM Acquisition LLC, Onstead Interests, Ltd. and R.
Randall Onstead, Jr. Together, these shareholders hold approximately 83% of
Randall's outstanding common stock.
Pursuant to the voting agreements, these shareholders have agreed, among
other things, to vote in favor of approval of the merger agreement and against
other proposals to acquire Randall's. These shareholders also have agreed that
if the merger agreement is terminated under specified circumstances, and the
shareholder sells its or his shares under specified circumstances within 12
months after termination of the voting agreement, each shareholder will pay 50%
of the consideration received in excess of $41.75 per share less transaction
costs, to Safeway.
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The voting agreements terminate on the earlier of the completion of the
merger and 60 days after the date on which the merger agreement is terminated.
Randall's has scheduled a special meeting on September 10, 1999 at which
the Randall's shareholders will vote on a proposal to approve the merger
agreement.
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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF SAFEWAY
In the table below, we provide you with selected historical consolidated
financial data of Safeway. We derived this information from the audited
consolidated financial statements of Safeway, except for the financial data for
the 24-week periods ended June 19, 1999 and June 20, 1998, which are derived
from unaudited financial statements. The information is only a summary and you
should read it in conjunction with Safeway's consolidated financial statements
and accompanying notes, which are included in Annexes H and J to this
prospectus. The results of operations for the 24 weeks ended June 19, 1999 and
June 20, 1998 contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The results for the 24 weeks ended June 19, 1999 are not
necessarily indicative of the results expected for the full year. In addition,
equity in earnings of unconsolidated affiliates includes equity in Vons'
earnings through the first quarter of 1997.
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
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24 WEEKS ENDED FISCAL YEAR ENDED
--------------------- ---------------------------------------------------------
52 53 52 52 52
JUNE 19, JUNE 20, WEEKS WEEKS WEEKS WEEKS WEEKS
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
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RESULTS OF OPERATIONS:
Sales................................ $12,450.2 $10,972.6 $24,484.2 $22,483.8 $17,269.0 $16,397.5 $15,626.6
--------- --------- --------- --------- --------- --------- ---------
Gross Profit......................... 3,716.6 3,186.3 7,124.5 6,414.7 4,774.2 4,492.4 4,287.3
Operating and administrative
expense............................ (2,821.8) (2,474.2) (5,522.8) (5,135.0) (3,882.5) (3,765.0) (3,675.2)
--------- --------- --------- --------- --------- --------- ---------
Operating profit..................... 894.8 712.1 1,601.7 1,279.7 891.7 727.4 612.1
Interest expense..................... (147.5) (104.4) (235.0) (241.2) (178.5) (199.8) (221.7)
Equity in earnings of unconsolidated
affiliates......................... 13.2 10.4 28.5 34.9 50.0 26.9 27.3
Other income, net.................... 2.0 1.7 1.7 2.9 4.4 2.0 6.4
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary loss................. 762.5 619.8 1,396.9 1,076.3 767.6 556.5 424.1
Income taxes......................... (320.3) (261.8) (590.2) (454.8) (307.0) (228.2) (173.9)
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary loss..... 442.2 358.0 806.7 621.5 460.6 328.3 250.2
Extraordinary loss, net of tax
benefit of $41.1, $1.3 and $6.7.... -- -- -- (64.1) -- (2.0) (10.5)
--------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 442.2 $ 358.0 $ 806.7 $ 557.4 $ 460.6 $ 326.3 $ 239.7
========= ========= ========= ========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary loss... $ 0.86 $ 0.71 $ 1.59 $ 1.25 $ 0.97 $ 0.68 $ 0.51
Extraordinary loss................. -- -- -- (0.13) -- -- (0.02)
--------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 0.86 $ 0.71 $ 1.59 $ 1.12 $ 0.97 $ 0.68 $ 0.49
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA:
Total assets......................... $11,813.7 $ 8,587.0 $11,389.6 $ 8,493.9 $ 5,545.2 $ 5,194.3 $ 5,022.1
Total debt........................... 5,088.3 3,207.5 4,972.1 3,340.3 1,984.2 2,190.2 2,196.1
</TABLE>
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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF RANDALL'S
In the table below, we provide you with selected historical consolidated
financial data of Randall's. We derived this information from the audited
consolidated financial statements of Randall's, except for the financial data
for the 40-week periods ended April 3, 1999 and April 4, 1998, which are derived
from unaudited financial statements. The information is only a summary and you
should read it in conjunction with Randall's consolidated financial statements
and accompanying notes, which are included in Annexes L and O to this
prospectus. The results of operations for the 40 weeks ended April 3, 1999 and
April 4, 1998 contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The results for the 40 weeks ended April 3, 1999 are not
necessarily indicative of the results expected for the full year.
(DOLLARS IN MILLIONS EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
40 WEEKS ENDED FISCAL YEAR ENDED
------------------- ----------------------------------------------------
APRIL 3, APRIL 4, JUNE 27, JUNE 28, JUNE 29, JUNE 24, JUNE 25,
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............ $1,997.2 $1,851.8 $2,419.0 $2,345.0 $2,368.6 $2,328.2 $2,304.5
Cost of sales(1)..... 1,442.5 1,345.1 1,755.2 1,711.8 1,739.8 1,728.7 1,718.7
-------- -------- -------- -------- -------- -------- --------
Gross profit......... 554.7 506.7 663.8 633.2 628.8 599.5 585.8
Selling, general and
administrative
expenses........... 429.0 412.7 541.5 559.6 506.1 501.6 495.3
Depreciation and
amortization....... 46.0 38.0 50.9 48.9 45.8 47.4 45.1
Interest expense,
net................ 26.4 25.6 33.0 36.8 39.0 43.4 50.4
Gain on sale of
warehouse.......... -- -- -- -- -- -- (5.2)
Litigation
charge(2).......... -- -- -- 9.5 1.0 -- --
Severance/benefits
charge(3).......... -- -- -- 4.5 -- -- --
Estimated store
closing costs(1)... -- -- -- 29.8 1.2 -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary
item............... 53.3 30.4 38.4 (55.9) 35.7 7.1 0.2
(Provision) benefit
for income taxes... (23.0) (13.9) (17.7) 15.2 (16.3) (7.0) (3.7)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary
item............... 30.3 16.5 20.7 (40.7) 19.4 0.1 (3.5)
Loss on early
extinguishment of
debt(4)............ -- -- -- (9.8) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ 30.3 $ 16.5 $ 20.7 $ (50.5) $ 19.4 $ 0.1 $ (3.5)
======== ======== ======== ======== ======== ======== ========
Fully diluted
earnings (loss) per
share:
Income (loss)
before
extraordinary
loss............... $ 0.97 $ 0.55 $ 0.69 $ (2.51) $ 0.80 $ -- $ (0.30)
Extraordinary
loss............... -- -- -- (0.57) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income
(loss)............. $ 0.97 $ 0.55 $ 0.69 $ (3.08) $ 0.80 $ -- $ (0.30)
======== ======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 15
<TABLE>
<CAPTION>
40 WEEKS ENDED FISCAL YEAR ENDED
------------------- ----------------------------------------------------
APRIL 3, APRIL 4, JUNE 27, JUNE 28, JUNE 29, JUNE 24, JUNE 25,
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(end of period):
Total assets......... 1,011.9 869.2 883.8 862.4 823.3 816.8 876.8
Total long-term debt
and capital lease
obligations........ 438.7 343.3 342.5 362.2 438.0 463.9 533.3
Redeemable common
stock.............. 6.7 4.9 5.2 5.0 31.1 18.8 16.1
</TABLE>
(1) Cost of sales for fiscal year 1997 includes inventory losses of
approximately $3.0 million recorded in connection with Randall's plan
to close, replace or sell certain stores. Estimated store closing costs
in fiscal year 1997 represents an additional charge recorded in
connection with such planned closures.
(2) With respect to litigation expense, during fiscal year 1997, Randall's
increased its litigation reserve by $9.5 million to fully reserve for
the settlement of a lawsuit in which two individuals alleged on behalf
of Randall's Employee Stock Ownership Plan which is referred to as the
ESOP, and certain participants and former participants in and
beneficiaries of the ESOP alleged that Randall's, certain employees of
Randall's 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. Randall's concluded it was
desirable to settle the litigation in order to avoid further expense,
inconvenience and distractions, as well as the uncertainty and risks
inherent in litigation.
(3) Severance/benefit charge represents a charge recorded in connection
with departure of certain executives and other employees of Randall's,
as well as certain charges relating to benefits granted under certain
employment agreements.
(4) Loss on extinguishment of debt represents an extraordinary item of $9.8
million, net of taxes of $6.0 million, resulting from the early
extinguishment of debt.
11
<PAGE> 16
COMPARATIVE PER SHARE DATA
The following table sets forth the historical earnings and book value per
share of Safeway and Randall's. The unaudited pro forma combined information is
based on the historical financial statements of Safeway and Randall's, as
applicable, as adjusted to reflect consummation of the merger using the purchase
method of accounting.
It is important that when you read this information, you read along with it
the financial statements and accompanying notes of Safeway and Randall's
included in the annexes to this Prospectus. You should not rely on the pro forma
per share data as being indicative of the results of operations or the financial
condition that would have been reported by the combined company had the merger
been in effect during these periods or that may be reported in the future.
The pro forma combined book value per common share amount is calculated by
dividing total pro forma common stockholders' equity by the sum of total
outstanding shares of Safeway common stock plus new shares of Safeway common
stock to be issued in the merger, based on the number of shares of Randall's
common stock outstanding as of the date of the merger agreement and assuming
that all Randall's options are exercised immediately prior to closing. The
Randall's pro forma equivalent amounts are calculated by multiplying Safeway's
pro forma combined amounts by the exchange ratio of .3204.
<TABLE>
<CAPTION>
24 WEEKS FISCAL YEAR
ENDED JUNE 19, ENDED JANUARY 2,
1999 1999
-------------- ----------------
<S> <C> <C>
HISTORICAL -- SAFEWAY:
Diluted earnings per share........................... $0.86 $1.59
Book value per common share.......................... 7.25 6.29
</TABLE>
<TABLE>
<CAPTION>
40 WEEKS FISCAL YEAR
ENDED APRIL 3, ENDED JUNE 27,
1999 1998
-------------- --------------
<S> <C> <C>
HISTORICAL -- RANDALL'S:
Diluted earnings per share............................. $0.97 $0.69
Book value per common share............................ 8.77 7.79
</TABLE>
<TABLE>
<CAPTION>
24 WEEKS FISCAL YEAR
ENDED JUNE 19, ENDED JANUARY 2,
1999 1999
-------------- ----------------
<S> <C> <C>
PRO FORMA COMBINED DILUTED EARNINGS PER SHARE:
Per Safeway share.................................... $0.83 $1.48
Equivalent per Randall's share....................... 0.27 0.47
PRO FORMA COMBINED BOOK VALUE PER SHARE:
Per Safeway share.................................... $8.27 $7.34
Equivalent per Randall's share....................... 2.65 2.35
</TABLE>
12
<PAGE> 17
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Safeway common stock is quoted on the New York Stock Exchange under the
symbol "SWY". There is no established public trading market for Randall's common
stock.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sale prices per share for Safeway common stock as reported
on the New York Stock Exchange Composite Transactions Tape.
<TABLE>
<CAPTION>
HIGH LOW
---- -------
<S> <C> <C>
1997:
First Quarter........................................... $26 $20 9/16
Second Quarter.......................................... 24 13/16 21 1/8
Third Quarter........................................... 27 3/4 23 1/16
Fourth Quarter.......................................... 31 23/32 25 11/32
1998:
First Quarter........................................... $37 1/4 $30 1/2
Second Quarter.......................................... 40 7/16 34
Third Quarter........................................... 46 3/4 37 1/4
Fourth Quarter.......................................... 61 3/8 37 5/8
1999:
First Quarter........................................... $62 7/16 $50 5/16
Second Quarter.......................................... 56 43 15/16
Third Quarter (through August 12, 1999)................. 55 46 3/8
</TABLE>
On July 22, 1999, the last full day of trading before the public
announcement of the execution of the merger agreement, the closing sale price of
Safeway common stock as reported on the New York Stock Exchange Composite
Transactions Tape was $50 3/4 per share.
The closing sale price for Safeway common stock as reported on the New York
Stock Exchange Composite Transactions Tape was $48 15/16 per share on August 12,
1999.
Neither Safeway nor Randall's has declared or paid any cash dividends on
their common stock for the periods presented. Safeway does not currently intend
to declare or pay any cash dividends. Any determination to pay dividends in the
future will be at the discretion of the Safeway board of directors and will be
dependent upon Safeway's results of operations, financial condition, capital
expenditures, working capital requirements, any contractual restrictions and
other factors deemed relevant by its board of directors. Safeway's credit
agreement contains restrictions on Safeway's ability to pay cash dividends on
Safeway common stock.
13
<PAGE> 18
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This prospectus and the documents attached as annexes to this prospectus
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to risks and
uncertainties and are based on the beliefs and assumptions of management of
Safeway and Randall's, based on information currently available to each
company's management. These statements relate to, among other things, capital
expenditures, cost reduction, cash flow and operating improvements and Safeway
and Randall's use of words or phrases such as "anticipate," "estimate," "plans,"
"projects," "continuing," "ongoing," "expects," "management believes," "the
Company believes," "the Company intends," "we believe," "we intend" and similar
words or phrases to identify these statements. The principal factors that could
cause actual results to differ materially from the forward-looking statements
include the following factors:
- general business and economic conditions in operating regions, including
the rate of inflation, population, employment and job growth in our
markets;
- pricing pressures and other competitive factors, which could include
pricing strategies, store openings and remodels;
- results of programs to reduce costs;
- the ability to integrate any acquired companies and achieve operating
improvements at those companies;
- increases in labor costs and relations with union bargaining units
representing our employees;
- issues arising from addressing year 2000 information technology issues;
- expansion, renovation and opening of new stores by competitors;
- failure to obtain new customers or retain existing customers;
- inability to carry out strategies to accelerate new store development and
remodeling programs, differentiate products and services, leverage
frequent shopper programs and increase private label sales;
- loss or retirement of key executives;
- higher selling, general and administrative expenses occasioned by the
need for additional advertising, marketing, administrative or management
information systems expenditures;
- adverse publicity and news coverage;
- opportunities or acquisitions that Safeway pursues; and
- the availability and terms of financing.
You should understand that these factors, in addition to those discussed
elsewhere in this prospectus could affect the future results of Safeway,
Randall's and the combined entity of Safeway and Randall's, and could cause
those results to be materially different from those expressed in the
forward-looking statements. Safeway and Randall's do not undertake any
obligation to update any forward-looking statements to reflect events or
circumstances arising after the date of this prospectus.
14
<PAGE> 19
THE MERGER
BACKGROUND OF THE MERGER
RANDALL'S
Randall's was founded by Robert R. Onstead, R. C. Barclay and Norman N.
Frewin in Houston, Texas in 1966 with the purchase of two existing grocery
stores. Since then, Randall's has expanded its operations through internal
growth and acquisition. In 1992, Randall's acquired Cullum Companies, Inc., a
company that operated 62 stores in Dallas and Austin under the Tom Thumb banner.
In 1994, Randall's acquired 15 stores from AppleTree Markets, Inc. Today,
Randall's operates 117 stores located in Houston, Dallas/ Fort Worth and Austin.
In April 1997, Randall's entered into a transaction pursuant to which, in
June 1997 RFM Acquisition LLC, a limited liability company formed at the
direction of KKR, acquired 18,579,686 shares of Randall's common stock (which
represents approximately 62% of the outstanding Randall's shares) and an option
to purchase 3,606,881 shares of Randall's common stock at an exercise price of
$12.11 per share. Five executives of KKR, Nils P. Brous, James H. Greene, Jr.,
Henry R. Kravis, Paul E. Raether and George R. Roberts, are members of the
Randall's board of directors. Each of those individuals owns 5,000 shares of
Randall's common stock directly.
SAFEWAY
Safeway began operations in 1926 and today is one of the largest food and
drug retailers in North America, with 1,528 stores. In 1986, a corporation
formed at the direction of KKR acquired Safeway. In recent years, affiliates of
KKR have sold a substantial portion of their Safeway stock. KKR Associates, an
affiliate of KKR, owns 30,348,647 shares of Safeway common stock (which
represents approximately 6% of the issued and outstanding Safeway shares). Four
executives of KKR, Messrs. Greene, Kravis and Roberts and Robert I. MacDonnell,
are members of the Safeway board of directors.
BACKGROUND OF THE MERGER
Over the past few years, Safeway has pursued a growth strategy which has
focused on acquisitions. In April 1999, Steven A. Burd, Chairman, President and
Chief Executive Officer of Safeway, telephoned R. Randall Onstead, Jr., Chairman
and Chief Executive Officer of Randall's, to explore whether Randall's might be
interested in pursuing such a transaction. In early May, Messrs. Burd and
Onstead met to discuss further whether an acquisition of Randall's might be
attractive to both companies. On about May 20, 1999, Safeway and Randall's
executed a confidentiality agreement covering information to be furnished to
Safeway by Randall's. During May 1999, Mr. Burd met with Mr. Onstead on several
occasions to discuss operational and financial information about Randall's. In
late May, members of Safeway management met with members of Randall's
management, and Randall's furnished Safeway with certain non-public information
regarding Randall's.
At a regularly scheduled board meeting in May 1999, the Randall's board was
briefed on the conversations that had taken place with Safeway and discussed the
possibility of a transaction with Safeway. In early June, members of Safeway
management had a preliminary meeting with representatives of Randall's to
discuss a potential valuation of Randall's and the issue of whether Safeway
would pay cash or stock to the Randall's shareholders. The parties did not reach
agreement on the appropriate valuation or form of
15
<PAGE> 20
consideration. Shortly thereafter, Safeway and Randall's suspended discussions
concerning a possible transaction and Safeway returned the information provided
by Randall's.
Later in June, representatives of Safeway and Randall's discussed a
possible structure for an acquisition that would permit Safeway to pay as much
as 60% of the consideration in cash. Safeway's management believed that paying a
portion of the consideration in cash would be more accretive to Safeway's
earnings in the long-term than issuing shares of stock for the total
consideration. In addition, under a part cash and part stock structure,
Randall's shareholders could receive the shares of Safeway stock on a
tax-deferred basis. These discussions led to further negotiations regarding
value. In early July 1999, representatives of Safeway and Randall's agreed on an
enterprise value for Randall's of $1.8 billion. The parties agreed to a
structure in which the merger consideration would consist of approximately 60%
cash and 40% stock, subject to applicable tax considerations necessary to make
the transaction a reorganization under the Internal Revenue Code so that the
stock portion of the consideration would be tax-deferred, and the Safeway shares
would be valued at $49 7/8 per share for purposes of determining the stock
portion of the consideration. This valuation was subsequently increased to
$52 1/8, as part of the negotiations described below.
On July 7, 1999, Safeway's board of directors met by telephone conference
to discuss the possible acquisition of Randall's. At this meeting, Safeway's
senior management described the status of the negotiations and provided an
overview of the proposed structure of the transaction. In light of the fact that
four executives of KKR served on the Safeway board of directors, the ownership
interests in Randall's and Safeway of affiliates of KKR, the role of KKR as
financial advisor to, and a representative of, Randall's in the negotiations
with Safeway, the Safeway board established a special committee of outside
directors who are not affiliated with KKR. The special committee was comprised
of Paul Hazen, Rebecca Stirn and William Tauscher. The Safeway board authorized
the special committee to review and approve or disapprove the proposed
acquisition of Randall's, and, if approved, to recommend the transaction to the
Safeway board. Immediately following the board meeting, the special committee
met. At that meeting, senior management presented in more detail its view of the
benefits to Safeway of acquiring Randall's. Management stated its view that
while Randall's was a strong operator, management believed there would be
opportunities for Safeway to implement programs at Randall's to save costs and
improve operations. The special committee determined that it would retain an
independent financial advisor to assist it in its review of the financial
aspects of the proposed acquisition.
Over the next two weeks representatives of Randall's and Safeway negotiated
a definitive merger agreement. Those negotiations covered all aspects of the
merger agreement, including the scope of the representations and warranties, the
circumstances under which the parties would have the right to terminate the
agreement and the amount of a termination fee, the conditions to Safeway's
obligations to consummate the merger, the treatment of Randall's employee
benefit plans following the merger, and the restrictions on the operations of
Randall's and Safeway pending completion of the merger. During that time,
Safeway insisted, as a condition to signing the definitive agreement, that RFM
Acquisition LLC and Messrs. Robert R. Onstead and R. Randall Onstead, Jr.
execute agreements pursuant to which they would agree to vote shares of
Randall's stock that they owned in favor of the merger and against competing
proposals. The parties engaged in extensive negotiations over the terms of the
voting agreements, including the termination provisions. In connection with its
entering into a voting agreement, RFM Acquisition LLC requested that Safeway
expand the existing registration rights agreement
16
<PAGE> 21
with its affiliate, KKR Associates, to include the Safeway shares that would be
issued in the merger.
During July, Safeway and its advisors conducted a financial and legal due
diligence investigation of Randall's. As a portion of the proposed consideration
would be Safeway common stock, Randall's and its representatives informed
Safeway that they would need to conduct due diligence regarding Safeway. On or
about July 12, 1999, Safeway and Randall's executed a new confidentiality
agreement covering information to be furnished to Randall's by Safeway, and
Safeway provided certain legal and financial information to Randall's and its
representatives.
During the week of July 12, 1999, those directors of Randall's who are not
executives of KKR and who will be referred to as the independent directors began
working directly with Merrill Lynch, Pierce, Fenner & Smith Incorporated and
provided Merrill Lynch certain publicly available information and other
financial information and projections relating to Randall's prepared by
Randall's management. The independent directors requested Merrill Lynch to
review the information provided and the proposed terms of the merger and perform
a financial analysis in order to determine if the consideration proposed to be
paid by Safeway in the merger was fair from a financial point of view to
Randall's shareholders, other than Safeway and its affiliates. The independent
directors also requested Merrill Lynch to make a presentation to the independent
directors and the full board to discuss the underlying analyses performed by
Merrill Lynch regarding its opinion. The independent directors also began
working directly with Vinson & Elkins so that Vinson & Elkins could aid the
independent directors in evaluating the proposed transaction from a legal point
of view. On July 16, 1999, the Randall's independent directors were informally
updated as to the status of the negotiations with Safeway.
On July 19, 1999, the Safeway special committee met to review the proposed
acquisition. Senior management and the special committee's financial advisors
presented their analysis of the operations and financial condition of Randall's.
Senior management also provided the special committee with an update on the
negotiations and reported the results of Safeway's due diligence review of
Randall's. Safeway's management informed the special committee of several
important issues that the parties needed to resolve before definitive agreements
could be finalized.
On July 20, 1999, at a regular meeting of the Safeway board of directors,
the board expanded the authority of the special committee. The Safeway board
authorized the special committee to approve the transaction and authorize the
issuance of the Safeway shares in the merger, without any further action of the
Safeway board. Later that day, members of Safeway management, representatives of
Randall's and KKR and counsel further negotiated provisions of the draft merger
agreement and the voting agreements. Over the next two days, representatives of
Safeway and Randall's continued to negotiate in an effort to reach a definitive
agreement.
On July 21, 1999, the Randall's board of directors held a special meeting
by telephone conference to discuss the proposed acquisition of Randall's by
Safeway. At this meeting, the full board of directors received a presentation
concerning the board's legal duties and, in particular, the role of the
independent directors in light of the representation on both the Randall's and
Safeway boards of directors of KKR executives, the ownership interest in both
Randall's and Safeway of affiliates of KKR and the role of KKR as a financial
advisor to, and a representative of, Randall's in the negotiations with Safeway
(and the proposed payment by Randall's of a fee of $8.5 million in consideration
for those advisory services). The Randall's board of directors also received a
detailed presentation of the
17
<PAGE> 22
terms of the proposed transaction and of the remaining unresolved issues.
Following a discussion of these matters, the full Randall's board of directors
delegated to the independent directors the right to engage their own financial
and legal advisors. Immediately after the meeting of the full board of
directors, the independent directors met among themselves and formally retained
Vinson & Elkins as their legal advisor and Merrill Lynch as their financial
advisor to render an opinion as to the fairness from a financial point of view
of the consideration to be received by Randall's shareholders in the merger,
other than Safeway and its affiliates. The independent directors had been
working with their legal advisor and their financial advisor since July 12,
1999. The independent directors then conferred among themselves and their
advisors before adjourning.
On July 22, 1999, the independent directors met in person with Vinson &
Elkins and Merrill Lynch. The other members of the Randall's board of directors
were not present at this meeting. During this meeting, Merrill Lynch reviewed
with the independent directors the analyses performed by Merrill Lynch
underlying its conclusion that the proposed consideration to be received by
Randall's shareholders in the merger was fair from a financial point of view to
the Randall's shareholders (other than Safeway and its affiliates). Merrill
Lynch informed the independent directors that it was prepared to render a
written opinion to this effect. The independent directors also discussed the
terms of the transaction with Vinson & Elkins. Following the meeting of the
independent directors, the remaining Randall's directors joined the board
meeting by teleconference so that the entire board of directors could be given a
report as to the final proposed terms of the transaction and hear a review of
the analyses performed by Merrill Lynch. During these meetings, Merrill Lynch
orally rendered its opinion described above to the independent directors and to
the full board, which opinion was subsequently confirmed by writing. After this
discussion and presentation, the members of the Randall's board of directors who
are executives of KKR left the meeting. Following their departure and after
further discussion, the Randall's independent directors unanimously voted to
approve (1) the merger agreement, the merger and the other transactions and
agreements contemplated by the merger agreement, including the voting
agreements, and (2) the arrangements between KKR and its affiliates and
Randall's, including an engagement letter with KKR for advisory services
providing for the payment by Randall's of a fee of $8.5 million, payable at the
effective time of the merger, and an indemnification agreement with RFM
Acquisition LLC, Onstead Interests, Ltd. and R. Randall Onstead, Jr. related to
the voting agreements. Following the deliberations of and actions by the
Randall's independent directors, the full board of Randall's reconvened and was
given a report as to the actions taken by the Randall's independent directors.
The full board then discussed the transactions contemplated by the merger
agreement and all of the directors present voted unanimously to approve the
merger agreement, the merger and the other transactions and agreements
contemplated by the merger agreement.
On July 22, 1999, the Safeway special committee met and reviewed with
counsel the terms of the merger agreement, the voting agreements and the
amendment to the KKR registration rights agreement in substantially final form.
After discussion with and questions to senior management and its financial
advisor, the special committee unanimously approved the merger agreement, the
merger and the other transactions and agreements contemplated by the merger
agreement.
On July 22, 1999, representatives of Safeway and Randall's executed the
Merger Agreement, Voting Agreements and Amendment to Registration Rights
Agreement. The parties publicly announced the execution of the merger agreement
in a joint press release early the next morning.
18
<PAGE> 23
RANDALL'S REASONS FOR THE MERGER
In reaching its decision to approve the merger agreement and the merger,
the Randall's board of directors, including the directors unaffiliated with KKR
acting separately, considered a number of factors, including, without
limitation, the following material factors:
- the amount of consideration to be received by the shareholders of
Randall's in the merger;
- the historical and projected information concerning the business,
financial performance and operations of Randall's and Safeway;
- a review of the possible strategic and financial alternatives available
to Randall's, including the possibility of continuing to operate
Randall's as an independent entity, as well as the risks and
uncertainties associated with those alternatives;
- the current trend towards consolidation in the supermarket industry,
which increases the competitive risks facing Randall's;
- the opportunity for Randall's shareholders to participate, as holders of
Safeway common stock, in a larger, more diversified company, including
participation in the value that may be generated through the combination
of Randall's and Safeway;
- the historical market prices and trading information with respect to
Safeway common stock and current financial market conditions;
- the fact that the holders of approximately 83% of the shares of Randall's
common stock (including a majority of the shares of Randall's common
stock held by holders unaffiliated with KKR) were prepared to commit to
vote their shares in favor of the approval of the merger agreement;
- the written opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
that, on the basis and subject to the assumptions and limitations set
forth in the opinion, the merger consideration was fair from a financial
point of view to the holders of Randall's common stock, other than
Safeway and its affiliates, and the financial presentation made by
Merrill Lynch to the Randall's board of directors in connection with the
delivery of its opinion;
- the ability under the merger agreement of Randall's, subject to specified
conditions, to (a) respond to an unsolicited acquisition proposal and (b)
terminate the merger agreement if the Randall's board of directors
approves a superior proposal, subject to the payment of a termination fee
in an amount which the Randall's board of directors believed would not
meaningfully impair the possibility of a more favorable competing
transaction; and
- the other terms and conditions of the merger agreement, including the
relatively limited number of closing conditions which provides increased
certainty that the merger will be completed.
This discussion of the information and factors considered by the Randall's
board of directors is not intended to be exhaustive. In view of the variety of
material factors considered in connection with its evaluation of the merger, the
Randall's board of directors did not find it practicable to, and did not
quantify or otherwise assign relative weights to, the specific factors
considered in reaching its determination. In addition, individual members of the
Randall's board of directors may have given different weights to different
factors. For a discussion of the interests of some members of management of
Randall's and
19
<PAGE> 24
the Randall's board of directors, see "-- Interests of Members of Randall's
Board of Directors and Management in the Merger".
SAFEWAY'S REASONS FOR THE MERGER
A special committee of the board of directors of Safeway unanimously
approved Safeway's acquisition of Randall's, the merger agreement and the
issuance of Safeway common stock in connection with the merger. The special
committee was comprised of three directors who are not affiliated with KKR.
Neither the Delaware General Corporation Law nor the New York Stock Exchange
requires that Safeway stockholders approve the merger agreement or the merger,
and Safeway is not seeking approval of its stockholders.
In reaching its conclusion to approve the merger agreement and the merger,
the special committee of Safeway's board of directors was favorably influenced
by the following factors:
- a component of Safeway's long-term business strategy is growth through
acquisition. Safeway has identified certain criteria for considering
acquisition targets, which include strong market share and the potential
for improving EBITDA margin. Safeway believes that the merger is
consistent with and in furtherance of this strategy;
- the continuing trend of consolidation in the grocery retailing industry
and the importance of operational scale and geographic diversity in
remaining competitive in the long term;
- the opportunities presented by the merger to expand Safeway's presence
into Texas; and
- the terms and conditions of the merger agreement and the agreements
contemplated by the merger agreement, including the form and amount of
consideration and the representations, warranties, covenants and
conditions contained in those agreements.
This discussion of the information and factors considered by the special
committee of the Safeway board of directors is not intended to be exhaustive. In
view of the variety of material factors considered in connection with its
evaluation of the merger, the special committee did not find it practicable to,
and did not quantify or otherwise assign relative weights to, the specific
factors considered in reaching its determination. In addition, individual
members of the special committee may have given different weights to different
factors.
FINANCIAL INFORMATION PROVIDED TO SAFEWAY BY RANDALL'S
During the course of discussions between Safeway and Randall's, Randall's
provided to Safeway information about Randall's which Randall's believes was not
and is not publicly available. Set forth below is certain projected financial
information for 2000. Randall's does not as a matter of course publicly disclose
forecasts as to its future revenues, earnings or other financial information.
Safeway has not summarized forecast data furnished to it with respect to periods
beyond 2000 due to the necessarily more speculative and even less reliable
character of such data at points so far in the future. The 2000 forecasts were
based upon a variety of assumptions, including same store sales growth of
between 1.0% and 2.5%, the addition of eight new stores and capital expenditures
of $190 million and other assumptions relating to the achievement of strategic
goals, objectives and targets over the applicable period. Those assumptions
involve judgments
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<PAGE> 25
with respect to among other things, strategies with respect to new store
development and remodeling programs, transition into self-distribution, future
competitive conditions, financial market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Randall's. The projections were not
prepared with a view toward public disclosure, use in this prospectus or
compliance with published guidelines of the Commission, nor were they prepared
in accordance with the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
projections. In light of the uncertainties inherent in projected data, we
caution shareholders of Randall's not to place undue reliance on the following
projections.
FISCAL YEAR ENDED JUNE 24, 2000 PROJECTIONS
(IN MILLIONS)
<TABLE>
<S> <C>
Revenues............................. $2,951.0
Net Income........................... 67.2
EBITDA............................... 224.3
</TABLE>
Neither Safeway's nor Randall's independent auditors, nor any other
independent accountants, have compiled, examined, or performed any procedures
with respect to the prospective financial information contained herein, nor have
they expressed any opinion or any other form of assurance on such information or
its achievability, and assume no responsibility for, and disclaim any
association with, the prospective financial information.
OPINION OF FINANCIAL ADVISOR
On July 22, 1999, at a meeting of the Randall's board, Merrill Lynch
delivered an oral opinion that, as of that date and on the basis of and subject
to the matters reviewed with the Randall's board, the consideration to be
received by the holders of Randall's common stock pursuant to the merger was
fair from a financial point of view to those holders, other than Safeway and its
affiliates. Merrill Lynch confirmed the opinion in writing later that day.
THE FULL TEXT OF THE MERRILL LYNCH OPINION IS ATTACHED AS ANNEX F TO THIS
PROSPECTUS AND IS INCORPORATED BY REFERENCE. THE MERRILL LYNCH OPINION EXPLAINS
THE ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, THE MATTERS CONSIDERED AND THE
LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN BY MERRILL LYNCH. HOLDERS OF
RANDALL'S COMMON STOCK ARE URGED TO, AND SHOULD, READ THE MERRILL LYNCH OPINION
CAREFULLY AND IN ITS ENTIRETY. ALTHOUGH MERRILL LYNCH ACTED AS A FINANCIAL
ADVISOR TO THE INDEPENDENT MEMBERS OF THE RANDALL'S BOARD, THE MERRILL LYNCH
OPINION WAS FOR THE USE AND BENEFIT OF ALL THE MEMBERS OF THE RANDALL'S BOARD.
THE MERRILL LYNCH OPINION ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, TO THE HOLDERS OF RANDALL'S COMMON STOCK OTHER THAN SAFEWAY AND ITS
AFFILIATES, OF THE CONSIDERATION TO BE RECEIVED PURSUANT TO THE MERGER. THE
MERRILL LYNCH OPINION DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY
RANDALL'S TO ENGAGE IN THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY HOLDER OF RANDALL'S COMMON STOCK AS TO HOW ANY HOLDER SHOULD VOTE ON THE
MERGER. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERRILL LYNCH
OPINION.
In arriving at the Merrill Lynch opinion, Merrill Lynch, among other
things:
(1) reviewed publicly available business and financial information
relating to Randall's and Safeway that Merrill Lynch deemed to be relevant;
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<PAGE> 26
(2) reviewed information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
Randall's furnished to Merrill Lynch by Randall's;
(3) conducted discussions with members of senior management of
Randall's concerning the matters described in clauses (1) and (2) above;
(4) conducted discussions with senior management of Safeway to discuss
publicly available business and financial information and financial
forecasts relating to Safeway;
(5) reviewed the results of operations of Randall's and Safeway and
compared them with those of publicly traded companies that Merrill Lynch
deemed to be relevant;
(6) compared the proposed financial terms of the merger with the
financial terms of other transactions that Merrill Lynch deemed to be
relevant;
(7) reviewed the market prices and valuation multiples for the shares
of Safeway common stock and compared them with those of other publicly
traded companies that Merrill Lynch deemed to be relevant;
(8) participated in discussions among representatives of Randall's and
Safeway and their financial and legal advisors;
(9) reviewed the merger agreement;
(10) reviewed the potential pro forma impact of the merger; and
(11) reviewed other financial studies and analyses and took into
account other matters as Merrill Lynch deemed necessary, including Merrill
Lynch's assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or publicly available. Merrill Lynch
did not assume any responsibility for independently verifying that information
or undertake an independent evaluation or appraisal of the assets or liabilities
of Randall's or Safeway, nor was Merrill Lynch furnished with any evaluation or
appraisal. Merrill Lynch was not furnished any non-public information concerning
Safeway, including any financial forecasts. In addition, Merrill Lynch did not
assume any obligation to conduct, and it did not conduct, any physical
inspection of the properties or facilities of Randall's or Safeway. With respect
to the financial forecasts furnished to or discussed with Merrill Lynch by
Randall's, Merrill Lynch assumed that they had been reasonably prepared and
reflected the best currently available estimates and judgment of Randall's
management as to the expected future financial performance of Randall's. Merrill
Lynch also assumed that the merger would qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended. The Merrill Lynch opinion was necessarily based upon market, economic
and other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of the opinion.
In connection with the preparation of its opinion, Merrill Lynch was not
authorized by Randall's or the Randall's board to solicit, nor did it solicit,
third-party indications of interest for the acquisition of all or any part of
Randall's. The Merrill Lynch opinion does not address in any manner the prices
at which the Safeway common stock will actually trade following the announcement
or completion of the merger.
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<PAGE> 27
Merrill Lynch has in the past provided financial advisory and financing
services to Safeway and its affiliates and may continue to do so, and has
received, and may receive, fees for those services. In the ordinary course of
Merrill Lynch's business, it may actively trade shares of Safeway common stock,
for its own account and for the accounts of its customers, and, accordingly, may
at any time hold a long or short position in those securities.
The following is a summary of the financial analyses used by Merrill Lynch
in preparing the Merrill Lynch opinion and which were reviewed with the
Randall's board.
Randall's
SELECTED COMPARABLE COMPANIES ANALYSIS. Using publicly available
information and estimates of future financial results published by selected Wall
Street research analysts, Merrill Lynch compared certain financial and operating
information relating to six publicly traded companies: Winn-Dixie Stores, Inc.,
Hannaford Bros. Co., Ruddick Corporation, Food Lion, Inc., Great Atlantic and
Pacific Tea Company, Inc. and Weis Markets, Inc. Merrill Lynch selected these
companies because they are publicly traded companies with operations reasonably
similar to Randall's operations.
Based on the trading multiples of these companies, Merrill Lynch derived
ranges and averages of multiples of total enterprise or equity value to each of
the operating results and statistics presented in the following table. Total
enterprise value is defined as the market value of common equity plus the value
of total debt less cash. EBITDA means earnings before interest expense, taxes,
depreciation and amortization.
<TABLE>
<CAPTION>
RANGE OF
CATEGORY VALUES/MULTIPLES AVERAGE
- -------- ---------------- -------
<S> <C> <C>
2000 estimated per share price to earnings.............. 14.8x to 27.0x 18.8x
2000 estimated per share price to earnings to growth.... 0.62x to 3.38x 1.67x
Enterprise value to latest twelve month EBITDA.......... 6.0x to 12.0x 8.8x
Enterprise value to estimated 1999 EBITDA............... 4.7x to 10.7x 7.5x
</TABLE>
For purposes of these calculations, Merrill Lynch used the closing price
per share of the comparable companies' common stock as of July 21, 1999.
Merrill Lynch calculated implied equity values per share of Randall's
common stock by applying latest twelve month EBITDA multiples ranging from 8.0x
to 10.0x and fiscal year 2000 estimated EBITDA multiples ranging from 7.0x to
9.0x. The following table presents the ranges of implied equity values per share
of Randall's common stock implied by this analysis as compared with the merger
consideration per share:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
Latest twelve month EBITDA.................................. $28.60 $37.72
Fiscal Year 2000 estimated EBITDA
Base Case............................................ $33.53 $45.37
Upside Case.......................................... $35.53 $47.93
</TABLE>
See below under the subheading Discounted Cash Flow Analysis for a
definition of Base Case and Upside Case.
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<PAGE> 28
SELECTED ACQUISITION TRANSACTIONS ANALYSIS. Merrill Lynch analyzed certain
financial information relating to the following selected transactions in the
food retail industry:
<TABLE>
<CAPTION>
TARGET COMPANY ACQUIROR ANNOUNCEMENT DATE
- -------------- -------- -----------------
<S> <C> <C>
Pathmark Ahold March 9, 1999
Star Markets J. Sainsbury November 25, 1998
Oshawa Sobey's November 2, 1998
Provigo Loblaw October 30, 1998
Dominick's Safeway October 13, 1998
Carr-Gottstein Safeway August 6, 1998
Giant Food Ahold May 19, 1998
Shoppers Richfood April 9, 1998
Buttrey Albertson's January 20, 1998
Ralphs Fred Meyer November 7, 1997
Quality Food Centers Fred Meyer November 7, 1997
</TABLE>
Merrill Lynch calculated multiples of transaction value for the selected
transactions to the EBITDA and sales of the acquired businesses for the latest
twelve-month periods preceding the acquisition announcements, except in the case
of the Shoppers acquisition which was based on 1998 estimated EBITDA and sales.
Merrill Lynch compared these multiples with corresponding multiples for the
merger. For purposes of this analysis, transaction value was calculated as the
consideration offered for the common equity plus the liquidation value of the
preferred equity and the value of short and long term debt less cash and the
proceeds from exercisable options.
The analysis indicated that:
(1) total transaction value for the selected transactions as a
multiple of latest twelve month EBITDA ranged from 7.2x to 12.5x, with a
mean of 9.6x and a median of 9.3x.
(2) total transaction value for the selected transactions as a
multiple of the latest twelve month sales ranged from 0.23x to 0.81x, with
a mean of 0.52x and a median of 0.47x.
Merrill Lynch calculated implied equity values per share of Randall's
common stock by applying multiples of transaction value to the latest twelve
month EBITDA ranging from 9.0x to 11.0x and multiples of transaction value to
the latest twelve month sales ranging from 0.50x to 0.70x. The following table
presents the ranges of implied equity values per share of Randall's common stock
implied by this analysis as compared with the merger consideration per share:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
Latest twelve-month EBITDA............................. $33.16 $42.27
Latest twelve-month sales.............................. $27.84 $42.12
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS. Merrill Lynch performed a discounted cash
flow analysis of Randall's projected free cash flows for the fiscal years 2000
through 2003. This analysis was based on projections for those fiscal years.
Merrill Lynch obtained the projections from Randall's management. Randall's
management prepared two sets of projections, one called "Base Case," and one
called "Upside Case". Base Case projections
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<PAGE> 29
are more conservative than Upside Case projections. For example, Base Case
projections contemplate fewer number of Randall's stores opening in each of
fiscal years 2000, 2001, 2002 and 2003 and moderately lower EBITDA margins than
Upside Case projections.
Merrill Lynch calculated implied equity values per share of Randall's
common stock by using discount rates ranging from 9.0% to 11.0% and applying
terminal value multiples of estimated fiscal year 2003 EBITDA ranging from 7.0x
to 9.0x. The following table presents the ranges of implied equity values per
share of Randall's common stock implied by this analysis as compared with the
merger consideration per share:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C> <C>
Base Case....................................... $38.49 $54.35
Upside Case..................................... $43.84 $61.65
</TABLE>
Safeway
HISTORICAL TRADING ANALYSIS. Merrill Lynch reviewed the daily closing per
share price and trading volume of Safeway common stock from July 21, 1998 to
July 21, 1999. This was the day prior to the announcement of the merger. Merrill
Lynch calculated the following:
<TABLE>
<CAPTION>
SHARE CLOSING PRICE
------------------------
PERIOD LOW HIGH
------ ------ ------
<S> <C> <C> <C>
52 week......................................... $39.00 $61.06
MEAN
------
1 year.......................................... $50.13
6 months........................................ $52.10
3 months........................................ $50.64
2 months........................................ $49.61
1 month......................................... $49.27
Price per share as of July 21, 1999............. $52.50
</TABLE>
RESEARCH ANALYST ANALYSES. Merrill Lynch reviewed financial analyses
performed by research analysts on Safeway. These research analysts were from
Merrill Lynch, CS First Boston and Morgan Stanley. The analyses reflected the
following range of per share prices of Safeway common stock for the 52 weeks
following the day of the analyses:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C> <C>
Forward 52 weeks................................ $ 60 $ 73
Price per share as of July 21, 1999............. $52.50
</TABLE>
SELECTED COMPARABLE COMPANIES ANALYSIS. Using publicly available
information and estimates of future financial results published by selected Wall
Street research analysts, Merrill Lynch compared certain financial and operating
information for Safeway with the corresponding financial and operating
information for three publicly traded retail food companies, Royal Ahold, The
Kroger Co. and Albertson's, Inc. Merrill Lynch selected these companies because
they are publicly traded companies with operations reasonably similar to the
operations of Safeway.
Based on the multiples of these three companies, Merrill Lynch derived
ranges and averages of multiples of total enterprise or equity value to each of
the operating results and
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<PAGE> 30
statistics presented in the following table. Total enterprise value is defined
as market value of common equity plus value of total debt less cash:
<TABLE>
<CAPTION>
RANGE OF
CATEGORY VALUES/MULTIPLES AVERAGE
-------- ---------------- -------
<S> <C> <C>
2000 estimated per share price to earnings...... 17.3x to 26.0x 21.4x
2000 estimated per share price to earnings to
growth........................................ 1.16x to 1.62x 1.36x
Enterprise value to latest twelve month
EBITDA........................................ 9.8x to 14.9x 11.8x
Enterprise value to estimated 1999
EBITDA.......................................... 8.7x to 12.2x 10.4x
</TABLE>
For purposes of these calculations, Merrill Lynch used the closing per
share price of the comparable companies common stock as of July 21, 1999.
Merrill Lynch calculated implied equity values per share of Safeway common
stock by applying latest twelve month EBITDA multiples ranging from 10.5x to
14.5x, and fiscal year 1999 EBITDA multiples ranging from 9.5x to 12.5x. The
following table presents the ranges of implied equity values per share of
Safeway common stock implied by this analysis as compared with the Safeway per
share price as of July 21, 1999:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C> <C>
Latest twelve month EBITDA...................... $36.45 $53.70
Fiscal Year 1999 estimated EBITDA............... $37.50 $52.15
Price per share as of July 21, 1999............. $52.50
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS. Merrill Lynch performed a discounted cash
flow analysis of Safeway projected free cash flows for fiscal years 1999 through
2003. This analysis was based on projections for those fiscal years. Merrill
Lynch obtained the projections from reports prepared by Merrill Lynch's Equity
Research.
Merrill Lynch calculated implied equity values per share of Safeway common
stock by using discount rates ranging from 8.0% to 10.0% and applying terminal
value multiples of estimated fiscal year 2003 EBITDA ranging from 10.0x to
14.0x. The following table presents the ranges of implied equity values per
share of Safeway common stock implied by this analysis as compared with the per
share price of Safeway common stock as of July 21, 1999:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C> <C>
Implied Equity value per share of Safeway common
stock......................................... $46.59 $72.42
Price per share as of July 21, 1999............. $52.50
</TABLE>
PRO FORMA EPS ANALYSIS. Merrill Lynch analyzed the pro forma impact of the
merger on the projected earnings per share of Safeway common stock for each of
the fiscal years 2000, 2001, 2002 and 2003. Merrill Lynch's analysis was based
on the following:
- the assumption that the merger had been completed on July 1, 1999;
- purchase accounting treatment for the merger;
- potential pre-tax synergies of $50 million in fiscal year 2000 and $80
million in each fiscal year thereafter resulting from the merger; and
- alternative sets of assumptions based on (1) projections relating to
Randall's provided by Randall's management which reflected both the Base
Case and the
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<PAGE> 31
Upside Case and (2) projections relating to Safeway obtained from reports
prepared by selected Wall Street research analysts.
This analysis showed that the merger would result in moderate accretion to
the projected earnings per share of Safeway common stock in each of the fiscal
years 2000, 2001, 2002 and 2003.
The summary set forth above does not purport to be a complete description
of the analyses performed by Merrill Lynch in arriving at its opinion. The
preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
Therefore, a fairness opinion is not readily susceptible to partial or summary
description. In arriving at its opinion, Merrill Lynch did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Merrill Lynch believes that its analyses must be considered
as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create a
misleading view of the analyses underlying the Merrill Lynch opinion.
FEE ARRANGEMENT. Merrill Lynch acted as financial advisor to the
independent members of the Randall's board in connection with the merger.
Pursuant to a letter agreement dated July 20, 1999 between Randall's and Merrill
Lynch, Merrill Lynch will receive a fee from Randall's for its services of $1.5
million. In addition, Randall's has agreed to reimburse Merrill Lynch for its
reasonable out-of-pocket expenses incurred in connection with rendering
financial advisory services, including reasonable fees and disbursements of its
legal counsel. Randall's has agreed to indemnify Merrill Lynch and its
affiliates and their respective directors, officers, agents, employees and
controlling persons, for the expenses, losses, claims, damages and liabilities
related to or arising out of its rendering of services under its engagement as
financial advisor.
INTERESTS OF MEMBERS OF RANDALL'S BOARD OF DIRECTORS AND MANAGEMENT IN THE
MERGER
Shareholders should be aware that certain members of Randall's management
and board of directors have certain interests in the merger that are in addition
to the interests of Randall's shareholders generally.
Severance arrangements
R. RANDALL ONSTEAD, JR. In accordance with the terms of the merger
agreement, before the closing of the merger, Randall's will enter into a new
employment agreement with R. Randall Onstead, Jr., the Chairman and Chief
Executive Officer of Randall's, which will provide that upon the closing of the
merger, Mr. Onstead will, due to the special nature and circumstances of (1) Mr.
Onstead's duties with Randall's before the closing of the merger and (2) the
duties contemplated to be performed by Mr. Onstead with the surviving
corporation after the closing of the merger, have good reason to resign and
receive specified severance benefits. For purposes of Mr. Onstead's new
employment agreement, "good reason" means (A) the assignment to Mr. Onstead of
duties materially inconsistent with the duties associated with Mr. Onstead's
position before the closing of the merger and (B) a material breach by Randall's
of any material provision of Mr. Onstead's employment agreement which, if
correctable, remains uncorrected for 30 days following written notice of that
breach by Mr. Onstead to Randall's.
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<PAGE> 32
In the event that Mr. Onstead terminates his employment for good reason, he
will receive, among other things, the following:
- a lump sum payment equal to three times the sum of (a) his annual base
salary as of the date of his termination, which for purposes of this
calculation will never be less than his base salary in effect immediately
before the closing of the merger, and (b) the amount of his fiscal year
1999 annual bonus; and
- coverage for himself, his spouse and his dependents under the surviving
corporation's medical and dental plans for a period of three years after
the date of his termination of employment.
OTHER SEVERANCE PAY PLAN ARRANGEMENTS. In accordance with the terms of the
merger agreement, Randall's will amend its three current Severance Pay Plans and
enter into new letter agreements with the participants in those plans to provide
that, after the closing of the merger, in the event of a qualifying termination,
the participants will receive specified severance benefits. For purposes of the
new letter agreements, a qualifying termination means:
- an involuntary termination of an employee's employment by Randall's
without cause, or
- a resignation by the employee upon 30 days' prior written notice, given
no later than 90 days after a material reduction in the employee's
responsibilities or compensation.
However, a qualifying termination does not include:
- any termination of employment by reason of death, disability or
retirement of the employee, or
- in the event of the sale or transfer of the stock or assets of Randall's
or any of its businesses, any transfer to or commencement of employment
with the purchasing or transferee entity or its affiliates, even if it
involves a termination of employment with Randall's or its affiliates, so
long as the employee's services will be performed at the location where
the employee was employed or any office or location less than 20 miles
from that location.
In the event of a qualifying termination, the Severance Pay Plan
participants will be entitled to receive, among other things, the following:
- the product of
(1) the sum of (a) the participant's annual base salary as of the date of
termination, which for purposes of this calculation will never be
less than his or her base salary in effect immediately before the
closing of the merger, and (b) the amount of the participant's fiscal
year 1999 annual bonus, and
(2) one of the following:
- two, in the case of senior vice presidents,
- one, in the case of vice presidents, and
- one-half, in the case of director-level employees.
- the continuation, for the same multiple of years as described in (2)
above, of medical and dental benefits, unless coverage begins under a
subsequent employer's medical and dental benefit plans, in which case,
continuation of coverage will cease.
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<PAGE> 33
In addition to the changes described above, and in accordance with the terms of
the merger agreement, Michael Calbert, Senior Vice President and Chief Financial
Officer of Randall's, will enter into a letter agreement under the Severance Pay
Plans which will provide that, upon the closing of the merger, Mr. Calbert will,
due to the special nature and circumstances of (1) Mr. Calbert's duties with
Randall's before the closing of the merger, and (2) the duties contemplated to
be performed by Mr. Calbert with the surviving corporation after the closing of
the merger, be entitled to resign and receive the severance benefits provided to
senior vice presidents in the event of a termination, pursuant to the amended
Severance Pay Plans, as described above.
COVENANT NOT TO SOLICIT. Partially in exchange for the enhanced severance
benefits described above, the eight Randall's executives who will be covered by
the amended Severance Pay Plan for Senior Vice Presidents will, in addition to
the covenant not to compete with Randall's by which they are currently bound
under existing management stockholder agreements, enter into agreements not to
solicit Randall's employees. These agreements will provide that, for a period of
two years following the date of termination of employment of the executive, the
executive will not, directly or indirectly, on his own behalf or on behalf of
any person, firm or company with which he becomes employed, solicit or actively
seek to offer employment to any person who is an employee of Randall's or any of
its subsidiaries at the time the solicitation occurs or the offer is made to the
employee. However, a new employer of the executive may solicit or make an offer
of employment to any such employee at any time, so long as the executive is not
directly or indirectly involved in the solicitation or offer.
OPTIONS. Pursuant to the merger agreement, each outstanding Randall's stock
option will either become an option to purchase Safeway common stock or be
canceled in exchange for cash and Safeway common stock, in each case, as
described below. All options will become immediately exercisable as a result of
the merger, subject to the shareholder approval described below.
Immediately before the completion of the merger, the board of directors of
Randall's will take all actions that are required to provide that each
outstanding Randall's stock option, whether or not then exercisable, (1) subject
to the shareholder approval described below, become exercisable in full, and (2)
subject to the election of each holder and the approval of Safeway described
below, will be converted into options to acquire shares of Safeway common stock.
These Randall's stock options will be converted into an option to acquire that
number of shares of Safeway common stock equal to:
(1) the per share value of one share of Safeway common stock,
determined using the closing price of Safeway common stock on the New York
Stock Exchange on the trading day before the merger is completed, divided
into
(2) the product of (a) the per share value of the per share merger
consideration, based on the closing price of Safeway common stock,
determined as described above, multiplied by (b) the total number of shares
of Randall's common stock subject to the Randall's stock option that is to
be converted.
The exercise price of the new Safeway stock option will be equal to (1) the
product of (A) the per share exercise price of Randall's common stock subject to
the original Randall's stock option and (B) the closing price of Safeway's
common stock on the New York Stock Exchange on the trading day before the merger
is completed divided by (2) the per share merger consideration, based on the
closing price of Safeway common stock on the New York Stock Exchange on the
trading day before the merger is
29
<PAGE> 34
completed, with the exercise price of the new Safeway option rounded down to the
nearest cent. Safeway intends to offer certain employees of Randall's the
opportunity to waive acceleration of vesting for at least 80% of his or her
Randall's options that would otherwise be subject to accelerated exercisability
in exchange for an additional grant of options to purchase Safeway common stock.
Some holders of Randall's stock options will not be permitted to convert
their stock options into Safeway stock options. These holders will be selected
by Randall's after consultation with Safeway, where both Randall's and Safeway
have determined that, in their good faith judgment, these holders are not
reasonably expected to continue their employment with the surviving corporation
after the merger.
If and to the extent that a holder of a Randall's stock option is either
(1) not permitted to convert his or her option or (2) chooses not to convert his
or her option, the holder's option will be canceled and exchanged for a payment
from the surviving corporation equal in value to the product of (x) the total
number of shares of Randall's common stock subject to the Randall's stock option
and (y) the excess of $41.75 over the exercise price per share of the Randall's
common stock subject to the Randall's stock option. This amount less applicable
withholding taxes will be paid in Safeway common stock and cash in the same
proportion as Safeway common stock and cash is paid to shareholders of Randall's
in the merger.
SHAREHOLDER APPROVAL. The effectiveness of the enhanced severance
arrangements for specified executives of Randall's, including Mr. Onstead and
Mr. Calbert, and the acceleration of the vesting of some Randall's stock options
are subject to (1) the affected executives' agreeing in writing to the
termination of their existing employment arrangements and (2) approval, by more
than 75% of all Randall's shareholders who (a) are not receiving the severance
benefits described above, (b) do not hold Randall's stock options that would
become fully exercisable as a result of the acceleration of vesting described
above, or (c) are not lineally related to any individual who would either
receive the severance benefits described above or whose stock options would
become fully exercisable as a result of the acceleration of vesting described
above. As of the record date for the Randall's special shareholder's meeting,
KKR held more than 75% of the shares of Randall's common stock necessary to
approve these arrangements, and has informed Randall's that it intends to vote
for the approval of these arrangements. As a result, Randall's expects the
enhanced severance arrangements and the acceleration of the vesting of specified
Randall's stock options to become effective whether or not any other shareholder
votes in favor of them.
RESTRICTED STOCK. Before the completion of the merger, Randall's will also
cause all outstanding grants of Randall's common stock to become fully vested
and will cause the restrictions on transferability imposed on any Randall's
common stock pursuant to any Randall's stock purchase or stock option plan to
lapse immediately before the completion of the merger and be treated in the same
manner as other outstanding shares of Randall's common stock.
DIRECTORS' DEFERRED COMPENSATION PLAN. Pursuant to the terms of the
Directors' Deferred Compensation Plan, the accounts which are denominated in
Randall's common stock equivalents will be cashed out in the merger at $41.75
per share. All of the non-employee directors of Randall's participate in the
plan.
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Fees
In consideration of its advisory services to Randall's in connection with
the negotiation of the merger, pursuant to an engagement letter dated July 22,
1999, KKR will receive a fee of $8.5 million payable by Randall's at the
effective time of the merger. The directors of Randall's who are not affiliated
with KKR unanimously approved the payment of the fee to KKR.
Indemnification of KKR and Onsteads
In consideration for RFM Acquisition LLC, Onstead Interests, Ltd. and R.
Randall Onstead, Jr. entering into the voting agreements, Randall's has agreed
to indemnify each of those shareholders and their respective officers,
employees, general and limited partners, members, affiliates and assignees
against any liabilities which they may incur arising out of a claim that such
person, in his or its capacity as shareholder, has breached a fiduciary
obligation to other Randall's shareholders by entering into or performing his or
its obligations under the applicable voting agreement.
Registration Rights
Safeway has granted RFM Acquisition LLC registration rights with respect to
the shares of Safeway common stock that RFM Acquisition LLC will receive in the
merger.
ACCOUNTING TREATMENT
The merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles. Under this method of
accounting, the purchase price will be allocated to assets acquired and
liabilities assumed based on their estimated fair values with any excess
allocated to goodwill. Safeway's income will not include income of Randall's
prior to the effective time of the merger.
DISSENTERS' RIGHTS OF APPRAISAL
Any shareholder of record of Randall's may exercise dissenters' rights in
connection with the merger by properly complying with the requirements of
Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act. THE REQUIRED
PROCEDURE SET FORTH IN ARTICLES 5.11, 5.12 AND 5.13 OF THE TEXAS BUSINESS
CORPORATION ACT MUST BE FOLLOWED EXACTLY OR YOU MAY LOSE YOUR RIGHT TO DISSENT
FROM THE MERGER. The information that follows is a general summary of
dissenters' rights and as a summary is qualified by and not a substitute for the
provisions of Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation
Act. The full text of these Articles is set forth in Annex G. You should read
Annex G in its entirety for more complete information concerning your right to
dissent from the merger.
Each holder of shares of Randall's common stock outstanding as of the
record date for the special shareholders' meeting to be held by Randall's for
purposes of approving the merger agreement who follows the procedures set forth
in Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act will be
entitled to demand the purchase of that shareholder's shares of Randall's common
stock for a purchase price equal to the fair value of that holder's shares.
Under Texas law, fair value of shares for purposes of the exercise of
dissenters' rights is defined as the value of the shares as of the day
immediately preceding the day the vote is taken authorizing the merger,
excluding any appreciation or depreciation in value of the shares in
anticipation of the proposed merger.
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In order to be entitled to exercise your dissenters' rights, you must file
a written objection to the merger with Randall's prior to the date of the
shareholders meeting called to consider the merger. The written objection must
state that you will exercise your right to dissent if the merger becomes
effective and give your address where notice of the effectiveness of the merger
should be delivered or mailed. Randall's shareholders who desire to exercise
their dissenters' rights should send this written objection to Randall's Food
Markets, Inc., 3663 Briarpark, Houston, TX 77042, Attention: Secretary. Neither
a proxy nor a vote against the merger are sufficient to constitute a written
objection as required under the Texas Business Corporation Act.
If the merger is approved by the Randall's shareholders and subsequently
becomes effective, within 10 days of the effectiveness of the merger, Safeway
must deliver or mail notice of the effectiveness of the merger to each
dissenting shareholder that did not vote in favor of the merger. Any dissenting
shareholder that did not vote in favor of the merger may then make a written
demand on Safeway for the payment of the fair value of the shareholder's shares
within 10 days from the delivery or mailing of the notice by Safeway. Such
demand must state the number and class of shares of Randall's stock owned by the
dissenting shareholder and the dissenting shareholder's estimate of the fair
value of his Randall's stock. Any shareholder that fails to make such a demand
within the 10-day period will lose the right to dissent and will be bound by the
terms of the merger. In order to preserve dissenters' rights, within 20 days of
making a demand for payment, a dissenting shareholder must also submit such
shareholder's stock certificates to Safeway for the appropriate notation of the
demand. Safeway at its option may terminate the dissenting shareholder's rights
under Article 5.12 of the Texas Business Corporation Act for failure to submit
the stock certificates within the 20-day period unless a court of competent
jurisdiction directs otherwise upon a showing to the court that there is good
and sufficient cause.
Within 20 days of receipt of a proper demand for payment by a dissenting
Randall's shareholder, Safeway must deliver or mail to the dissenting
shareholder written notice that either (1) Safeway accepts the amount the
dissenting shareholder claimed and agrees to pay the amount of the shareholder's
demand within 90 days after the effectiveness of the merger upon receipt of the
dissenting shareholder's duly endorsed Randall's share certificates or (2) (A)
contains an estimate by Safeway of the fair value of the dissenting
shareholders' Randall's stock and (B) includes an offer to pay the amount of its
estimate within 90 days after the effectiveness of the merger, provided that
Safeway receives notice from the shareholder within 60 days after the effective
date of the merger that the dissenting shareholder agrees to accept Safeway's
estimate and upon receipt of the dissenting shareholder's duly endorsed
Randall's stock certificates. If the dissenting shareholder and Safeway agree
upon the value of the dissenting shareholder's shares within 60 days after
effectiveness of the merger, Safeway shall pay the amount of the agreed value to
the dissenting shareholder upon receipt of the dissenting shareholder's duly
endorsed share certificates within 90 days of the effectiveness of the merger.
Upon payment of the agreed value, the dissenting shareholder will no longer have
any interest in such shares of Randall's or Safeway.
If the dissenting shareholder and Safeway do not agree upon the value of
the dissenting shareholder's shares within 60 days after the effectiveness of
the merger, then either the dissenting shareholder or Safeway may, within 60
days after the expiration of that 60-day period, file a petition in a court of
competent jurisdiction in Harris County, Texas, seeking a determination of the
fair value of the dissenting shareholder's Randall's shares. Safeway shall file
with the court a list of all shareholders who have demanded
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payment for their shares with whom an agreement as to value has not been reached
within 10 days following receipt of the petition filed by a dissenting
shareholder or upon the filing of such a claim by Safeway. The clerk of the
court will give notice of the hearing of any such claim to Safeway and to all of
the dissenting shareholders on the list provided by Safeway. All dissenting
shareholders notified in this manner and Safeway will be bound by the final
judgment of the court as to the value of the shares.
In considering such a petition, the court will determine which of the
dissenting shareholders have complied with the provisions of the Texas Business
Corporation Act and are entitled to the payment of the fair value of their
shares and will appoint one or more qualified appraisers to determine the fair
value of the shares who are directed to make such determination "upon such
investigation as to them may seem proper." The appraisers will also allow the
dissenting shareholders and the corporation to submit to them evidence as to the
fair value of the shares.
Upon receipt of the appraisers' report, the court will determine the fair
value of the shares of the dissenting shareholders and will direct the payment
to the dissenting shareholders of the amount of the fair value of their shares,
with interest from the date 91 days after the effectiveness of the merger to the
date of the judgment, by Safeway, upon receipt of the dissenting shareholder's
share certificates. Upon payment of the judgment, the dissenting shareholders
will no longer have any interest in such shares of Randall's or Safeway.
Any dissenting shareholder may withdraw his or her demand at any time
before receiving payment for the shares or before a petition has been filed
seeking determination of the fair value of the shares. No dissenting shareholder
may withdraw his or her demand after payment has been made or, unless Safeway
consents to the withdrawal, where a petition has been filed.
Any dissenting shareholder who has properly demanded payment for his or her
shares of Randall's stock will not have any rights as a shareholder, except the
right to receive payment for such shares and the right to claim that the merger
and the related transactions were fraudulent.
IF YOU ARE CONSIDERING DISSENTING FROM THE MERGER YOU ARE URGED TO CONSULT
YOUR OWN LEGAL COUNSEL.
REQUIRED REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the
rules promulgated under that act by the United States Federal Trade Commission,
the merger may not be consummated until notifications have been given and
information has been furnished to the Antitrust Division of the Department of
Justice and the FTC, and specified waiting period requirements have been
satisfied. Safeway, Randall's and KKR each filed pre-merger notification and
report forms with the Antitrust Division and the FTC on August 6, 1999. At any
time before or after the consummation of the merger, and notwithstanding the
satisfaction of the Hart-Scott-Rodino Act requirements, the Antitrust Division
or the FTC or any state could take action under the federal or state antitrust
laws to seek to enjoin consummation of the merger. Private parties may also seek
to take legal action under the antitrust laws. Based on the information
available to them, each of Safeway and Randall's believes that the merger can be
effected in compliance with federal and state antitrust laws.
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Safeway and Randall's are not aware of any license or regulatory permit
which is material to the businesses of Safeway or Randall's and which is likely
to be adversely affected by consummation of the merger or of any approval or
other action by any state, federal or foreign government or governmental agency,
other than routine re-licensing procedures, that would be required before the
merger.
RESALE OF SAFEWAY STOCK
All shares of Safeway common stock received by Randall's shareholders in
the merger will be freely transferable, except that shares of Safeway common
stock received by persons deemed to be affiliates, as defined under the
Securities Act of 1933, of Randall's at the effective time may be resold only in
specified permitted circumstances set forth in Rules 144 and 145 under the
Securities Act. This prospectus does not cover resales of Safeway common stock
received by any person who may be deemed to be an affiliate of Randall's.
The merger agreement requires Randall's to request each person who may be
deemed to be an affiliate of Randall's to execute a written agreement to the
effect that such person will not sell, assign or transfer any shares of Safeway
common stock issued to such person pursuant to the merger except pursuant to an
effective registration statement, in conformity with the volume and other
limitations of Rule 144 and Rule 145(d) of the Securities Act or in a
transaction which, in the opinion of counsel or as described in a no-action
letter from the SEC, is not required to be registered under the Securities Act.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes material United States federal
income tax consequences of the merger to holders of Randall's common stock who
hold their Randall's common stock as a capital asset. It does not address all of
the United States federal income tax consequences that may be relevant to
particular shareholders in light of their individual circumstances or to
shareholders who are subject to special rules, such as financial institutions,
tax-exempt organizations, insurance companies, dealers in securities or foreign
currencies, foreign holders, persons who hold such shares as a hedge against
currency risk, or as part of a constructive sale or conversion transaction, or
holders who acquired their shares upon the exercise of employee stock options or
otherwise as compensation. The following summary is not binding on the Internal
Revenue Service. It is based upon the Internal Revenue Code, laws, regulations,
rulings and decisions in effect as of the date of this prospectus, all of which
are subject to change, possibly with retroactive effect. This summary does not
address tax consequences under state, local and foreign laws.
HOLDERS OF RANDALL'S COMMON STOCK ARE STRONGLY URGED TO CONSULT THEIR TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. Completion of
the merger is conditioned upon, among other things, the receipt by Randall's and
Safeway of tax opinions of Simpson Thacher & Bartlett and Latham & Watkins,
respectively, each dated as of the closing date, to the effect that the merger
will qualify for United States federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. These
opinions will be based on customary assumptions and representations made by
Randall's, the acquisition subsidiary, and Safeway. An opinion of
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counsel represents counsel's best legal judgment and is not binding on the
Internal Revenue Service or any court.
No ruling has been or will be sought from the Internal Revenue Service as
to the United States federal income tax consequences of the merger.
The following discussion assumes that the merger constitutes a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code.
EXCHANGE OF RANDALL'S COMMON STOCK FOR A COMBINATION OF SAFEWAY COMMON
STOCK AND CASH. Based on the above assumptions and qualifications, and except
as discussed below under "-- Additional Considerations -- Recharacterization of
Gain as a Dividend" and "-- Cash Instead of Fractional Shares," upon the
exchange of his or her Randall's common stock for a combination of Safeway
common stock and cash in the merger, a holder of Randall's common stock
generally will recognize capital gain, but will not recognize any loss, in an
amount equal to the lesser of
- the amount of gain realized by the holder, that is the excess of (1) the
sum of the amount of cash plus the fair market value of the Safeway
common stock received by the holder over (2) the holder's tax basis in
his or her Randall's common stock, or
- the amount of cash received by the holder.
The adjusted tax basis of the shares of Safeway common stock, including any
fractional interest, received by a holder of Randall's common stock will be
equal to the adjusted tax basis of the shares of Randall's common stock
exchanged, decreased by the amount of cash received in exchange for those shares
and increased by the amount of any gain recognized by the holder. A holder's
holding period with respect to the shares of Safeway common stock received in
the merger will include the holding period of the Randall's common stock
exchanged, provided that those shares of Randall's common stock are held as
capital assets on the date of the merger.
No gain or loss will be recognized by Safeway, the acquisition subsidiary
or Randall's as a result of the merger.
ADDITIONAL CONSIDERATIONS -- RECHARACTERIZATION OF GAIN AS A DIVIDEND.
There are circumstances in which all or part of the gain recognized by a holder
of Randall's common stock would be treated as a dividend rather than capital
gain. In that case, the amount of gain recognized by the holder, first, will be
taxable as ordinary dividend income (eligible for the dividends received
deduction for certain corporate holders) to the extent paid out of the holder's
ratable share of the accumulated earnings and profits of Randall's, and then as
capital gain. Because the application of dividend treatment depends upon each
holder's particular circumstances, including the application of certain
constructive ownership rules, holders should consult their own tax advisors
regarding the potential tax consequences of the merger to them.
CASH INSTEAD OF FRACTIONAL SHARES. A holder of Randall's common stock who
receives cash instead of fractional shares of Safeway common stock will be
treated as having received the fractional shares in the merger and then having
exchanged the fractional shares for cash in a redemption by Safeway. Any gain or
loss attributable to fractional shares generally will be capital gain or loss.
The amount of the gain or loss will be equal to the difference between the
amount of cash received and the holder's tax basis in the fractional share
interest.
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DISSENTING SHARES. A holder of Randall's common stock who receives cash in
respect of a dissenting share of Randall's common stock will recognize gain or
loss equal to the difference between the amount of cash received and his or her
tax basis in the dissenting shares. Any gain or loss attributable to dissenting
shares generally will be capital gain or loss.
CAPITAL GAIN OR LOSS. Any capital gain recognized by an individual holder
of Randall's common stock in connection with the transfer of his or her
Randall's common stock in the merger will be subject to a maximum United States
federal income tax rate of 20% if the individual had held his or her Randall's
common stock for more than 12 months at the effective time of the merger. The
deductibility of capital losses is subject to limitations for both individuals
and corporations.
BACKUP WITHHOLDING. Certain noncorporate holders of Randall's common stock
may be subject to backup withholding at a 31% rate on cash payments received in
exchange for Randall's common stock, instead of fractional shares of Safeway
common stock or in respect of dissenting shares. Backup withholding will not
apply, however, to a shareholder who (1) furnishes a correct taxpayer
identification number and certifies that he or she is not subject to backup
withholding on the substitute Form W-9 or successor form included in the letter
of transmittal to be delivered to Randall's shareholders following completion of
the merger, (2) provides a certification of foreign status on Form W-8 or
successor form or (3) is otherwise exempt from backup withholding.
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THE MERGER AGREEMENT
THE DETAILED TERMS OF AND CONDITIONS OF THE MERGER ARE CONTAINED IN THE
MERGER AGREEMENT, WHICH IS INCLUDED IN FULL AS ANNEX A TO THIS PROSPECTUS AND
INCORPORATED IN THIS PROSPECTUS BY REFERENCE. THE FOLLOWING SUMMARY DESCRIPTION
OF THE MATERIAL TERMS OF THE MERGER AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY,
AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE MERGER
AGREEMENT.
FORM OF THE MERGER
Subject to the terms and conditions of the merger agreement and in
accordance with Texas law, at the effective time of the merger Randall's will be
merged with and into SI Merger Sub, Inc., a wholly-owned subsidiary of Safeway
formed for purposes of the merger and a party to the merger agreement. The
acquisition subsidiary will survive the merger as a wholly-owned subsidiary of
Safeway, and will continue its corporate existence under Texas law under the
name "Randall's Food Markets, Inc."
MERGER CONSIDERATION
At the effective time of the merger, each share of Randall's common stock,
except for stock held by Safeway, the acquisition subsidiary, Randall's, any
direct or indirect wholly-owned subsidiary of Safeway or Randall's and
shareholders who perfect their dissenter's rights, will be converted into the
right to receive $25.05 in cash and .3204 of a share of Safeway common stock.
However, if all of the closing conditions other than those that, by their terms,
cannot be satisfied until the closing date, have been satisfied or waived except
for the condition relating to the delivery of opinions of counsel that the
merger constitutes a reorganization for purposes of the Internal Revenue Code,
the merger consideration will be adjusted to decrease the cash payment and
increase the exchange ratio so that the merger consideration will consist of
- cash and Safeway common stock with an aggregate value equal to the
aggregate value of the merger consideration, before any adjustment, based
on the closing price of the Safeway common stock on the New York Stock
Exchange on the trading day before the closing date, and
- the minimum number of shares of Safeway common stock necessary in order
for the conditions related to the delivery of tax opinions to be
satisfied.
So long as the value of the stock portion of the merger consideration on
the trading day immediately before the closing date represents at least 42% of
the aggregate value of the merger consideration, including cash paid for
fractional shares and cash paid or to be paid to dissenters, no adjustment will
be made to the exchange ratio or the cash portion of the merger consideration.
Based on the closing price of Safeway stock on the New York Stock Exchange on
August 12, 1999 of $48 15/16 per share, and assuming that none of the Randall's
shareholders exercise their dissenters' rights, the merger consideration would
be adjusted so that each share of Randall's common stock would be converted into
the right to receive $23.62 in cash and approximately .3496 shares of Safeway
common stock.
Safeway will not issue fractional shares of Safeway common stock in the
merger. Instead, promptly after the merger, the exchange agent will pay to each
shareholder who would otherwise have been entitled to receive a fraction of a
share of Safeway common stock an amount in cash without interest equal to:
- the fractional share interest to which the holder would otherwise be
entitled, multiplied by
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- the closing price for a share of Safeway common stock on the New York
Stock Exchange on the last trading day immediately before the closing
date of the merger.
As an example, if you own 100 shares of Randall's common stock at the
effective time of the merger, and assuming no adjustment to the cash amount and
the exchange ratio, your shares would be converted into $2,505 and 32.04 shares
of Safeway common stock. Since cash will be paid instead of fractional shares,
in addition to the cash amount, you would receive 32 shares of Safeway common
stock and a check for the fraction of the share.
As of the effective time of the merger, all shares of Randall's common
stock to be exchanged for the merger consideration will no longer be
outstanding, will automatically be canceled and will cease to exist, and each
holder of a certificate representing any of these shares will cease to have any
rights in respect of those shares except the right to receive the merger
consideration and any dividends or other distributions to which the holders
become entitled to in accordance with the merger agreement. See "-- Conversion
of Shares; Procedures for Exchange of Certificates". The merger consideration
was determined through arms'-length negotiations between Safeway and Randall's.
Any shares of Randall's common stock owned immediately before the merger by
Safeway, the acquisition subsidiary, Randall's and any direct or indirect
wholly-owned subsidiary of Safeway or Randall's will be canceled, and no
consideration will be delivered in exchange for these shares.
TREATMENT OF RANDALL'S OPTIONS
For a discussion of the treatment of Randall's stock options in the merger,
see "The Merger -- Interests of Members of Randall's Board of Directors and
Management in the Merger -- Options."
RFM Acquisition LLC currently holds an option to purchase 3,606,881 shares
of Randall's common stock at an exercise price of $12.11 per share. At the
effective time of the merger, Safeway will purchase this option for a purchase
price equal to the product of (1) the total number of shares of Randall's common
stock underlying the option and (2) $41.75 less the per share exercise price.
This value will be paid in Safeway common stock and cash in the same proportion
as Safeway common stock and cash is paid to shareholders of Randall's in the
merger.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of each share of Randall's common stock (other than those
shares held by shareholders who perfect their dissenter's rights) into the right
to receive .3204 of a share of Safeway common stock and $25.05 in cash will
occur automatically at the effective time of the merger. As soon as practicable
after the merger, First Chicago Trust Company of New York, the exchange agent,
or another bank or trust company acting as exchange agent chosen by Safeway and
reasonably satisfactory to Randall's, will send a transmittal letter to each
former Randall's shareholder. The transmittal letter will contain instructions
with respect to obtaining the merger consideration in exchange for shares of
Randall's common stock.
After the merger, each certificate that previously represented shares of
Randall's common stock will represent only the right to receive the merger
consideration (or, in the case of shares subject to dissenter's rights, the
right to receive the amount in cash determined under Texas law), including cash
for any fractional shares of Safeway common stock.
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Holders of certificates previously representing Randall's common stock will
not be paid dividends or distributions on the Safeway common stock into which
their Randall's common stock has been converted with a record date after the
merger, and will not be paid cash for any fractional shares of Safeway common
stock, until their certificates are surrendered to the exchange agent for
exchange. When their certificates are surrendered, any unpaid dividends and any
cash instead of fractional shares will be paid without interest.
In the event of a transfer of ownership of Randall's common stock which is
not registered in the records of Randall's transfer agent, the cash portion of
the merger consideration, including any cash payable instead of fractional
shares, may be paid, a certificate representing the proper number of shares of
Safeway common stock may be issued, and any dividends or distributions may be
issued, to a person other than the person in whose name the surrendered
certificate is registered if the certificate representing the shares is
presented to the exchange agent accompanied by all documents required to
evidence and effect such a transfer and to evidence that any applicable stock
transfer taxes have been paid.
The merger consideration paid and issued upon conversion of shares of
Randall's common stock, including any cash paid instead of any fractional
shares, will be deemed to have been paid and issued in full satisfaction of all
rights pertaining to those shares of Randall's common stock, except that Safeway
must pay any dividends or make any other distributions with a record date before
the merger that may have been declared or made by Randall's on those shares of
Randall's common stock in accordance with the merger agreement on or before the
merger and which remain unpaid at the effective time of the merger.
EFFECTIVE TIME OF THE MERGER
The effective time of the merger will be the time of the filing of the
articles of merger with and a certificate of merger has been issued by the Texas
Secretary of State or a later time if agreed upon by Safeway and Randall's and
specified in the articles of merger. The filing of the articles of merger will
occur as soon as practicable following the closing.
CONDITIONS TO THE COMPLETION OF THE MERGER
Each party's obligation to effect the merger is subject to the satisfaction
or waiver of various conditions on or before the date on which the merger is
completed. These include the following:
- the approval of the merger agreement by holders of a majority of all
outstanding shares of Randall's common stock;
- any waiting period applicable to the merger under the Hart-Scott-Rodino
Act having expired or been terminated;
- no laws having been adopted and no restraining order, injunction or other
orders being in effect that would make the merger illegal or otherwise
prohibit the completion of the merger;
- the registration statement having been declared effective and no stop
order or proceeding seeking a stop order with respect to the registration
statement having been initiated or threatened by the Commission; and
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- if required, the approval for listing on the New York Stock Exchange,
subject to official notice of issuance, of the shares of Safeway common
stock issuable (1) to Randall's shareholders in the merger, and (2) upon
exercise of options to purchase Randall's common stock.
In addition, each party's obligation to effect the merger is further
subject to the satisfaction or waiver of these conditions:
- the representations and warranties of the other party to the merger
agreement set forth in the merger agreement that are qualified as to
material adverse effect (as defined below) being true and correct as of
the date of the merger agreement and as of the closing date as though
made on and as of the closing date, except to the extent a representation
and warranty expressly relates to a specific date, in which case as of
that date;
- the representations and warranties of the other party to the merger
agreement set forth in the merger agreement that are not qualified as to
material adverse effect being true and correct in all material respects
as of the date of the merger agreement and as of the closing date as
though made on and as of the closing date, except (1) to the extent a
representation and warranty expressly relates to a specific date, in
which case as of that date or (2) where all failures of these
representations and warranties to be true and correct would not,
individually or in the aggregate, reasonably be expected to have a
material adverse effect on the party making the representations and
warranties;
- the other party to the merger agreement having performed all obligations
required to be performed by it under the merger agreement that are
qualified as to materiality and having performed in all material respects
all other obligations required to be performed by it that are not so
qualified as to materiality;
- each party having received from its counsel on the closing date an
opinion stating that the merger will qualify for United States federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. These opinions will be based on
customary assumptions and representations made by Randall's and Safeway.
See "The Merger -- Material United States Federal Income Tax
Consequences"; and
- there not having been any material adverse change of the other party.
The merger agreement provides that a "material adverse effect" or "material
adverse change" means, when used in connection with any entity, any change,
circumstance or effect that is or is reasonably likely to be materially adverse
to the assets, liabilities, business, financial condition, results of operations
or prospects of that entity and its subsidiaries taken as a whole or which could
reasonably be expected to materially impair or materially delay the ability of
that entity to consummate the merger, other than any change, circumstance or
effect relating to:
- the economy or securities markets in general, or
- the industries in which Safeway or Randall's operate and not specifically
relating to Safeway or Randall's.
NO SOLICITATION
The merger agreement provides that neither Randall's nor any of its
subsidiaries nor any of their officers and directors will, and that Randall's
will direct and use its best efforts
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to cause its and its subsidiaries' employees, agents and representatives
(including any investment banker, attorney or accountant retained by it or any
of its subsidiaries) not to, directly or indirectly:
- initiate, solicit or encourage or take any other action to facilitate any
inquiries or the making of any acquisition proposal, as defined below
other than any transaction otherwise permitted by the merger agreement
which is not reasonably expected to interfere with or delay the
consummation of the merger;
- have any discussion with or provide any confidential information or data
to any person relating to an acquisition proposal; or
- engage in any discussions or negotiations concerning an acquisition
proposal.
However, if the Randall's board of directors determines in good faith, based
upon the advice of its independent financial advisor of national reputation and
legal counsel, that an unsolicited bona fide written acquisition proposal would
reasonably be expected to result in or constitute a superior proposal, as
defined below, Randall's may, subject to providing prior notice to Safeway of
the significant terms and conditions of the proposal:
- furnish information to any person making such an acquisition proposal so
long as that person has executed a confidentiality agreement on terms and
conditions which, in the aggregate, are not more favorable to that person
than those contained in the confidentiality agreements between Randall's
and Safeway;
- engage in any discussions or negotiations concerning such an acquisition
proposal; or
- recommend such an acquisition proposal to Randall's shareholders or
withdraw or modify in any adverse manner its approval or recommendation
of the merger agreement.
The merger agreement provides that:
- the term "acquisition proposal" means any proposal or offer, other than
one made by Safeway or an affiliate of Safeway, with respect to a merger,
reorganization, share exchange, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction
involving, or any purchase or sale of all or any significant portion of
the assets of Randall's and its subsidiaries, taken as a whole, or 25% or
more of the equity securities, of Randall's or a material equity interest
in any of its significant subsidiaries; and
- the term "superior proposal" means any bona fide written acquisition
proposal which would result in the third party, including its affiliates
and/or shareholders, owning, directly or indirectly, shares of Randall's
common stock representing more than 50% of the equity interests in
Randall's then outstanding or all or any significant portion of the
assets of Randall's and its subsidiaries, which the Randall's board of
directors determines in good faith (based upon the advice of its
independent financial advisors of national reputation and legal counsel)
would, if consummated, result in a transaction that is more favorable to
Randall's shareholders (in their capacity as shareholders) from a
financial point of view than the merger, taking into account the legal,
financial, including the ability of the party making the acquisition
proposal to finance the transaction contemplated by the acquisition
proposal, regulatory, including antitrust, and other aspects of the
proposal, including the tax consequences of the proposal to the
shareholders of Randall's and the potential appreciation and liquidity of
any securities to be
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received by the shareholders of Randall's in connection with the proposed
transaction, and the party making the proposal.
Randall's may terminate the merger agreement in response to a superior proposal;
provided that Randall's has complied in all material respects with its
obligations under the provisions of the merger agreement described above and
described below under paragraph 6 under "-- Termination". Randall's must pay
Safeway a $45 million fee as a condition to this termination. See
"-- Termination" and "-- Termination Fees".
TERMINATION
The merger agreement may be terminated at any time before the effective
time of the merger, whether before or after approval of the merger agreement by
Randall's shareholders:
1. by mutual written consent of Safeway and Randall's by action of
their respective board of directors;
2. by Safeway or Randall's, if the merger has not been completed by
December 31, 1999; provided, however, that this termination right will not
be available to a party whose failure to perform any of its obligations
under the merger agreement has been the primary cause of the failure of the
merger to be completed by that date;
3. by Safeway or Randall's, if the Randall's shareholders have not
approved the merger agreement at a Randall's shareholders' meeting;
4. by Safeway or Randall's, if any government order, decree or ruling
permanently restraining, enjoining or otherwise prohibiting the merger is
in effect, has become permanent, final and nonappealable, and either makes
the merger illegal or otherwise prohibits completion of the merger,
provided that this termination right will not be available to a party whose
failure to use its reasonable best efforts to prevent the entry of or to
remove any such legal restraint, injunction or prohibition has been the
primary cause of that action or inaction;
5. by Safeway, if the Randall's board of directors withdraws or
modifies in any adverse manner its approval or recommendation of the merger
agreement as described above under "-- No Solicitation", approves or
recommends a superior proposal as described above under "-- No
Solicitation" or resolves to do either of the foregoing;
6. by Randall's on two business days' notice to Safeway if the
Randall's board of directors approves a superior proposal, provided that:
- Randall's has complied in all material respects with the provisions of
the merger agreement described above under "-- No Solicitation";
- the Randall's board of directors has concluded in good faith, after
considering any concessions which are offered by Safeway during the
two business day period, on the basis of the advice of its independent
financial advisors of national reputation and outside counsel, that
the proposal is a superior proposal; and
- Randall's may exercise this termination right only if it has paid
Safeway the $45 million termination fee.
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TERMINATION FEE
Randall's is required to pay Safeway a $45 million termination fee if:
1. Randall's terminates the merger agreement under paragraph 6 under
"-- Termination";
2. Safeway terminates the merger agreement under paragraph 5 under
"-- Termination"; or
3. all of the following occur:
- Randall's or Safeway terminates the merger agreement under paragraph 3
under "-- Termination"
- at the time of the event giving rise to this termination an
acquisition proposal has been made with respect to Randall's, and
- within 12 months of this termination, Randall's or any of its
subsidiaries either (A) enters into a definitive agreement with
respect to or consummates the acquisition proposal described in the
preceding bullet point or (B) consummates a superior proposal.
EMPLOYEE BENEFITS
Safeway has agreed to cause the surviving corporation to maintain Randall's
current employee benefits plans, other than plans that provide for the grant of
equity securities or equity-based awards, for the first 12 months following the
completion of the merger. However, Safeway may cancel, merge or amend the
Randall's ESOP/401(k) Savings Plan so long as Safeway provides Randall's
employees with benefits that are substantially equivalent to those under the
ESOP/401(k) Savings Plan. For the 12 months following the initial 12-month
period, Safeway has agreed that it or the surviving corporation will provide
Randall's employees with employee benefits that are, in the aggregate, no less
favorable than those under Randall's current employee benefits plans, other than
plans that provide for the grant of equity securities or equity-based awards.
Safeway also has agreed to cause specified severance arrangements to be kept in
place in accordance with the terms of those arrangements.
Safeway has agreed to cause annual bonuses that would otherwise be payable
to Randall's employees for fiscal year 2000 to be paid as follows:
- with respect to Randall's store level employees, Safeway will or will
cause the surviving corporation to, continue to provide and pay bonuses
quarterly through December 31, 1999; and
- with respect to Randall's corporate employees, other than those whose
employment with Randall's is not expected to continue for at least 20
business days after the effective time, Safeway will or will cause the
surviving corporation to, provide bonuses based on performance targets
that are (a) established by the surviving corporation pursuant to the
applicable bonus plans, adjusted to reflect the performance of the
surviving corporation through December 31, 1999 and (b) subject to
reasonable adjustment that Safeway and Randall's mutually and reasonably
agree to before the completion of the merger. This bonus will be prorated
for the period through termination for any Randall's corporate employee
whose employment with the surviving corporation is terminated by the
surviving corporation without cause or by the employee for good reason.
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INDEMNIFICATION AND INSURANCE
After the merger, Safeway will cause the surviving corporation to maintain:
- the current provisions regarding elimination of liability of directors
and indemnification of officers, directors and employees contained in the
articles of incorporation and bylaws of Randall's, and
- for a period of six years after the effective time of the merger, the
current policies of directors' and officers' liability insurance and
fiduciary liability insurance maintained by Randall's with respect to
claims arising from facts or events that occurred before the merger
including, without limitation, in respect of the transactions
contemplated by the merger agreement. However, the surviving corporation
may substitute policies of at least the same coverage and amounts
containing terms and conditions which are, in the aggregate, no less
advantageous to the insured. If the annual premium is more than 150% of
the annual premium currently paid by Randall's for this insurance,
Safeway must obtain a policy with the greatest coverage available for a
cost not exceeding that amount.
The surviving corporation may satisfy the obligations in the second bullet
point above by buying a "tail" policy covering those matters.
EXPENSES
The merger agreement provides that, whether or not the merger is completed,
all fees and expenses incurred in connection with the merger, the merger
agreement and the other transactions contemplated by the merger agreement will
be paid by the party incurring those fees or expenses, except as otherwise
provided in the merger agreement, the voting agreements and the amendment to the
registration rights agreement described below and except that:
- Safeway and Randall's will share equally the filing fees with respect to
the premerger notification and report forms under the Hart-Scott-Rodino
Act,
- Safeway will pay expenses incurred in connection with the filing,
printing and mailing of the registration statement and related
prospectus, and
- Randall's will pay expenses incurred in connection with the filing,
printing and mailing of the proxy statement.
Safeway will file any return with respect to, and will pay, any state or
local taxes, if any, which are attributable to the transfer of the beneficial
ownership of Randalls' real property as a result of the merger.
CONDUCT OF BUSINESS PENDING THE MERGER -- RANDALL'S
Under the merger agreement, Randall's has agreed that before the effective
time of the merger, except with the prior written consent of Safeway, which
consent, with respect to paragraph (1) and the ninth bullet of paragraph (2)
below, will not be unreasonably withheld or delayed:
(1) Randall's will, and will cause its subsidiaries to, conduct its
businesses, in all material respects, in the ordinary course, in a manner
consistent with past practice and in compliance with applicable laws; and
Randall's will use its reasonable best efforts to preserve substantially
intact its and its subsidiaries' business organization, to keep available
the services of the present officers, employees and consultants and to
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preserve, in all material respects, the present relationships of Randall's
and its subsidiaries with customers, suppliers, advertisers, distributors
and other persons with which Randall's or any of its subsidiaries has
significant business relations.
(2) Randall's will not, and will not permit its subsidiaries to:
- make or commit to make any capital expenditures, including,
without limitation, for store remodels, in excess of $200,000 in
the aggregate, other than (a) expenditures for routine or
emergency maintenance and repair, or (b) expenditures in amounts
not exceeding those reflected in capital expenditure budgets
supplied to Safeway before the date of the merger agreement;
provided that (1) those expenditures will be without significant
acceleration and (2) Safeway and Randall's agree to confer and
reasonably cooperate with respect to significant capital
expenditure items that are not fully committed on the date of the
merger agreement;
- incur or guarantee any indebtedness or make any loans or capital
contributions to, or equity investments in, any other entity or
issue or sell any debt securities, other than borrowings under
existing agreements in the ordinary course of business consistent
with past practice or inter-company indebtedness between
Randall's and any of its wholly-owned subsidiaries or between
those wholly-owned subsidiaries;
- amend its articles of incorporation or bylaws or amend the
charter or bylaws of any of its subsidiaries;
- split, combine or reclassify or, except in compliance with
existing Randall's employee benefit plans, redeem or purchase the
outstanding shares of its capital stock or other ownership
interests or declare, set aside or pay any dividend payable in
cash, stock or property or make any other distribution with
respect to its shares of capital stock or other ownership
interests; or sell or pledge any stock of any of its
subsidiaries, other than as permitted in the following bullet
point;
- other than as reflected in the capital expenditures budgets
referred to above and subject to the provisos in the first bullet
point of this paragraph (2) above:
- enter into any agreement to dispose of or acquire a segment
of its business or to sell, lease, license, close, shut down
or otherwise dispose of any stores or to relocate any
stores;
- except in the ordinary course of business consistent with
past practice and except for sales or dispositions of
obsolete assets, sell, pledge, dispose of or encumber any
assets including real property;
- other than as otherwise permitted by the first bullet point
of this paragraph (2), acquire any entity or any assets
including real property, other than inventory and other
immaterial assets, including real property, in each case in
the ordinary course of business consistent with past
practice, or
- make any investment or contribution to capital, in any other
entity, in any case in an amount in excess of $150,000 in
the aggregate;
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- other than upon exercise of outstanding options to purchase
shares of Randall's common stock or as otherwise provided in the
merger agreement, issue or sell or agree to issue or sell any
additional shares of, or grant any options or other rights to
acquire any shares of its capital stock;
- other than pursuant to policies or agreements in effect on the
date of the merger agreement described in a schedule to the
merger agreement, grant any severance or termination pay under
its severance or termination pay policies or agreements in effect
on the date of the merger agreement or enter into any employment
or severance agreement with any officer, director or employee;
- except as otherwise permitted by the merger agreement, adopt,
amend or terminate any employee benefit plan, agreement or other
arrangement or increase the compensation or fringe benefits of
any director, officer or employee or grant or pay any bonuses or
other benefit not required by any existing plan, arrangement or
agreement, in each case except (a) for increases in salary or
bonus in the ordinary course of business with respect to
employees of Randall's at the level of store director and below
or (b) as required by law;
- enter into or amend any lease, contract, agreement, commitment,
understanding or other arrangement, in each case involving annual
expenditures or liabilities in excess of $250,000 or which is not
cancelable within one year without penalty, cost or liability,
other than short-term promotional agreements with vendors entered
into in the ordinary course of business;
- enter into any collective bargaining agreements;
- change in any material respect its tax or accounting policies or
make any material reclassification of assets or liabilities
except as required by law or generally accepted accounting
principles;
- change or make any new tax elections, change materially any
method of accounting with respect to taxes, file any amended tax
return, or settle or compromise any material federal, state,
local or foreign tax liability;
- other than in the ordinary course of business consistent with
past practice, pay, discharge or satisfy any material claims,
liabilities or obligations, except the payment, discharge or
satisfaction of (a) liabilities or obligations in the ordinary
course of business consistent with past practice or in accordance
with their terms as in effect on the date of the merger agreement
or (b) claims settled or compromised as permitted by the
following bullet point, or waive, release, grant or transfer any
rights of material value or modify or change in any material
respect any existing material contract;
- settle or compromise any litigation, other than litigation not in
excess of amounts reserved for in the most recent publicly filed
consolidated financial statements of Randall's or, if not so
reserved for, in an aggregate amount not in excess of $100,000,
provided in either case such settlement
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documents do not involve any material non-monetary obligations on
the part of Randall's and its subsidiaries;
- adopt a plan of liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization or
otherwise alter its or any of its subsidiaries' corporate
structure and ownership;
- make any payment to an affiliate, except in accordance with the
terms of any contract or compensation to employees in the
ordinary course of business and otherwise in accordance with the
merger agreement; and
- take, or offer or propose to take, or agree to take in writing or
otherwise, any of the actions described in this paragraph (2) or
any action which would result in any of the conditions to the
effectiveness of the merger not being satisfied.
CONDUCT OF BUSINESS PENDING THE MERGER -- SAFEWAY
Under the merger agreement, Safeway has agreed that prior to the effective
time of the merger, except with the prior written consent of Randall's, which
consent, with respect to paragraph (1) below, will not be unreasonably withheld
or delayed:
(1) Safeway will, to the extent consistent with its reasonable
commercial judgment and to the extent material, use its reasonable best
efforts to preserve substantially intact its and its subsidiaries' current
business organizations, keep available the services of its present
officers, employees and consultants and preserve, in all material respects,
its and any of its subsidiaries' present relationships with customers,
suppliers, advertisers, distributors and others having significant business
relations with it except where the failure to do so would not have a
material adverse affect on Safeway.
(2) Safeway will not, and will not permit its subsidiaries to:
- amend its certificate of incorporation or bylaws in such a manner
as would cause holders of Randall's common stock that receive
Safeway common stock pursuant to the merger to be treated
differently than other holders of Safeway common stock;
- split, combine or reclassify the outstanding shares of Safeway's
capital stock or other ownership interests or declare, set aside
or pay any dividend payable in cash, stock or property or make
any other distribution with respect to such shares of capital
stock or other ownership interests, except that a wholly-owned
subsidiary may declare and pay a dividend to its parent;
- adopt a plan of complete or partial liquidation with respect to
Safeway or resolutions providing for or authorizing such a
liquidation or a dissolution;
- acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business
organization or division thereof or otherwise acquire or agree to
acquire any assets or stores, offices, plants and warehouses that
operate within Randall's existing principal market areas; and
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- take, or offer or propose to take, or agree to take in writing or
otherwise, any of the actions described in this paragraph (2) or any
action which would result in any of the conditions to the
effectiveness of the merger not being satisfied.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties for
Randall's and Safeway relating to, among other things:
- corporate organization and similar corporate matters;
- capitalization;
- authorization, execution, delivery, performance and enforceability of,
conflicts and defaults created by, and required consents of governmental
authorities relating to, the merger agreement and related matters;
- compliance with applicable laws;
- documents filed by each of Safeway and Randall's with the Securities and
Exchange Commission, the accuracy of information contained in those
documents and the absence of undisclosed liabilities of each of Safeway
and Randall's;
- the accuracy of information supplied for Randall's proxy statement and
this prospectus and the registration statement of which it is a part;
- engagement and payment of fees of brokers, investment bankers, finders
and financial advisors; and
- the absence of material adverse changes or events.
In addition, Randall's has made representations and warranties relating to,
among other things:
- subsidiaries and joint ventures;
- litigation;
- tax matters;
- employee benefit matters;
- title to assets;
- material contracts, including Randall's rights under an option agreement
to purchase shares of a subsidiary;
- labor relations;
- intellectual property;
- environmental matters;
- year 2000 matters;
- affiliate transactions;
- receipt of a fairness opinion;
- required board approval;
- absence of other agreements to sell Randall's;
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- required shareholder vote;
- the satisfaction of Texas law takeover requirements;
- insurance policies; and
- books and records.
In addition, Safeway has made representations and warranties relating to,
among other things:
- no required stockholder vote;
- financial resources; and
- no prior activities of the acquisition subsidiary.
AMENDMENT, EXTENSION AND WAIVER
The merger agreement provides that, subject to applicable law, (1) the
merger agreement may be amended by the parties, by action of their respective
boards of directors, in writing at any time, except that after the merger
agreement has been adopted by the Randall's shareholders, no amendment may be
entered into which requires further approval by Randall's shareholders unless
this further approval is obtained, and (2) at any time prior to the merger, a
party may, by action of its board of directors, and by written instrument signed
on behalf of the party, to the extent legally allowed, extend the time for
performance of the obligations of any other party to the merger agreement, waive
inaccuracies in representations and warranties of any other party contained in
the merger agreement or in any document delivered under the merger agreement and
waive compliance by any other party with any agreements or conditions in the
merger agreement.
THE VOTING AGREEMENTS
THE FOLLOWING SUMMARY DESCRIPTION OF THE MATERIAL TERMS OF THE VOTING
AGREEMENTS IS QUALIFIED IN ITS ENTIRETY BY, AND MADE SUBJECT TO, THE MORE
COMPLETE INFORMATION SET FORTH IN THE VOTING AGREEMENTS WHICH ARE INCLUDED IN
FULL AS ANNEXES B, C AND D TO THIS PROSPECTUS AND INCORPORATED IN THIS
PROSPECTUS BY REFERENCE.
Concurrently with the execution of the merger agreement, Safeway entered
into voting agreements with RFM Acquisition LLC, Onstead Interests, Ltd., and R.
Randall Onstead, Jr. On the record date for the Randall's special shareholders
meeting to vote on the approval of the merger agreement, Mr. Onstead owned
203,336 shares of Randall's common stock, Onstead Interests, Ltd. owned
6,009,470 shares of Randall's common stock, and RFM Acquisition LLC owned
18,579,686 shares of Randall's common stock. Together these shares represent
approximately 83% of the outstanding shares of Randall's common stock on the
record date.
Pursuant to the voting agreements, these shareholders have agreed, among
other things, to vote those shares of Randall's common stock for which they have
voting power or control:
- in favor of the approval of the merger;
- against any competing acquisition proposal; and
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- against any amendment to Randall's articles of incorporation or by-laws
which would in any manner prevent or materially impede, interfere with or
delay the merger.
Under the terms of the voting agreements, each shareholder has granted an
irrevocable proxy and power of attorney to certain designees of Safeway to vote
or act by written consent with respect to the shares they hold. As a result of
the voting agreements, the proposal to approve the merger agreement will be
approved, whether or not any other shareholder of Randall's votes in favor of
the proposal.
The voting agreement further provides that
(1) in the event the merger agreement is terminated pursuant to any
provision under which a termination fee could become payable to Safeway,
and
(2) the shareholder sells or disposes of his or its shares
- within 12 months of termination of the voting agreement pursuant
to an acquisition proposal;
- in any other transaction, other than a bona fide public offering
within 12 months of termination of the voting agreement and, at
that time, an acquisition proposal is pending; or
- at any time pursuant to a superior proposal so long as the
agreement with respect to the superior proposal is entered into
within 12 months of termination of the voting agreement,
then each shareholder party to a voting agreement will pay to Safeway 50% of the
"profit" (as defined below) on the aggregate consideration paid in the sale or
other disposition of that shareholder's Randall's common stock. The "profit"
equals the aggregate consideration received by the shareholder in the sale or
disposition of its shares less $41.75 per share and less out of pocket
transaction costs of the shareholder in connection with that sale or
disposition.
The voting agreement provides that it will terminate and the proxy
described above will expire upon the earliest to occur of:
- the completion of the merger, and
- 60 days after the date on which the merger agreement is terminated.
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THE FOLLOWING SUMMARY DESCRIPTION OF THE TERMS OF THE AMENDMENT TO THE
REGISTRATION RIGHTS AGREEMENT BY AND AMONG SAFEWAY AND VARIOUS SHAREHOLDERS IS
QUALIFIED IN ITS ENTIRETY BY, AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION
SET FORTH IN THE AMENDMENT TO THE REGISTRATION RIGHTS AGREEMENT WHICH IS
INCLUDED IN FULL AS ANNEX E TO THIS PROSPECTUS AND INCORPORATED IN THIS
PROSPECTUS BY REFERENCE.
Concurrently with the execution of the voting agreement with RFM
Acquisition LLC, Safeway and other shareholders of Safeway who are affiliates of
RFM Acquisition LLC
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and who were parties to a registration rights agreement with Safeway, entered
into an amendment to that registration rights agreement. The amendment provides
that:
- RFM Acquisition LLC will be treated as a party to the registration rights
agreement and entitled to participate in the registration rights with
respect to the Safeway common stock it receives in the merger; and
- the number of demand rights available to the shareholders who are party
to the registration rights agreement will be increased from six to eight.
The amendment will become effective upon the effective time of the merger.
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DESCRIPTION OF SAFEWAY CAPITAL STOCK
GENERAL
Pursuant to Safeway's certificate of incorporation, the authorized capital
stock of Safeway consists of 1,500,000,000 shares of Common Stock, par value
$0.01 per share, and 25,000,000 shares of preferred stock, par value $0.01 per
share. At July 21, 1999, Safeway had issued and outstanding 497,370,837 shares
of common stock and no outstanding shares of preferred stock. All shares of
Safeway common stock are fully paid and nonassessable. As of August 3, 1999,
there were approximately 10,521 holders of record of Safeway common stock.
COMMON STOCK
Each holder of Safeway common stock is entitled to one vote for each share
owned of record on all matters voted upon by stockholders, and a majority vote
is required for all action to be taken by stockholders. In the event of a
liquidation, dissolution or winding-up of Safeway, the holders of Safeway common
stock are entitled to share equally and ratably in the assets of Safeway, if
any, remaining after the payment of all debts and liabilities of Safeway and the
liquidation preference of any outstanding preferred stock. The Safeway common
stock has no preemptive rights, no cumulative voting rights and no redemption,
sinking fund or conversion provisions.
Safeway's certificate of incorporation provides for a classified board of
directors consisting of three classes as nearly equal in size as practicable.
Each class holds office until the third annual meeting for election of directors
following the election of such class.
Safeway's by-laws provide for additional notice requirements for
stockholder nominations and proposals at annual or special meetings of Safeway.
At annual meetings, stockholders may submit nominations for directors or other
proposals only upon written notice to Safeway not less than 50 days nor more
than 75 days prior to the annual meeting.
The Safeway common stock is listed on the New York Stock Exchange. The
transfer agent and registrar for the Safeway common stock is First Chicago Trust
Company of New York.
PREFERRED STOCK
The board of directors of Safeway is authorized without further stockholder
action, to divide any or all shares of the authorized preferred stock into
series and to fix and determine the designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date of this prospectus, the board of directors of Safeway
has not authorized any series of preferred stock and there are no plans,
agreements or understandings for the issuance of any shares of preferred stock.
DIVIDENDS
Holders of Safeway common stock are entitled to receive dividends if, as
and when declared by the board of directors of Safeway out of funds legally
available therefor, subject to the dividend and liquidation rights of any
preferred stock that may be issued and
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subject to the dividend restrictions in Safeway's credit agreement and the
indentures relating to Safeway's senior and senior subordinated debt securities.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the effective time, KKR Associates and RFM Acquisition
LLC will own an aggregate of approximately 38 million shares of outstanding
Safeway common stock (representing approximately 7.5% of the outstanding
shares). Safeway also has a stock option plan for employees, directors and
consultants pursuant to which as of August 4, 1999 options to purchase
approximately 33.3 million shares of Safeway common stock were issued and
approximately 19.8 million shares were eligible to be granted in the future. If
exercised, these options would result in the issuance of a substantial number of
shares of Safeway common stock, thereby diluting the proportionate voting power
and equity interests of the holders of Safeway common stock to be issued in the
merger.
After the effective time, KKR Associates and RFM Acquisition LLC will be
entitled to certain registration rights with respect to their shares of Safeway
common stock. See "Amendment to Registration Rights Agreement."
Safeway cannot predict the effect, if any, that future sales of shares, or
the availability of shares for future sales, will have on the market price of
the Safeway common stock prevailing from time to time. Sales of substantial
amounts of Safeway common stock, or the perception that such sales could occur,
could adversely affect prevailing market prices for Safeway common stock.
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COMPARISON OF RIGHTS OF HOLDERS OF
SAFEWAY COMMON STOCK AND RANDALL'S COMMON STOCK
After consummation of the merger, Randall's shareholders will become
stockholders of Safeway. The following is a summary of some similarities and all
material differences between the rights of Randall's shareholders and the rights
of Safeway stockholders.
The following discussion is not intended to be complete and is qualified in
its entirety by reference to the Texas Business Corporation Act and the Delaware
General Corporation Law, Randall's articles of incorporation and by-laws and
Safeway's certificate of incorporation and by-laws.
SECURITIES THAT HAVE VOTING RIGHTS
Under Texas law, the holder of each outstanding share of stock, regardless
of class, is entitled to one vote per share on each matter submitted to a
shareholder vote, except as limited or expanded by the articles of
incorporation. Randall's articles of incorporation provide for one vote for each
share of Randall's common stock.
Under Delaware law, the holder of each outstanding share of stock,
regardless of class, is entitled to one vote per share on each matter submitted
to a shareholder vote, except as limited or expanded by the certificate of
incorporation. Safeway's certificate of incorporation provides for one vote for
each share of Safeway common stock.
PREEMPTIVE RIGHTS AND CUMULATIVE VOTING
Neither Texas nor Delaware law require shareholders to have preemptive
rights or the right of cumulative voting. As a shareholder of Randall's and as a
stockholder of Safeway, you do not and will not have preemptive rights or the
right of cumulative voting.
ELECTION, NUMBER, CLASSIFICATION AND REMOVAL OF DIRECTORS
The number of directors of Randall's is fixed by the Randall's by-laws and
is at least one and not more than fifteen. The Randall's board currently
consists of eight directors is not divided into separate classes. Directors
serve until the next annual meeting of shareholders or until a special meeting
of the shareholders held in lieu of the annual meeting and until their
successors are elected and qualified.
At any meeting of Randall's shareholders at which a quorum of shareholders
is present, called expressly for the purpose of removing one or more directors,
any director of Randall's or the entire board of directors may be removed from
office, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of directors. The Randall's by-laws
do not require advance notice of nominations by shareholders for election of
directors or other business brought before an annual meeting by a shareholder.
Safeway's certificate of incorporation provides for a board of directors
consisting of not less than six nor more than twelve directors. Safeway's
by-laws currently have set the number of directors at nine. Safeway's
certificate of incorporation provides for three classes of directors, each
consisting as nearly as possible, one-third of the total number of directors
constituting the entire board of directors. At each annual meeting of
stockholders, one class is elected to serve for a three year term.
Classification of the board of directors has the effect of making it more
difficult to change the membership of the board of directors even if the reason
for such a change may be dissatisfaction with the performance of
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incumbent directors. At least two annual stockholder meetings would ordinarily
be required to effect a change of control of the board of directors.
Safeway's by-laws provide that advance notice of nominations by
stockholders for the election of directors must be given in the manner and to
the extent provided in the by-laws. In addition, Safeway's by-laws provide for
advance notice of any other business to be properly brought before an annual
meeting by a shareholder.
Any director or the entire board of directors of a Delaware corporation may
be removed with or without cause by the vote of the holders of a majority of the
corporation's outstanding shares entitled to vote thereon, provided, however,
unless the certificate of incorporation otherwise provides, in the case of a
corporation whose board is classified, stockholders may remove directors only
for cause. Safeway's certificate of incorporation provides that any or all of
Safeway's directors may be removed from office at any time, either with or
without cause, by the affirmative vote of stockholders owning a majority in
amount of the entire capital stock of Safeway issued and outstanding, and
entitled to vote.
VOTING RIGHTS ON BUSINESS COMBINATIONS; TRANSACTIONS WITH INTERESTED
STOCKHOLDERS; DELAWARE GENERAL CORPORATION LAW SECTION 203 AND
TEXAS BUSINESS CORPORATION ACT ARTICLE 13
Under the Texas Business Corporation Act, the vote of the holders of two
thirds of each class of outstanding Randall's stock entitled to vote must
approve a merger or the sale, lease or disposition of all or substantially all
of Randall's property and assets, unless a different percentage is specified in
the articles of incorporation. The Randall's articles of incorporation provide
that a merger or the sale, lease or disposition of all or substantially all of
Randall's property or assets may be approved by the affirmative vote of a
majority of the outstanding shares of common stock entitled to vote on such
matter.
Randall's is subject to Part 13 of the Texas Business Corporation Act,
which prohibits a Texas corporation from engaging in a business combination with
an affiliated shareholder, defined generally as a person owning 20% or more of a
corporation's outstanding voting stock, for three years after becoming an
affiliated shareholder unless:
- the board approved the business combination or the transaction in which
the affiliated shareholder became an affiliated shareholder before the
person became an affiliated shareholder, or
- holders of two-thirds of the outstanding voting stock of the corporation
not owned by the affiliated shareholder approve the business combination
at least six months after the person became an affiliated shareholder.
Safeway is subject to Section 203 of the Delaware General Corporation Law.
Under Section 203, an interested stockholder, defined generally as a person
owning 15% or more of a corporation's outstanding voting stock, is prevented
from engaging in a business combination with the corporation for three years
after becoming an interested stockholder unless:
- the board approved the transaction in which the interested stockholder
became an interested stockholder,
- the interested stockholder owns more than 85% of the stock after the
consummation of the transaction in which the stockholder became
interested; or
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- the board approves the business combination and two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder approves the business combination.
RIGHT TO CALL SPECIAL MEETINGS
Under the Texas Business Corporation Act, holders of not less than 10% of
all shares entitled to vote have the right to call for a special shareholder's
meeting, unless the articles of incorporation provide for a number of shares
greater than or less than 10%. If so specified, special meetings of the
shareholders may be called by holders of at least the percentage of shares so
specified in the articles of incorporation, but the articles of incorporation
may not provide for a number of shares greater than 50% to call a special
shareholder's meeting. Additionally, a special meeting of shareholders may be
called by the president, the board of directors, or any other person authorized
in the articles of incorporation or bylaws. Randall's bylaws authorize each of
the president, the board of directors, and the chairman of the board to call a
special meeting and require that such a special shareholder's meeting be called
at the written request of holders of not less than 10% of all the shares
entitled to vote.
Safeway's certificate of incorporation provides that special meetings of
stockholders may be called at any time by the board of directors, the Chairman
of the board of directors, the President or the stockholders owning a majority
in amount of the entire capital stock of Safeway issued and outstanding, and
entitled to vote.
SHAREHOLDER ACTION BY WRITTEN CONSENT
Unless otherwise provided in the articles of incorporation, under the Texas
Business Corporation Act, any action which is required to be taken or may be
taken at a meeting of shareholders may be taken by a written consent signed by
the holder or holders of all the shares entitled to vote with respect to the
action that is the subject of the consent. Randall's articles of incorporation
do not provide otherwise.
Delaware law allows any action required or permitted to be taken by
shareholders of a corporation to be taken without a meeting and without a
shareholder vote if a written consent setting forth the action to be taken is
signed by the holders of shares of outstanding stock having the requisite number
of votes that would be necessary to authorize such action at a meeting of
shareholders, except as specifically prohibited by the certificate of
incorporation. Safeway's by-laws specifically allow action by written consent of
Safeway's stockholders.
AMENDMENT OF CERTIFICATE/ARTICLES OF INCORPORATION AND BYLAWS
The Texas Business Corporation Act provides that a corporation's articles
can be amended upon receiving the affirmative vote of the holders of at least
two-thirds of the outstanding shares entitled to vote on such amendment, unless
a different percentage is specified in the articles of incorporation. The
Randall's articles of incorporation provide for amendment in some instances upon
receiving the affirmative vote of a majority of the outstanding shares of common
stock entitled to vote on the amendment. The power to amend Randall's bylaws has
been delegated to the board of directors, subject to repeal or change by action
of the shareholders.
Safeway's certificate of incorporation provides that any provision
contained in the certificate of incorporation may be repealed, altered, amended
or rescinded in the manner prescribed by statute. Under the Delaware General
Corporation Law, amendments to the
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certificate of incorporation may be adopted by the board of directors and the
affirmative vote of a majority of the outstanding stock of each class entitled
to vote thereon as a class.
Under Delaware law, the power to adopt, amend or repeal by-laws is vested
in the stockholders provided that the certificate of incorporation of a Delaware
corporation may contain provisions conferring upon directors the power to amend,
alter or repeal by-laws. Under the provisions of Safeway's certificate of
incorporation and by-laws, the power to amend, alter or repeal the by-laws is
conferred on the board of directors, in addition to the stockholders.
DISSENTERS' RIGHTS
Under the Texas Business Corporation Act, shareholders of Texas
corporations have the right to dissent from most mergers and the sale, lease,
exchange or other disposition of all or substantially all of the property and
assets of the corporation if that action requires the special authorization of
the corporation's shareholders, or any plan of exchange in which the
shareholders' shares are to be acquired. However, a shareholder of a Texas
corporation does not have dissenters' rights with respect to any plan of merger
when there is a single surviving or new domestic or foreign corporation, or from
any plan of exchange, if:
- the shares held by the shareholder are part of a class or series of
shares which are listed on a national securities exchange, listed on the
Nasdaq Stock Market, designated as a national market security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not less than 2,000 holders, on the
record date fixed to determine the shareholders entitled to vote on the
plan of merger or plan of exchange,
- the shareholder is not required by the terms of the plan of merger or
exchange to accept for the shareholder's shares any consideration that is
different than the consideration to be provided to any other holder of
shares of the same class or series, and
- the shareholder is not required by the terms of the plan of merger or
exchange to accept for his or her shares any consideration other than:
(a) shares of a corporation that, immediately after the merger or
exchange, will be a part of a class or series of shares which are
listed, or authorized for listing upon official notice of issuance, on
a national securities exchange, approved for quotation as a national
market security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or held of record by not less
than 2,000 holders;
(b) cash in lieu of fractional shares; or
(c) a combination of (a) and (b) above.
The dissenters' rights of Randall's shareholders in the merger are summarized in
this prospectus under "The Merger -- Dissenters' Rights of Appraisal" on page
30.
Stockholders of a Delaware corporation have the right to dissent and demand
appraisal of the fair value of their shares in some business combination
transactions. These rights are not available for shares of stock of Delaware
corporations which are either listed on a national securities exchange or quoted
on the Nasdaq Stock Market or held by more than 2,000 stockholders unless the
corporation's stockholders are required to accept for such stock anything other
than (i) stock of the surviving corporation, (ii) stock of any
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company either listed on a national securities exchange or quoted on the Nasdaq
Stock Market or held by more than 2,000 stockholders, (iii) cash in lieu of
fractional shares of corporations described in (i) and (ii) above, or (iv) a
combination of the foregoing. Delaware law does not provide dissenters' rights
in connection with sales of substantially all the assets of a corporation,
reclassification of stock or other amendments to the certificate of
incorporation which adversely affect a class of stock.
EXPERTS
The consolidated financial statements of Safeway Inc. as of January 2, 1999
and January 3, 1998 and for each of the three fiscal years in the period ended
January 2, 1999, which are included in Safeway's 1998 Annual Report on Form 10-K
for the year ended January 2, 1999 attached as Annex H to this prospectus, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is also included herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements of Randall's as of June 27, 1998 and
June 28, 1997 and for the fiscal years then ended, included in Randall's Annual
Report on Form 10-K which is attached as Annex L to 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 statements of operations, redeemable stock and
stockholders' equity and cash flows for fiscal year 1996 of Randall's included
in Annex L to 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.
With respect to the unaudited financial information of Randall's for the
period ended January 9, 1999 and April 3, 1999 which are attached as Annexes N
and O to this prospectus, Deloitte & Touche LLP have applied limited procedures
in accordance with professional standards for a review of such information.
However, as stated in their reports included in Randall's Quarterly Reports on
Form 10-Q for the quarters ended January 9, 1999 and April 3, 1999 and attached
as Annexes N and O to this prospectus, they did not audit and did not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their reports on such information should be restricted in light of
the limited nature of the review procedures applied. Deloitte & Touche LLP are
not subject to the liability provisions of Section 11 of the Securities Act of
1933 for their reports on the unaudited interim financial information because
those reports are not "reports" or a "part" of the registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Securities Act.
LEGAL COUNSEL
The validity of the shares of Safeway common stock to be issued pursuant to
the merger will be passed upon by Michael C. Ross, General Counsel of Safeway.
Certain tax matters with respect to the merger will be passed upon for
Randall's by Simpson Thacher & Bartlett.
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WHERE YOU CAN FIND MORE INFORMATION
Safeway and Randall's file annual, quarterly and special reports, proxy
statements and other information with the Commission. You can inspect and copy
these reports, proxy statements and other information at the public reference
facilities of the Commission, in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and
Suite 1400, Citicorp Center, 500 W. Madison Street, Chicago, Illinois
60661-2511. You can also obtain copies of these materials from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Commission also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
(http://www.sec.gov). Safeway common stock is listed on the New York Stock
Exchange. You can inspect reports and other information about Safeway at the
office of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York
10005.
Safeway filed a registration statement on Form S-4 and related exhibits
with the Commission under the Securities Act of 1933 with respect to the shares
of Safeway common stock to be issued in connection with the merger. The
registration statement contains additional information about Safeway and the
merger. You may inspect the registration statement and exhibits without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and you may obtain copies from the Commission at prescribed rates. As
allowed by the Commission rules, this prospectus does not contain all
information you can find in the registration statement or the exhibits to the
registration statement.
All documents filed by Safeway and Randall's with the Commission pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934 between the
date of this prospectus and prior to the consummation of the merger shall be
deemed to be incorporated by reference in this prospectus and to be a part
hereof from the respective dates of filing of such documents. Any statement
contained herein or in a document attached as an annex to this prospectus shall
be deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in any subsequently filed document which also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
Randall's has supplied all information contained in, or attached as an
annex to, this prospectus relating to Randall's, and Safeway has supplied all
such information relating to Safeway.
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If you are a stockholder, we may have sent you some of the documents
attached as annexes to this prospectus or any documents filed by us with the
Commission, but you can obtain any of them through us or the Commission.
Documents attached as annexes to this prospectus or any documents filed by us
with the Commission are available from us without charge, excluding all exhibits
unless we have specifically incorporated by reference an exhibit in this
prospectus. Stockholders may obtain documents attached as annexes to this
prospectus or any documents filed by us with the Commission by requesting them
in writing or by telephone from the appropriate party at the following
addresses:
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
(713) 268-3500
Investor Relations
Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton, California 94588
(925) 467-3790
To make sure you receive these documents in a timely manner, please make
your request by September 2, 1999.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS, INCLUDING
ANY DOCUMENTS ATTACHED AS ANNEXES TO THIS PROSPECTUS. WE HAVE NOT AUTHORIZED
ANYONE ELSE TO PROVIDE YOU WITH INFORMATION FROM WHAT IS CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS IS DATED AUGUST 13, 1999. YOU SHOULD NOT ASSUME THAT
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN AUGUST 13, 1999, AND NEITHER THE MAILING OF THE PROSPECTUS NOR ANY THE
ISSUANCE OF SAFEWAY COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO
THE CONTRARY.
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ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 22, 1999
AMONG
SAFEWAY INC.
SI MERGER SUB, INC.
AND
RANDALL'S FOOD MARKETS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE> 66
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I
THE MERGER................................................................ A-2
1.1 The Merger.......................................................... A-2
1.2 Closing............................................................. A-3
1.3 Effective Time...................................................... A-3
1.4 Effects of the Merger............................................... A-3
1.5 Articles of Incorporation........................................... A-3
1.6 By-Laws............................................................. A-3
1.7 Officers and Directors of Surviving Corporation..................... A-3
1.8 Effect on Capital Stock............................................. A-3
1.9 Treatment of Options and Other Stock Awards......................... A-5
1.10 Treatment of Investor Option........................................ A-6
ARTICLE II
EXCHANGE OF CERTIFICATES.................................................. A-7
2.1 Exchange Fund....................................................... A-7
2.2 Exchange Procedures................................................. A-7
2.3 Distributions with Respect to Unexchanged Shares.................... A-8
2.4 No Further Ownership Rights in Company Common Stock................. A-8
2.5 No Fractional Shares of Parent Common Stock......................... A-9
2.6 Termination of Exchange Fund........................................ A-9
2.7 No Liability........................................................ A-9
2.8 Investment of the Exchange Fund..................................... A-9
2.9 Lost Certificates................................................... A-9
2.10 Withholding Rights.................................................. A-10
2.11 Further Assurances.................................................. A-10
2.12 Stock Transfer Books................................................ A-10
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................................ A-10
3.1 Representations and Warranties of the Company....................... A-10
(a) Organization and Qualification.............................. A-10
(b) Authorization; Validity and Effect of Agreement............. A-11
(c) Capitalization.............................................. A-11
(d) Subsidiaries................................................ A-12
(e) Other Interests............................................. A-13
(f) No Conflict; Required Filings and Consents.................. A-13
(g) Compliance.................................................. A-14
(h) SEC Documents............................................... A-14
(i) Absence of Certain Changes.................................. A-15
(j) Litigation.................................................. A-15
(k) Taxes....................................................... A-16
(l) Employee Benefits........................................... A-17
(m) Title to Assets............................................. A-19
(n) Contracts................................................... A-20
(o) Labor Relations............................................. A-21
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(p) Intellectual Property....................................... A-21
(q) Affiliate Transactions...................................... A-22
(r) Environmental Matters....................................... A-22
(s) Information Supplied........................................ A-23
(t) Opinion of Financial Advisor................................ A-23
(u) Brokers..................................................... A-23
(v) Vote Required............................................... A-24
(w) No Other Agreements to Sell the Company or its Assets....... A-24
(x) Texas Takeover Statute; State Takeover Statutes............. A-24
(y) Year 2000 Compliance........................................ A-24
(z) Insurance Policies.......................................... A-24
(aa) Books and Records........................................... A-25
(bb) Option Agreement............................................ A-25
3.2 Representations and Warranties of Parent and Merger Sub............. A-25
(a) Organization and Qualification.............................. A-25
(b) Authorization; Validity and Effect of Agreement............. A-26
(c) Capitalization.............................................. A-26
(d) No Conflict; Required Filings and Consents.................. A-27
(e) Compliance.................................................. A-27
(f) SEC Documents............................................... A-28
(g) Absence of Certain Changes.................................. A-29
(h) Information Supplied........................................ A-29
(i) Brokers..................................................... A-30
(j) Vote Required............................................... A-30
(k) Financial Resources......................................... A-30
(l) No Prior Activities......................................... A-30
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS................................. A-30
4.1 Covenants of Company................................................ A-30
4.2 Covenants of Parent................................................. A-33
4.3 Governmental Filings................................................ A-34
4.4 Covenant Regarding Certain Company Plans or Other Arrangements...... A-34
ARTICLE V
ADDITIONAL AGREEMENTS..................................................... A-34
5.1 Preparation of Proxy Statement; Form S-4; Company Shareholders
Meeting............................................................. A-34
5.2 Access to Information............................................... A-35
5.3 Reasonable Best Efforts............................................. A-36
5.4 Acquisition Proposals............................................... A-38
5.5 Employee Benefits Matters........................................... A-39
5.6 Fees and Expenses................................................... A-41
5.7 Directors' and Officers' Insurance.................................. A-41
5.8 Public Announcements................................................ A-42
5.9 Listing of Shares of Parent Common Stock............................ A-42
5.10 Affiliate Letter.................................................... A-42
5.11 Shareholder Agreement............................................... A-42
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE VI
CONDITIONS PRECEDENT...................................................... A-43
6.1 Conditions to Each Party's Obligation to Effect the Merger.......... A-43
(a) Shareholder Approval........................................ A-43
(b) No Injunctions or Restraints, Illegality.................... A-43
(c) HSR Act..................................................... A-43
(d) NYSE Listing................................................ A-43
(e) Effectiveness of the Form................................... A-43
6.2 Additional Conditions to Obligations of Parent and Merger Sub....... A-43
(a) Representations and Warranties.............................. A-43
(b) Performance of Obligations of the Company................... A-44
(c) Tax Opinion................................................. A-44
(d) Affiliate Agreements........................................ A-44
(e) Material Adverse Change..................................... A-44
6.3 Additional Conditions to Obligations of the Company................. A-44
(a) Representations and Warranties.............................. A-44
(b) Performance of Obligations of Parent........................ A-45
(c) Tax Opinion................................................. A-45
ARTICLE VII
TERMINATION AND AMENDMENT................................................. A-45
7.1 Termination......................................................... A-45
7.2 Effect of Termination............................................... A-46
7.3 Amendment........................................................... A-46
7.4 Extension; Waiver................................................... A-47
ARTICLE VIII
GENERAL PROVISIONS........................................................ A-47
8.1 Non-Survival of Representations, Warranties and Agreements.......... A-47
8.2 Notices............................................................. A-47
8.3 Interpretation...................................................... A-48
8.4 Counterparts........................................................ A-48
8.5 Entire Agreement; No Third Party Beneficiaries...................... A-48
8.6 Governing Law....................................................... A-48
8.7 Severability........................................................ A-48
8.8 Assignment.......................................................... A-49
8.9 Enforcement......................................................... A-49
8.10 Intentionally Omitted............................................... A-49
8.11 Definitions......................................................... A-49
</TABLE>
iii
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AGREEMENT AND PLAN OF MERGER, dated as of July 22, 1999 (this "Agreement"),
among SAFEWAY INC., a Delaware corporation ("Parent"), SI MERGER SUB, INC., a
Texas corporation and a direct wholly-owned subsidiary of Parent ("Merger Sub"),
and RANDALL'S FOOD MARKETS, INC., a Texas corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company have each determined that the merger of the Company with and into Merger
Sub (the "Merger") is advisable and in the best interests of their respective
stockholders, and such Boards of Directors have approved such Merger, upon the
terms and subject to the conditions set forth in this Agreement, pursuant to
which each outstanding share of common stock, par value $.25 per share, of the
Company (the "Company Common Stock") issued and outstanding immediately prior to
the Effective Time (as defined in Section 1.3), other than shares owned or held
directly or indirectly by Parent or the Company and other than Dissenting Shares
(as defined in Section 1.8(e)),will be converted into the right to receive a
unit consisting of a fraction of a fully paid and nonassessable share of common
stock, par value $.01 per share, of Parent ("Parent Common Stock") and an amount
in cash;
WHEREAS, as a condition to Parent and Merger Sub entering into this
Agreement and incurring the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, Parent and Merger Sub are entering
into a Voting Agreement with each of (i) RFM Acquisition LLC ("RFM"), (ii)
Onstead Interests, Ltd. ("Onstead Interests") and (iii) R. Randall Onstead, Jr.
(the "Onstead Party") (collectively, the "Voting Agreements") pursuant to which,
among other things, RFM, Onstead Interests and the Onstead Party each has
agreed, subject to the terms thereof, to vote all shares of capital stock owned
by it in favor of this Agreement, the Merger and the transactions contemplated
hereby;
WHEREAS, Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated hereby and also to prescribe various conditions to the
transactions contemplated hereby; and
WHEREAS, Parent, Merger Sub and the Company intend, by approving
resolutions authorizing this Agreement, to adopt this Agreement as a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations promulgated thereunder
("Treasury Regulations").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Texas Business Corporation Act (the
"TBCA"),
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the Company shall be merged with and into Merger Sub at the Effective Time.
Following the Merger, the separate corporate existence of the Company shall
cease and Merger Sub shall continue as the surviving corporation (the "Surviving
Corporation") under the name "Randall's Food Markets, Inc.".
1.2 CLOSING. Unless this Agreement shall have been terminated pursuant to
the provisions of Section 7.1, the closing of the Merger (the "Closing") will
take place on the second Business Day (as defined in Section 8.11) after the
satisfaction or waiver (subject to applicable law) of the conditions (excluding
conditions that, by their terms, cannot be satisfied until the Closing Date and
taking into account the provisions of Section 1.8(a)) set forth in Article VI
(the "Closing Date"), unless another time or date is agreed to in writing by the
parties hereto. The Closing shall be held at the offices of Latham & Watkins,
505 Montgomery Street, Suite 1900, San Francisco, California 94111, unless
another place is agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME. As soon as practicable following the Closing, the
parties shall (i) file articles of merger (the "Articles of Merger") in such
form as is required by and executed in accordance with the relevant provisions
of the TBCA and (ii) make all other filings or recordings required under the
TBCA. The Merger shall become effective at such time as the Articles of Merger
are duly filed with the Secretary of State of the State of Texas and a
certificate of merger has been issued or at such subsequent time as Parent and
the Company shall agree and be specified in the Articles of Merger (the date and
time the Merger becomes effective being the "Effective Time").
1.4 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
will have the effects set forth in the TBCA. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers and franchises of the Company and Merger Sub shall be
vested in the Surviving Corporation, and all debts, liabilities and duties of
the Company and Merger Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
1.5 ARTICLES OF INCORPORATION. The articles of incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the articles
of incorporation of the Surviving Corporation, until thereafter changed or
amended as provided therein or by applicable law, except that Article I of the
Articles of Incorporation of the Surviving Corporation shall be amended to read
in its entirety as follows: "The name of this Corporation is 'Randall's Food
Markets, Inc.' "
1.6 BY-LAWS. The by-laws of Merger Sub as in effect at the Effective Time
shall be the by-laws of the Surviving Corporation until thereafter changed or
amended as provided therein or by applicable law.
1.7 OFFICERS AND DIRECTORS OF SURVIVING CORPORATION. The officers of the
Company as of the Effective Time shall be the officers of the Surviving
Corporation, until the earlier of their resignation or removal or otherwise
ceasing to be an officer or until their respective successors are duly elected
and qualified, as the case may be. The directors of Merger Sub as of the
Effective Time shall be the directors of the Surviving Corporation until the
earlier of their resignation or removal or otherwise ceasing to be a director or
until their respective successors are duly elected and qualified.
1.8 EFFECT ON CAPITAL STOCK. At the Effective Time by virtue of the Merger
and without any action on the part of the holder thereof,
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(a) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Company
Common Stock owned or held by Parent, Merger Sub, the Company, or any
direct or indirect wholly-owned Subsidiary of Parent or the Company, all of
which shall be canceled as provided in Section 1.8(c), and other than any
Dissenting Shares (as defined in Section 1.8(e)) shall be converted into
the right to receive (i) cash in an amount equal to $25.05 (the "Cash
Consideration") and (ii) a fraction of a fully paid and nonassessable share
of Parent Common Stock equal to the Exchange Ratio (as defined below)
(collectively, the "Merger Consideration"), subject to Section 2.5 with
respect to fractional shares; provided that, if all of the conditions set
forth in Article VI (excluding conditions that, by their terms, cannot be
satisfied until the Closing Date) have been satisfied or waived other than
the condition set forth in Section 6.2(c) or 6.3(c), the Merger
Consideration shall be adjusted to decrease the Cash Consideration and
increase the Exchange Ratio such that the Merger Consideration shall
consist of an amount of cash and a number of shares of Parent Common Stock
with an aggregate value equal to the aggregate value of the Merger
Consideration prior to any such adjustment, based on the closing price of
the Parent Common Stock on the New York Stock Exchange (the "NYSE") on the
trading day prior to the Closing Date, but which shall consist of the
minimum number of shares of Parent Common Stock necessary in order for the
conditions set forth in Sections 6.2(c) and 6.3(c) to be satisfied and,
after such adjustment, references herein to the terms "Merger
Consideration," "Cash Consideration" and "Exchange Ratio" shall mean the
Merger Consideration, Cash Consideration and Exchange Ratio, respectively,
as so adjusted. For purposes of this Agreement, "Exchange Ratio" means
.3204 shares of Parent Common Stock, as such ratio may be adjusted in
accordance with the proviso to the preceding sentence.
(b) As a result of the Merger and without any action on the part of
the holders thereof, at the Effective Time, all shares of Company Common
Stock (other than shares referred to in Sections 1.8(c) and (e)) shall
cease to be outstanding and shall be canceled and retired and shall cease
to exist, and each holder of a certificate which immediately prior to the
Effective Time represented any such shares of Company Common Stock (a
"Certificate") shall thereafter cease to have any rights with respect to
such shares of Company Common Stock, except the right to receive the
applicable Merger Consideration and any cash in lieu of fractional shares
of Parent Common Stock to be issued or paid in consideration therefor and
any dividends or other distributions to which holders become entitled all
in accordance with Article II upon the surrender of such Certificate.
(c) Each share of Company Common Stock issued and owned or held by
Parent, Merger Sub, the Company or any direct or indirect wholly-owned
Subsidiary of Parent or the Company at the Effective Time shall, by virtue
of the Merger, cease to be outstanding and shall be canceled and retired
and no Merger Consideration or other consideration shall be delivered in
exchange therefor.
(d) Each share of common stock, par value $.01 per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time, shall
remain issued, outstanding and unchanged as a validly issued, fully paid
and nonassessable share of common stock, par value $.01 per share, of the
Surviving Corporation.
(e) Notwithstanding anything in this Agreement to the contrary, shares
of Company Common Stock issued and outstanding immediately prior to the
Effective Time held by a holder (if any) who has the right to demand
payment for and an
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appraisal of such shares in accordance with Section 5.11 of the TBCA (or
any successor provision) ("Dissenting Shares") shall not be converted into
a right to receive Merger Consideration or any cash in lieu of fractional
shares of Parent Common Stock (but shall have the rights set forth in
Section 5.11 of the TBCA (or any successor provision)) unless such holder
fails to perfect or otherwise loses such holder's right to such payment or
appraisal, if any. If, after the Effective Time, such holder fails to
perfect or loses any such right to appraisal, each such share of such
holder shall be treated as a share of Company Common Stock that had been
converted as of the Effective Time into the right to receive Merger
Consideration in accordance with this Section 1.8. The Company shall give
prompt notice to Parent of any demands received by the Company for
appraisal of shares of Company Common Stock, withdrawals of such demands
and any other instruments served pursuant to the TBCA received by the
Company, and Parent shall have the right to participate in and direct all
negotiations and proceedings with respect to such demands. The Company
shall not, except with the prior written consent of Parent, make any
payment with respect to, or settle or offer to settle, any such demands or
agree to do or commit to do any of the foregoing.
(f) If prior to the Effective Time, Parent or the Company, as the case
may be, should (after obtaining the consent required by Section 4.1 or 4.2,
as the case may be, hereof) split, combine or otherwise reclassify the
Parent Common Stock or the Company Common Stock, or pay a stock dividend or
other stock distribution in Parent Common Stock or Company Common Stock, or
otherwise change the Parent Common Stock or Company Common Stock into any
other securities, or make any other such stock dividend or distribution in
capital stock of Parent or the Company in respect of the Parent Common
Stock or the Company Common Stock, respectively, then any number or amount
contained herein which is based upon the price of the Parent Common Stock
or the number of shares of Company Common Stock or Parent Common Stock, as
the case may be, will be appropriately adjusted to reflect such split,
combination, dividend or other distribution or change.
1.9 TREATMENT OF OPTIONS AND OTHER STOCK AWARDS. As soon as practicable
following the date of this Agreement, the Board of Directors (as defined in
Section 8.11) of the Company (or, if appropriate, any committee administering
the Company Stock Plans (as defined in Section 3.1(c) herein)) shall adopt such
resolutions or take such other actions as may be required to effect the
following:
(a) Adjust the terms of all outstanding employee or director stock
options to purchase Company Common Stock and any related stock-based rights
("Company Options") granted under any Company Stock Plan, to provide that
at the Effective Time, each Company Option outstanding immediately prior to
the Effective Time shall (except to the extent that Parent and the holder
of a Company Option otherwise agree prior to the Effective Time and with
respect to those individuals identified in Section 5.5 of the Company
Disclosure Schedule subject to the approval of the acceleration of vesting
of Company Options by the Company's shareholders as contemplated by Code
Section 280G(b)(5)(A)(ii) (and the regulations thereunder and Section 4.4))
become exercisable in full and shall, except as otherwise provided herein,
at the election of each optionholder subject to the agreement of Parent in
accordance with the last sentence of this paragraph, be assumed by Parent
and converted into an option (the "Parent Options") to acquire, on the same
terms and conditions as previously applicable to the original Company
Option, such number of
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shares of Parent Common Stock as shall result from dividing (i) the per
share value of one share of Parent Common Stock (determined based on the
closing price of the Parent Common Stock on the NYSE on the trading day
prior to the Closing Date (the "Parent Closing Price")) into the (ii)
product of (A) the per share value of the per share Merger Consideration
(based on the Parent Closing Price) multiplied by (B) the aggregate number
of shares subject to the Company Option; provided, further, that the
exercise price of the Parent Option shall be equal to the product of (x)
the per share exercise price of the Company Common Stock subject to the
original Company Option and (y) the Parent Closing Price divided by the per
share value of the per share Merger Consideration (based on the Parent
Closing Price), with the exercise price of any Parent Option calculated in
accordance with the terms of this Section 1.9(a) rounded down to the
nearest cent. As soon as practicable after the signing of this Agreement,
Parent and the Company shall agree on mutually acceptable reasonable
procedures to effect the foregoing. Parent and the Company agree to
endeavor to agree on such procedures within 10 Business Days of the date
hereof. Optionholders who are not permitted to convert their Company
Options into Parent Options shall be selected by the Company after
consultation with Parent, wherein both the Company and Parent have
determined that, in their good faith judgment, each such optionholder's
employment with the Surviving Corporation is not reasonably expected to
continue on or after the Effective Time.
If and to the extent that an optionholder (i) is not permitted to
convert his or her Company Option into a Parent Option or (ii) is so
permitted but does not so elect, each of such optionholder's outstanding
Company Options shall, immediately prior to the Effective Time, be canceled
in exchange for a payment from the Surviving Corporation (subject to any
applicable withholding taxes) equal in value to the product of (1) the
total number of shares of Company Common Stock subject to such Company
Option and (2) the excess of $41.75 over the exercise price per share of
Company Common Stock subject to such Company Option (the "Option Payment");
provided, that immediately prior to the Effective Time, Parent shall pay to
each holder of a Company Option the Option Payment in a combination of cash
and Parent Common Stock, with the amount of cash equal to the product of
the Option Payment and 0.60 (the "Cash Percentage") and the number of
shares of Parent Common Stock equal to the quotient of (x) the product of
the Option Payment and 0.40 (the "Stock Percentage") divided by (y) $52L,
subject to Section 2.5 with respect to fractional shares; provided that the
Cash Percentage and Stock Percentage shall be subject to adjustment in the
same manner as set forth in Section 1.8. In addition, Parent shall take all
corporate action necessary to reserve for issuance a sufficient number of
shares of Parent Common Stock for delivery upon payment of the Option
Payment; and
(b) Cause all outstanding grants of restricted Company Common Stock to
all persons listed on Section 3.1(c) of the Company Disclosure Schedule to
become fully vested and cause all restrictions on transferability imposed
pursuant to any Company Stock Plan on any outstanding shares of Company
Common Stock to lapse immediately prior to the Effective Time; provided,
that upon the Effective Time, all such shares of Company Common Stock
previously subject to such restrictions shall be treated in accordance with
Section 1.8 herein.
1.10 TREATMENT OF INVESTOR OPTION. At the Effective Time, Parent shall
purchase from RFM Acquisition LLC ("Investor") the option to purchase 3,606,881
shares of
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Company Common Stock (subject to adjustment) issued June 27, 1997 to Investor
(the "Investor Option") for a purchase price equal to the product of (1) the
total number of shares of Company Common Stock underlying the Investor Option
and (2) the excess of $41.75 over the per share exercise price thereof subject
to the Investor Option (the "Investor Option Payment"); provided, that
immediately prior to the Effective Time, Parent shall pay to the holder of the
Investor Option the Investor Option Payment in a combination of cash and Parent
Common Stock, with the amount of cash equal to the product of the Investor
Option Payment and the Cash Percentage and the number of shares of Parent Common
Stock equal to the quotient of (x) the product of the Investor Option Payment
and the Stock Percentage divided by (y) $52L, subject to Section 2.5 with
respect to fractional shares; provided that the Cash Percentage and Stock
Percentage shall be subject to adjustment in the same manner as set forth in
Section 1.8. In addition, Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Parent Common Stock for
delivery upon payment of the Investor Option Payment. Upon the purchase of the
Investor Option and payment of the Investor Option Payment in accordance with
the provisions of this Section 1.10, Investor shall cease to have any rights
with respect to the Investor Option. Parent agrees that neither Parent nor the
Surviving Corporation will report (or take any position) that any amounts paid
in respect of the Investor Option are compensation for federal or state income
tax purposes unless the Internal Revenue Service obtains a final determination
to the contrary under Section 1313(a)(i) of the Code.
ARTICLE II
EXCHANGE OF CERTIFICATES
2.1 EXCHANGE FUND. At or prior to the Effective Time, Parent shall deposit
with First Chicago Trust Company of New York or such other bank or trust company
as Parent shall determine and who shall be reasonably satisfactory to the
Company (the "Exchange Agent"), in trust for the benefit of holders of shares of
Company Common Stock, for exchange in accordance with Section 1.8, all the cash
and certificates representing shares of Parent Common Stock to be paid or issued
pursuant to this Agreement in exchange for outstanding Company Common Stock and
cash sufficient to pay cash in lieu of fractional shares pursuant to Section
2.5. Parent agrees to make available to the Exchange Agent from time to time as
needed, cash sufficient to pay any dividends and other distributions pursuant to
Section 2.3. Any cash and certificates of Parent Common Stock deposited with the
Exchange Agent shall hereinafter be referred to as the "Exchange Fund".
2.2 EXCHANGE PROCEDURES. As promptly as practicable after the Effective
Time, the Exchange Agent will send to each record holder of a Certificate other
than Certificates to be canceled pursuant to Section 1.8(c), (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in a form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. As soon as reasonably practicable after the Effective Time, each
holder of a Certificate, upon surrender of a Certificate to the Exchange Agent
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, shall be entitled
to receive in exchange therefor a certificate or certificates representing the
number of full shares of Parent Common Stock and the amount of cash (including
amounts to be paid pursuant to Section 1.8(a), in lieu of fractional shares of
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Parent Common Stock pursuant to Section 2.5 and in respect of any dividends or
other distributions to which holders are entitled pursuant to Section 2.3), if
any, into which the aggregate number of shares of Company Common Stock
previously represented by such Certificate shall have been converted pursuant to
this Agreement. The Exchange Agent shall accept such Certificates upon
compliance with such reasonable terms and conditions as the Exchange Agent may
impose to effect an orderly exchange thereof in accordance with normal exchange
practices. No interest will be paid or will accrue on any cash payable pursuant
to Section 1.8, Section 2.3 or Section 2.5. In the event of a transfer of
ownership of Company Common Stock which is not registered in the transfer
records of the Company, one or more shares of Parent Common Stock evidencing, in
the aggregate, the proper number of shares of Parent Common Stock, a check in
the proper amount of cash pursuant to Section 1.8(a) and cash in lieu of any
fractional shares of Parent Common Stock pursuant to Section 2.5 and any
dividends or other distributions to which such holder is entitled pursuant to
Section 2.3, may be issued with respect to such Company Common Stock to such a
transferee if the Certificate representing such shares of Company Common Stock
is presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. Subject to the Exchange Agent agreeing to effect
the following and Parent and the Company using their reasonable best efforts to
effect the intent of the following, with respect to shares of Company Common
Stock that members of the Company's management have pledged to the Company to
secure notes payable to the Company, the obligation of Parent and the Surviving
Corporation to pay the Merger Consideration for such shares shall be subject to
the repayment by such shareholder of such notes (including through a deduction
from the Merger Consideration otherwise payable with respect to such shares) and
the delivery by the shareholder of such shares free and clear of all
Encumbrances.
2.3 DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made with respect to shares of Parent Common
Stock with a record date after the Effective Time shall be paid to the holder of
any unsurrendered Certificate with respect to the shares of Parent Common Stock
that such holder would be entitled to receive upon surrender of such Certificate
and no cash payment in lieu of fractional shares of Parent Common Stock shall be
paid to any such holder pursuant to Section 2.5 until such holder shall
surrender such Certificate in accordance with Section 2.2. Subject to the effect
of applicable laws, following surrender of any such Certificate, there shall be
paid to such holder of shares of Parent Common Stock issuable in exchange
therefor, without interest, (a) promptly after the time of such surrender, the
amount of any cash payable in lieu of fractional shares of Parent Common Stock
to which such holder is entitled pursuant to Section 2.5 and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock, and
(b) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such shares of Parent Common Stock.
2.4 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of
Parent Common Stock issued and cash paid upon conversion of shares of Company
Common Stock in accordance with the terms of Article I and this Article II
(including any cash paid pursuant to Section 1.8(a), 2.3 or 2.5) shall be deemed
to have been issued or paid in full satisfaction of all rights pertaining to the
shares of Company Common Stock.
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2.5 NO FRACTIONAL SHARES OF PARENT COMMON STOCK. (a) No certificates or
scrip or shares of Parent Common Stock representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of Certificates and
such fractional share interests will not entitle the owner thereof to vote or to
have any rights of a shareholder of Parent or a holder of shares of Parent
Common Stock.
(b) Notwithstanding any other provision of this Agreement, each holder of
shares of Company Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Parent Common
Stock (after taking into account all Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
the product of (i) such fractional part of a share of Parent Common Stock
multiplied by (ii) the last sales price per share of Parent Common Stock quoted
on the NYSE on last trading day immediately prior to the Closing Date. As
promptly as practicable after the determination of the amount of cash, if any,
to be paid to holders of fractional interests, the Exchange Agent shall so
notify Parent, and Parent shall cause the Exchange Agent to forward payments to
such holders of fractional interests subject to and in accordance with the terms
hereof.
2.6 TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates for six months after the
Effective Time shall be delivered to the Surviving Corporation or otherwise on
the instruction of the Surviving Corporation, and any holders of Certificates
who have not theretofore complied with this Article II shall thereafter look
only to the Surviving Corporation and Parent (subject to abandoned property,
escheat or other similar laws) for the Merger Consideration with respect to the
shares of Company Common Stock formerly represented thereby to which such
holders are entitled pursuant to Section 1.8, any cash in lieu of fractional
shares of Parent Common Stock to which such holders are entitled pursuant to
Section 2.5 and any dividends or distributions with respect to shares of Parent
Common Stock to which such holders are entitled pursuant to Section 2.3.
2.7 NO LIABILITY. None of Parent, Merger Sub, the Company, the Surviving
Corporation or the Exchange Agent shall be liable to any Person (as defined in
Section 8.11) in respect of any Merger Consideration from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
2.8 INVESTMENT OF THE EXCHANGE FUND. Any funds included in the Exchange
Fund may be invested by the Exchange Agent, as directed by Parent; provided that
such investments shall be in obligations of or guaranteed by the United States
of America and backed by the full faith and credit of the United States of
America or in commercial paper obligations rated A-1 or P-1 or better by Moody's
Investors Services, Inc. or Standard & Poor's Corporation, respectively. Any
interest and other income resulting from such investments shall promptly be paid
to the Surviving Corporation.
2.9 LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such Person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate or other
documentation (including an indemnity in customary form) reasonably requested by
Parent, the Exchange Agent will deliver in exchange for such lost, stolen or
destroyed Certificate the applicable Merger Consideration with respect to the
shares of Company Common Stock formerly represented thereby, any cash in lieu of
fractional shares of
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Parent Common Stock, and unpaid dividends and distributions on shares of Parent
Common Stock deliverable in respect thereof, pursuant to this Agreement.
2.10 WITHHOLDING RIGHTS. Each of the Surviving Corporation and Parent
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Common
Stock and any holder of Company Options such amounts as it is required to deduct
and withhold with respect to the making of such payment under the Code and the
rules and regulations promulgated thereunder, or any provision of state, local
or foreign tax law (including without limitation, under Section 1445 of the Code
if Parent has not received the certificate or certificates described in Section
5.3(j) of this Agreement as of the Closing Date). To the extent that amounts are
so withheld by the Surviving Corporation or Parent, as the case may be, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding was made by the Surviving Corporation or
Parent, as the case may be.
2.11 FURTHER ASSURANCES. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company or Merger Sub, any deeds,
bills of sale, assignments or assurances and to take and do, in the name and on
behalf of the Company or Merger Sub, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger.
2.12 STOCK TRANSFER BOOKS. At the close of business, Houston time, on the
day the Effective Time occurs, the stock transfer books of the Company shall be
closed and there shall be no further registration of transfers of shares of
Company Common Stock thereafter on the records of the Company. From and after
the Effective Time, the holders of Certificates shall cease to have any rights
with respect to such shares of Company Common Stock formerly represented
thereby, except as otherwise provided herein or by law. On or after the
Effective Time, any Certificates presented to the Exchange Agent or Parent for
any reason shall be converted into the Merger Consideration with respect to the
shares of Company Common Stock formerly represented thereby, any cash in lieu of
fractional shares of Parent Common Stock to which the holders thereof are
entitled pursuant to Section 2.5 and any dividends or other distributions to
which the holders thereof are entitled pursuant to Section 2.3.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Parent and Merger Sub that:
(a) ORGANIZATION AND QUALIFICATION. The Company and each of its
Subsidiaries (as defined in Section 8.11) is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, with the corporate power and authority to own and operate its
business as presently conducted. The Company and each of its Subsidiaries
is duly qualified as a foreign corporation or other entity to do business
and is in good standing in each jurisdiction where the character of its
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properties owned or held under lease or the nature of its activities makes
such qualification necessary, except for such failures of the Company and
any of its Subsidiaries to be so qualified as would not, individually or in
the aggregate, have a Material Adverse Effect (as defined in Section 8.11)
on the Company. The Company has previously made available to Parent true
and correct copies of its Articles of Incorporation and Bylaws and the
charter documents and bylaws or other organizational documents of each of
its Subsidiaries, as currently in effect.
(b) AUTHORIZATION; VALIDITY AND EFFECT OF AGREEMENT. The Company has
the requisite corporate power and authority to execute, deliver and perform
its obligations under this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Company and the performance by the Company of its obligations hereunder and
the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of the Company and all other necessary
corporate action on the part of the Company, other than the adoption and
approval of this Agreement by the stockholders of the Company, and no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement and the transactions contemplated hereby. The Board of
Directors of the Company has approved for the purposes of Section 5.01 of
the TBCA this Agreement. This Agreement has been duly and validly executed
and delivered by the Company and constitutes a legal, valid and binding
obligation of the Company, enforceable against it in accordance with its
terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) and an implied
covenant of good faith and fair dealing.
(c) CAPITALIZATION. The authorized capital stock of the Company
consists of 75,000,000 shares of Company Common Stock, 8,250 shares of
Class A preferred stock and 5,000,000 shares of serial preferred stock. As
of July 20, 1999, 29,983,426 shares of Company Common Stock were
outstanding and no shares of preferred stock were outstanding. As of June
26, 1999, 387,523 of the outstanding shares of Company Common Stock were
redeemable at the option of the holder thereof. As of July 20, 1999, (i)
2,575,759 shares of Company Common Stock were reserved for issuance and
issuable upon or otherwise deliverable under the Company's Corporate
Incentive Plan, the Company's Stock Option and Restricted Stock Plan, and
the Amended and Restated 1997 Stock Purchase and Option Plan For Key
Employees (collectively, the "Company Stock Plans") in connection with the
exercise of outstanding Company Options and (ii) 3,606,881 shares of
Company Common Stock were reserved for issuance and issuable upon or
otherwise deliverable in connection with the Investor Option. A true and
complete copy of the Investor Option, as amended as of the date of this
Agreement, has been provided to Parent. All of the issued and outstanding
shares of Company Common Stock are, and all shares of Company Common Stock
which may be issued pursuant to the Company Stock Plans, when issued in
accordance with the terms of those plans, will be, validly issued, fully
paid and non-assessable. Since July 20, 1999, no shares of Company Common
Stock have been issued, other than upon exercise of Company Options. Except
for the Company Options and the Investor Option, there are no outstanding
bonds, debentures, notes or other indebtedness or other securities of the
Company or any Subsidiary having the right to vote (or convertible into,
exercisable, or exchangeable for, securities having the right to vote) on
any matters on which shareholders of the Company may vote,
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including the Merger. As of the date hereof, except as otherwise disclosed
in Section 3.1(c) of the disclosure schedule delivered by the Company to
Parent and Merger Sub prior to the execution of this Agreement (the
"Company Disclosure Schedule"), there are no existing options, warrants,
calls, subscriptions, convertible securities or other securities,
agreements, commitments, or obligations which would require the Company or
any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold shares of Common Stock, Preferred Stock or any other
equity securities, or securities convertible into or exchangeable or
exercisable for shares of Common Stock, Preferred Stock or any other equity
securities of Company or any of its Subsidiaries. Section 3.1(c) of the
Company Disclosure Schedule sets forth, as of June 26, 1999, for each
holder of redeemable shares, the holder's name, the number of redeemable
shares of Company Common Stock held and the price at which the shares are
redeemable. Section 3.1(c) of the Company Disclosure Schedule contains a
list, as of July 20, 1999, of each record holder of Company Common Stock
and the number of shares of Company Common Stock held by each such holder
(including an indication of whether any such securities are subject to
restrictions on transfer), and a list, as of June 26, 1999, of each holder
of Company Options or other equity securities and the number of shares of
Company Common Stock issuable upon exercise of such Company Options or
other equity securities to such holder. Except as set forth in Section
3.1(c) of the Company Disclosure Schedule, the Company has no commitments,
obligations or understandings to purchase or redeem or otherwise acquire
any shares of Common Stock or the capital stock of any of its Subsidiaries
or to provide funds to or make any investment (in the form of a loan,
capital contribution or otherwise) in any such Subsidiary or any other
entity. Except as set forth in Section 3.1(c) of the Company Disclosure
Schedule, there are no shareholders' agreements, voting trusts or other
agreements or understandings to which the Company is a party or by which it
is bound relating to the voting or registration of any shares of capital
stock of the Company or any preemptive rights with respect thereto. As of
the date hereof, the record and, to the knowledge of the Company,
beneficial ownership of and voting power in respect of, the capital stock
of the Company with respect to the signatories to each Voting Agreement set
forth in each Voting Agreement, is accurate in all material respects. As of
the date of this Agreement, the exercise price of the Investor Option is
$12.11 per share of Company Common Stock.
(d) SUBSIDIARIES. The only Subsidiaries of the Company are those set
forth in Section 3.1(d) of the Company Disclosure Schedule. All of the
outstanding shares of capital stock and other ownership interests of each
of the Company's Subsidiaries are validly issued, fully paid,
non-assessable and free of preemptive rights, rights of first refusal or
similar rights. Except as set forth in Section 3.1(d) of the Company
Disclosure Schedule, the Company owns, directly or indirectly, all of the
issued and outstanding capital stock and other ownership interests or
securities of each of its Subsidiaries, free and clear of all Encumbrances
(as defined in Section 8.11), and there are no existing options, warrants,
calls, subscriptions, convertible securities or other securities,
agreements, commitments or obligations of any character relating to the
outstanding capital stock or other securities of any Subsidiary of the
Company or which would require any Subsidiary of the Company to issue or
sell any shares of its capital stock, ownership interests or securities
convertible into or exchangeable for shares of its capital stock or
ownership interests.
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(e) OTHER INTERESTS. Except as set forth in Section 3.1(e) of the
Company Disclosure Schedule, neither the Company nor any of the Company's
Subsidiaries owns, directly or indirectly, any interest or investment in
(whether equity or debt) any corporation, partnership, limited liability
company, joint venture, business, trust or other Person (other than the
Company's Subsidiaries).
(f) NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(i) Except as set forth in Section 3.1(f) of the Company Disclosure
Schedule with respect to clause (C) below, neither the execution and
delivery of this Agreement nor the performance by the Company of its
obligations hereunder, nor the consummation of the transactions
contemplated hereby, will: (A) conflict with the Company's Articles of
Incorporation or Bylaws; (B) assuming satisfaction of the requirements
set forth in Section 3.1(f)(ii) below, violate any statute, law,
ordinance, rule or regulation, applicable to the Company or any of its
Subsidiaries or any of their properties or assets; or (C) violate,
breach, be in conflict with or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under,
or permit the termination of any provision of, or result in the
termination of, the acceleration of the maturity of, or the acceleration
of the performance of any obligation of the Company or any of its
Subsidiaries under, or cause an indemnity payment to be made by the
Company or any of its Subsidiaries under, or result in the creation or
imposition of any Encumbrance upon any properties, assets or business of
the Company or any of its Subsidiaries under, any note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization,
license, contract, instrument or other agreement or commitment or any
order, judgment or decree to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their respective assets or properties is bound or
encumbered, or give any Person the right to require the Company or any
of its Subsidiaries to purchase or repurchase any notes, bonds or
instruments of any kind except, in the case of clauses (B) and (C), for
such violations, breaches, conflicts, defaults or other occurrences
which, individually or in the aggregate, would not have a Material
Adverse Effect on the Company.
(ii) Except for (A) the pre-merger notification requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations thereunder (the "HSR Act"), (B) state
securities or "blue sky" laws (the "Blue Sky Laws"), (C) applicable
requirements of the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder (the "Securities Act"), (D) rules
and regulations of the NYSE, (E) the filing of the Articles of Merger
pursuant to the TBCA, (F) with respect to matters set forth in Sections
3.1(f)(i) or 3.1(f)(ii) of the Company Disclosure Schedule, and (G)
applicable requirements, if any, of the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act"), no consent, approval or authorization of, permit from,
notice to, or declaration, filing or registration with, any governmental
or regulatory authority, or any other Person or entity is required to be
made or obtained by the Company or its Subsidiaries in connection with
the execution, delivery and performance of this Agreement by the Company
and the consummation by the Company of the transactions contemplated
hereby, except where the failure to obtain such consent, approval,
authorization, permit or declaration, to deliver such notice or
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to make such filing or registration would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
(g) COMPLIANCE. Except as set forth in Section 3.1(g) of the Company
Disclosure Schedule, the Company and each of its Subsidiaries is in
compliance in all material respects with all foreign, federal, state and
local laws and regulations applicable to its operations or with respect to
which compliance is a condition of engaging in the business thereof. Except
as set forth in Section 3.1(g) of the Company Disclosure Schedule, neither
the Company nor any of its Subsidiaries has received any notice asserting a
failure, or possible failure, to comply with any such law or regulation,
the subject of which notice has not been resolved as required thereby or
otherwise to the satisfaction of the party sending the notice, except for
such failure as would not, individually or in the aggregate, have a
Material Adverse Effect on the Company. The Company and its Subsidiaries
have all material permits, Environmental Permits, licenses, grants,
authorizations, easements, consents, certificates, approvals, orders and
franchises (collectively, "Permits") from governmental agencies required to
conduct their respective businesses as they are now being conducted and
assuming that all necessary consents to transfer are obtained, all such
Permits will remain in effect after the Effective Time (except as a result
of the actions of Parent or any of its Subsidiaries). The Company and its
Subsidiaries are in compliance in all material respects with the terms of
the Permits.
(h) SEC DOCUMENTS.
(i) The Company has delivered or made available to Parent true and
complete copies of each registration statement, proxy or information
statement, form, report and other document required to be filed by it
with the Securities and Exchange Commission (the "SEC") since January 1,
1998 (collectively, the "Company SEC Reports"). As of their respective
dates, the Company SEC Reports (A) complied (except to the extent
revised or superseded by a subsequent filing with the SEC prior to the
date hereof), or, with respect to those not yet filed, will comply, in
all material respects with the applicable requirements of the Securities
Act and the Exchange Act and (B) did not (except to the extent revised
or superseded by a subsequent filing with the SEC prior to the date
hereof), or, with respect to those not yet filed, will not, contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made,
not misleading. The Company has filed all Company SEC Reports required
to be filed by it under the Exchange Act since January 1, 1998. The
Company has heretofore made available or promptly will make available to
Parent a complete and correct copy of all amendments or modifications to
any Company SEC Report which has been filed prior to the date hereof.
For purposes of all representations and warranties of the Company
contained herein (other than this paragraph (h)(i) and paragraph
(h)(ii)), the term "the Company SEC Reports" shall refer to those
Company SEC Reports filed with the SEC prior to the date hereof.
(ii) Each of the consolidated balance sheets of the Company
included in or incorporated by reference into the Company SEC Reports
(including the related notes and schedules) is in accordance in all
material respects with the books and records of the Company and presents
fairly (except to the extent revised or superseded by financial
statements included in a subsequent filing with the SEC
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prior to the date hereof), in all material respects, the consolidated
financial position of the Company and its consolidated Subsidiaries as
of its date, and each of the consolidated statements of income, retained
earnings and cash flows of the Company included in or incorporated by
reference into the Company SEC Reports (including any related notes and
schedules) presents fairly (except to the extent revised or superseded
by financial statements included in a subsequent filing with the SEC
prior to the date hereof), in all material respects, the results of
operations, retained earnings or cash flows, as the case may be, of the
Company and its Subsidiaries for the periods set forth therein (subject,
in the case of unaudited statements, to normal year-end adjustments,
which are not expected to be material in amount), in each case in
accordance with generally accepted accounting principles ("GAAP")
consistently applied during the periods involved, except as may be noted
therein.
(iii) Except as set forth in the Company SEC Reports, neither the
Company nor any of its Subsidiaries has any liabilities or obligations
of any nature (whether accrued, absolute, contingent or otherwise) that
would be required to be reflected on, or reserved against in, a
consolidated balance sheet of the Company and its Subsidiaries or in the
notes thereto, prepared in accordance with GAAP consistently applied,
except for (A) liabilities or obligations that were so reserved on, or
reflected in (including the notes to), the consolidated balance sheet of
the Company as of April 3, 1999, (B) liabilities or obligations arising
in the ordinary course of business (including trade indebtedness) since
April 3, 1999 and (C) liabilities or obligations which would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company.
(i) ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.1(i)
of the Company Disclosure Schedule and except as set forth in the Company
SEC Reports and except for the transactions expressly contemplated hereby,
since April 3, 1999, the Company and its Subsidiaries have conducted their
respective businesses only in the ordinary and usual course consistent with
past practices and there has not been any Material Adverse Change of the
Company. Except as set forth in Section 3.1(i) of the Company Disclosure
Schedule and except as set forth in the Company SEC Reports, from April 3,
1999 through the date of this Agreement, neither the Company nor any of its
Subsidiaries has taken any of the actions prohibited by clauses (b),
(d)(ii), (d)(iii), (d)(iv), (h), (i), (j), (k), (l), (m) or (n) of Section
4.1 hereof.
(j) LITIGATION. Except as set forth in Section 3.1(j) of the Company
Disclosure Schedule and except as set forth in the Company SEC Reports,
there is no Action (as defined in Section 8.11) instituted, pending or, to
the knowledge of the Company, threatened, in each case against the Company
or any of its Subsidiaries or any of their respective properties or assets,
which would, individually or in the aggregate, directly or indirectly, have
a Material Adverse Effect on the Company, nor is there any outstanding
judgment, decree or injunction, in each case against the Company or any of
its Subsidiaries, or any order of any domestic or foreign court,
governmental department, commission or agency applicable to the Company or
any of its Subsidiaries which has or will have, individually or in the
aggregate, a Material Adverse Effect on the Company.
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(k) TAXES. Except as set forth in Section 3.1(k) of the Company
Disclosure Schedule:
(i) The Company and its Subsidiaries have (A) duly filed (or there
have been duly filed on their behalf) with the appropriate governmental
authorities all material Tax Returns (as defined in Section 8.11)
required to be filed by them, which Tax Returns are true, complete and
correct in all material respects, and (B) duly paid in full, or
adequately disclosed and fully provided for as a liability on the
financial statements of the Company and its Subsidiaries included in the
Company SEC Reports made available or delivered to Parent prior to the
date hereof, all material Taxes (as defined in Section 8.11);
(ii) The Company and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the
withholding of Taxes and the payment of such withheld Taxes to the
proper Tax Authority or other governmental authorities;
(iii) Audits of all federal income Tax Returns of the Company and
its Subsidiaries for periods through the taxable year ended June 30,
1994 have either been completed or such Tax Returns were not subject to
audit, and no federal or material state, local or foreign audits or
other administrative or court proceedings are presently being conducted
with respect to any Taxes or Tax Returns of the Company or its
Subsidiaries. There are no audits, investigations or claims for or
relating to any material liability in respect of Taxes or any material
Tax Returns of the Company or its Subsidiaries that are pending or that
have been threatened in writing. No matters are the subject of written
requests from any Taxing Authority or other governmental authority with
respect to Taxes of the Company or any of its Subsidiaries that could
reasonably be expected materially to affect such Taxes. Neither the
Company nor any of its Subsidiaries has waived in writing any statute of
limitations with respect to material Taxes;
(iv) There are no liens for Taxes upon any Assets of the Company or
any Subsidiary thereof, except for liens for Taxes not yet due and
payable or immaterial liens;
(v) Neither the Company nor any of its Subsidiaries has, with
regard to any assets or property held by any of them, agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by the Company or any of its Subsidiaries or is required to treat
any of its assets as owned by another person or as tax-exempt bond
financed property or tax-exempt use property within the meaning of
Section 168 of the Code or under any comparable state or local income
Tax or other Tax provision;
(vi) Since 1980, neither the Company nor any of its Subsidiaries
has been a member of an affiliated group of corporations within the
meaning of Section 1504 of the Code, with the exception of the group for
which the Company is the common parent, nor has the Company or any of
its Subsidiaries, or any predecessor or affiliate of any of them, become
liable (whether by contract, as transferee or successor, by law or
otherwise) for the Taxes of any other person or entity under Treasury
Regulation Section 1.1502-6 or any similar provision of state, local or
foreign law. As of the Closing Date, neither the Company nor any
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of its Subsidiaries shall be party to, be bound by or have an obligation
under, any Tax sharing agreement or similar contract or arrangement or
any agreement that obligates it to make any payment computed by
reference to Taxes, taxable income or taxable losses of any other
Person;
(vii) No material written power of attorney that has been granted
by the Company or its Subsidiaries (other than to the Company or a
Subsidiary) currently is in force with respect to any matter relating to
Taxes.
(viii) Neither the Company nor any of its Subsidiaries has agreed
to make, or is required to make, any material adjustment under Section
481(a) of the Code; and
(ix) Neither the Company nor any of its Subsidiaries has issued or
assumed (i) any obligations described in Section 279(a) of the Code,
(ii) any applicable high yield discount obligation, as defined in
Section 163(i) of the Code or (iii) any registration-required
obligation, within the meaning of Section 163(f)(2) of the Code, that is
not in registered form.
(l) EMPLOYEE BENEFITS.
(i) Section 3.1(l)(i) of the Company Disclosure Schedule contains a
true and complete list of each material "employee benefit plan" (within
the meaning of ERISA section 3(3)), each stock purchase, stock option,
severance, employment, change-in-control, fringe benefit, collective
bargaining, bonus, incentive, deferred compensation and all other
employee benefit plans, agreements, programs, policies or other
arrangements relating to employment, benefits or entitlements, whether
oral or written, whether or not subject to ERISA, under which any
employee or former employee of Company has any present or future right
to benefits and for which the Company has any present or future
liability. All such plans, agreements, programs, policies and
arrangements shall be collectively referred to as the "Company Plans".
(ii) With respect to each Company Plan, Company will deliver or
make available to Parent a current, accurate and complete copy (or, to
the extent no such copy exists, an accurate description) thereof and, to
the extent applicable, (a) any related trust agreement, annuity contract
or other funding instrument; (b) the most recent determination letter;
(c) any summary plan description provided under a Company Plan; (d) for
the most recent year (1) the Form 5500 and attached schedules, (2)
audited financial statements, (3) actuarial valuation reports, and (4)
attorney's response to auditors' requests for information and (e) with
respect to the Company ESOP/401(k) Plan (the "ESOP"), (1) records of all
purchases of Company Common Stock under the ESOP and (2) all valuations
of Company Common Stock obtained on behalf of, or in connection with the
operation of, the ESOP, in each case since June 13, 1997 (the date of
the court order approving the final settlement of the ESOP litigation).
(iii) Except as disclosed in Section 3.1(1)(iii) of the Company
Disclosure Schedule and except as would not, individually or in the
aggregate, be reasonably likely to result in a Material Adverse Effect
on the Company: (a) each Company Plan has been established and
administered in accordance with its terms, and in compliance with the
applicable provisions of ERISA, the Code and other
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applicable laws; (b) each Company Plan which is intended to be qualified
within the meaning of Section 401(a) of the Code has received a
favorable determination letter as to its qualification and, to the
knowledge of Company, nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification; (c) with
respect to any Company Plan, no Actions (other than routine claims for
benefits in the ordinary course) are pending or, to the knowledge of the
Company, threatened, and no facts or circumstances exist which could
give rise to any such Actions and the Company will promptly notify
Parent in writing of any pending claims or, to the knowledge of the
Company, any threatened claims arising between the date hereof and the
Closing; (d) neither the Company nor any other party has engaged in a
prohibited transaction, as such term is defined under Section 4975 of
the Code or ERISA section 406, which would subject the Company or Parent
to any taxes, penalties or other liabilities under Section 4975 of the
Code or ERISA sections 409 or 502(i); (e) no event has occurred and no
condition exists which would subject the Company, either directly or by
reason of its affiliation with any of its ERISA Affiliates (defined as
any organization which is a member of a controlled group of
organizations with the Company within the meaning of Sections 414(b),
(c), (m) or (o) of the Code), to any liability, tax, fine or penalty
imposed by ERISA, the Code or other applicable laws including, but not
limited to, the taxes imposed by Sections 4069, 4971, 4972, 4977, 4979,
4980B, 4976(a) of the Code or the fine imposed by ERISA Section 502(c);
(f) for each Company Plan with respect to which a Form 5500 has been
filed, no material change has occurred with respect to the matters
covered by the most recent Form 5500 since the date thereof; (g) no
employee of the Company will be entitled to any additional benefits or
any acceleration of the time of payment or vesting of any benefits under
any Company Plan as a result of the transactions contemplated by this
Agreement, including where such benefits, payments or vesting are
contingent upon the occurrence of a subsequent event under the terms of
the agreements, plans or arrangements pertaining thereto; (h) neither
the Company nor any ERISA Affiliate has any announced plan or legally
binding commitment to create any additional Company Plans or to amend or
modify any existing Company Plan; and (i) no Company Plan provides for
medical or health benefits (through insurance or otherwise) or provided
for the continuation of such benefits or coverage for any participant or
any dependent or beneficiary of any participant after such participant's
retirement or other termination of employment, except as may be required
by Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the
Code ("COBRA").
(iv) Except as disclosed in Section 3.1(l)(iv) of the Company
Disclosure Schedule, with respect to any Company Plan maintained by or
contributed to by the Company or any Subsidiary within six years prior
to the date of this Agreement: (a) no "accumulated funding deficiency"
as such term is defined in ERISA section 302 and Section 412 of the Code
(whether or not waived) has been incurred, where any such liability that
remains outstanding could be reasonably expected, individually or in the
aggregate, to have a Material Adverse Effect on the Company; (b) no
event or condition exists which could be deemed a reportable event
within the meaning of ERISA section 4043 which could result in a
liability to Company or any of its ERISA Affiliates, and no condition
exists which could subject Company or any of its ERISA Affiliates to a
fine under ERISA section 4971, except where such liability or fine could
not be reasonably
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expected, individually or in the aggregate, to have a Material Adverse
Effect on the Company; (c) neither the Company nor any ERISA Affiliate
is subject to any unpaid liability to the PBGC for any plan termination
occurring on or prior to the Closing, except where such liability could
not be reasonably expected, individually or in the aggregate, to have a
Material Adverse Effect on the Company; and (d) no amendment has
occurred which has required or could require Company or any of its ERISA
Affiliates to provide security pursuant to Section 401(a)(29) of the
Code;
(v) Neither the Company nor any Subsidiaries nor any ERISA
Affiliate has ever contributed to, or withdrawn in a partial or complete
withdrawal from, any "multiemployer plan" (as defined in Section 3(37)
of ERISA) or has any fixed or contingent liability under Section 4204 of
ERISA. No Company Plan is a "multiple employer plan" as described in
Section 3(40) of ERISA or Section 413(c) of the Code.
(vi) Neither the Company nor any officer, director, nor employee
has breached in any material respect its, his or her obligation to
administer the Company ESOP/401(k) Savings Plan in accordance with
applicable law.
(m) TITLE TO ASSETS.
(i) Except as set forth in Section 3.1(m)(i) of the Company
Disclosure Schedule, the Company and its Subsidiaries have good and
marketable fee title to all improved or unimproved real property owned
by the Company or any of its Subsidiaries (the "Owned Real Property"),
free and clear of all Encumbrances (other than Permitted Encumbrances
(as defined in Section 8.11)). Section 3.1(m)(i) of the Company
Disclosure Schedule sets forth, as of the date hereof, a complete list
of the Owned Real Property.
(ii) Except as set forth in Section 3.1(m)(ii) of the Company
Disclosure Schedule, the Company and its Subsidiaries, have validly
existing and enforceable leasehold, subleasehold or occupancy interests
in all improved or unimproved real property leased by the Company or its
Subsidiaries (the "Leased Real Property"), free and clear of all
Encumbrances (other than Permitted Encumbrances). Section 3.1(m)(ii) of
the Company Disclosure Schedule sets forth, as of the date hereof, a
complete list of the Leased Real Property.
(iii) Except as set forth in Section 3.1(m)(iii) of the Company
Disclosure Schedule, the Company and its Subsidiaries have good and
marketable title or a valid right to use all of the stores, offices,
plants and warehouses ("Facilities") that are used in the conduct of the
business of the Company or any of its Subsidiaries, free and clear of
all Encumbrances (other than Permitted Encumbrances). Section
3.1(m)(iii) of the Company Disclosure Schedule sets forth, as of the
date hereof, a complete list of the Facilities.
(iv) Except as set forth in Section 3.1(m)(iv) of the Company
Disclosure Schedule, and except for any failure which would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company, the Company and its Subsidiaries have good and marketable title
or a valid right to use all of the personal assets and properties that
are necessary for the conduct of business of the Company or any of its
Subsidiaries, free and clear of all Encumbrances (other than Permitted
Encumbrances).
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(v) There are no pending or, to the knowledge of the Company,
threatened condemnation or similar proceedings against the Company or
any of its Subsidiaries or, otherwise relating to any of the Owned Real
Property, Leased Real Property or Facilities of the Company and its
Subsidiaries and none of the Company or any of its Subsidiaries has
received any written notice of the same, except for such proceedings
which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
(vi) The Company or its Subsidiaries, as the case may be, has in
all material respects performed all obligations on its part required to
have been performed with respect to (A) all assets (other than the
Leases) leased by it or to it (whether as lessor or lessee), and (B) all
Leases and there exists no material default or event which, with the
giving of notice or lapse of time or both, would become a material
default on the part of the Company or any of its Subsidiaries or, to the
knowledge of the Company, of any other party, under any Lease, except in
the case of clause (A) only, where the failure to perform or such
default or event would not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
(vii) Each of the Leases is valid, binding and enforceable in
accordance with its terms and is in full force and effect, and assuming
all consents required by the terms thereof or applicable law have been
obtained and except as a result of any action of Parent or any of its
Subsidiaries, the Leases will continue to be valid, binding and
enforceable in accordance with their respective terms and in full force
and effect immediately following the consummation of the transactions
contemplated hereby.
(viii) The land, buildings, improvements, leasehold improvements,
furniture, fixtures, furnishings, machinery and equipment and other
assets, real or personal, tangible or intangible, owned, leased or
licensed, but excluding the Leases, of the Company and its Subsidiaries,
taken as a whole, are sufficient to permit the Company and its
Subsidiaries to conduct their business as currently being conducted with
only such exceptions as would not have a Material Adverse Effect on the
Company.
(n) CONTRACTS. Each Contract (as defined in Section 8.11) of the
Company and its Subsidiaries is valid, binding and enforceable and in full
force and effect, and assuming all consents required by the terms thereof
or applicable law have been obtained, such Contracts will continue to be
valid, binding and enforceable and in full force and effect immediately
following the consummation of the transactions contemplated hereby, and
there are no defaults thereunder by the Company or its Subsidiaries or, to
the knowledge of the Company, by any other party thereto, except for any
such failure or default which would not, individually or in the aggregate,
have a Material Adverse Effect on the Company. No event has occurred which
either entitles, or would, on notice or lapse of time or both, entitle the
holder of any indebtedness for borrowed money of the Company or any of its
Subsidiaries to accelerate, or which does accelerate, the maturity of any
Contract relating to indebtedness of the Company or any of its
Subsidiaries, except as set forth in Section 3.1(n) of the Company
Disclosure Schedule and except for any such event which would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company. Except as set forth in Section 3.1(n) of the Company Disclosure
Schedule, as of the date hereof, none of the Company or any Subsidiary is a
party to
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any written, (a) contract or agreement containing covenants limiting the
freedom of the Company or any Subsidiary after the date hereof to engage in
any line of business in any geographic area or to compete with any Person
(b) contract, agreement or instrument providing for the indemnification by
the Company or a Subsidiary of any Person with respect to any liabilities,
other than any contract, agreement or instrument entered into in the
ordinary course of business consistent with past practice, (c) partnership,
joint venture, shareholders' or other similar contract or agreement with
any Person or (d) contract, option, right of first refusal or other
contract or agreement relating to the disposition or leasing of any
properties or assets of the Company or any of its Subsidiaries (other than
(i) inventory, (ii) the disposition or leasing of immaterial properties or
assets and (iii) any such contract entered into in the ordinary course of
business consistent with past practice).
(o) LABOR RELATIONS. Neither the Company nor any of its Subsidiaries
is a party to any collective bargaining agreement or other labor union
contract applicable to persons employed by the Company or its Subsidiaries
except as disclosed in Section 3.1(o) of the Company Disclosure Schedule.
Except as set forth on Section 3.1(o) of the Company Disclosure Schedule
and except for any such event which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company, there is no labor
strike, slowdown or work stoppage or lockout pending or, to the best
knowledge of the Company, threatened against the Company or any of its
Subsidiaries, there is no unfair labor practice charge or other employment
related complaint pending or, to the best knowledge of the Company,
threatened against the Company or any of its Subsidiaries, and there is no
representation claim or petition pending before the National Labor
Relations Board and no question concerning representation exists with
respect to the employees of the Company or its Subsidiaries.
(p) INTELLECTUAL PROPERTY. Except as set forth in Section 3.1(p) of
the Company Disclosure Schedule and, in the case of clause (iii), except
where any failure would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, the Company and its Subsidiaries
own (in each case free of all Encumbrances, other than Permitted
Encumbrances) (i) the "Randall's's" and "Tom Thumb" trademarks and any
variations thereof used by the Company or its Subsidiaries within the State
of Texas, (ii) the "Remarkable" trademarks and any variations thereof used
by the Company and its Subsidiaries within the State of Texas with respect
to customer courtesy card services offered at retail grocery stores and
supermarkets and (iii) all other Intellectual Property used by the Company
and its Subsidiaries within the State of Texas, and any variations thereof
used within the State of Texas by the Company or its Subsidiaries. Except
as set forth on Section 3.1(p) of the Company Disclosure Schedule, the
Company and its Subsidiaries have the exclusive right to use in the State
of Texas, with respect to grocery and supermarket services, the trade names
"Randall's", "Tom Thumb" and with respect to customer courtesy card
services offered at retail grocery stores and supermarkets, the trade names
"Remarkable" and any variations thereof used by the Company and its
Subsidiaries. Except as disclosed on Section 3.1(p) of the Company
Disclosure Schedule and except as would not, individually or in the
aggregate, have a Material Adverse Effect on the Company, (a) to the
knowledge of the Company, the use within the State of Texas of any
Intellectual Property by the Company or its Subsidiaries does not infringe
on the rights of any Person, (b) to the knowledge of the Company, no Person
is infringing on any right of the Company or any of its Subsidiaries with
respect to any Intellectual Property of the Company or its
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Subsidiaries, (c) neither the Company nor any of its Subsidiaries has
entered into any agreement limiting the right of the Company or any of its
Subsidiaries to use any of its Intellectual Property and (d) neither the
Company nor any of its Subsidiaries has granted any license to any Person
for the use of any of the Intellectual Property of the Company or its
Subsidiaries. Except as set forth on Schedule 3.1(p) and except as would
not, individually or in the aggregate, have a Material Adverse Effect on
the Company, all trademark registrations are valid and subsisting and in
full force and effect and all affidavits of continuing use have been filed
on a timely basis.
(q) AFFILIATE TRANSACTIONS. Except as set forth in the Company SEC
Reports and as set forth in Section 3.1(q) of the Company Disclosure
Schedule, from January 1, 1998 through the date of this Agreement there
have been no transactions, agreements, arrangements or understandings
between the Company or any of its Subsidiaries, on the one hand, and any
Affiliates (as defined in Section 8.11) (other than wholly-owned
Subsidiaries) of the Company or other Persons, on the other hand, that
would be required to be disclosed under Item 404 of Regulation S-K under
the Securities Act.
(r) ENVIRONMENTAL MATTERS. Except as disclosed in the Company SEC
Reports, and as set forth in Section 3.1(r) of the Company Disclosure
Schedule, and except to the extent that, individually or in the aggregate,
failure to satisfy the following representations has not had, and would not
reasonably be expected to have a Material Adverse Effect on the Company:
(i) The Company and each of its Subsidiaries hold and formerly
held, and are, and have been, in compliance with, all Environmental
Permits, and the Company and each of its Subsidiaries are, and have
been, otherwise in compliance with all applicable Environmental Laws;
(ii) (x) None of the Company or any of its Subsidiaries has
received any Environmental Claim, and (y) none of Company or any of its
Subsidiaries is aware of any Environmental Claim that has been
threatened in writing or of any circumstances, conditions or events that
could reasonably be expected to give rise to an Environmental Claim, in
each case, against the Company or any of its Subsidiaries;
(iii) None of the Company or any of its Subsidiaries has entered
into or agreed to any consent decree, order or agreement under any
Environmental Law, and none of the Company or any of its Subsidiaries is
subject to any judgment, decree or order relating to compliance with any
Environmental Law or to any investigation, clean-up, remediation or
removal of Hazardous Materials under an Environmental Law;
(iv) There are no Hazardous Materials present at or about any
facility currently owned, leased, or operated by the Company or any of
its Subsidiaries;
(v) Hazardous Materials have not been generated, transported,
treated, stored, disposed of, released or threatened to be released by
any Person at, on, under or from any of the properties or facilities
currently owned, leased or otherwise used by the Company or any of its
Subsidiaries or by the Company or any of its Subsidiaries at, on, under
or from any formerly owned, leased or otherwise used properties or
facilities; and
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(vi) Neither the Company nor any of its Subsidiaries has
contractually assumed any liabilities under any Environmental Laws.
(s) INFORMATION SUPPLIED. (i) None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in
(A) the registration statement on Form S-4 to be filed with the SEC by
Parent in connection with the issuance of the Parent Common Stock in the
Merger will, at the time the Form S-4 (as defined in Section 5.1)
(including any amendments or supplements thereto) becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, (B) the Prospectus (as defined
in Section 5.1) included in the Form S-4 will, on the date it is first
mailed to stockholders of the Company or at the time of the Company
Shareholders Meeting (as defined in Section 5.1) contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading and (C) the
Proxy Statement related to the Company Shareholders Meeting will, on the
date it is first mailed to stockholders of the Company or at the time of
the Company Shareholders Meeting, be false or misleading with respect to
any material fact, or omit to state any material fact required to be stated
therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they are made, not misleading or
necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the Company Shareholders Meeting
which has become false or misleading.
(ii) Notwithstanding the foregoing, the Company makes no
representations or warranties with respect to information that has been or
will be supplied by Parent or Merger Sub, or their auditors, attorneys,
financial advisers, other consultants or advisers, specifically for use in
the Form S-4, the Prospectus, the Proxy Statement or in any other documents
to be filed with the SEC or any regulatory agency in connection with the
transactions contemplated hereby.
(t) OPINION OF FINANCIAL ADVISOR. The Board of Directors of the
Company has received the opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill"), dated July 22, 1999, to the effect that, as of
the date of the opinion, the Merger Consideration to be received by the
holders of the Company Common Stock pursuant to the Merger is fair from a
financial point of view to the holders of such shares, other than Parent
and its affiliates. An executed copy of such opinion will be provided to
Parent. The Company has been authorized by Merrill to permit, subject to
prior review and consent by Merrill and its counsel, the inclusion of such
fairness opinion (or a reference thereto) in the Proxy Statement.
(u) BROKERS. No consultant, broker, finder or investment banker
(other than Kohlberg Kravis Roberts & Co. L.P. ("KKR") and Merrill) is
entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company. The Company has
heretofore furnished to Parent a complete and correct copy of all
agreements between the Company and Merrill and between the Company and KKR,
which are the only agreements pursuant to which either such firm would be
entitled to any payment relating to the transactions contemplated hereby.
The total fees and expenses of the Company for Merrill, KKR, the Company's
accountants, and the Company's legal counsel in connection with the
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Merger will be no more than the amount set forth in Section 3.1(u) of the
Company Disclosure Schedule.
(v) VOTE REQUIRED. The affirmative vote of the holders of a majority
of the outstanding shares of Voting Common Stock entitled to vote thereon
(the "Required Company Vote") is the only vote of the holders of any class
or series of the Company's capital stock necessary to approve this
Agreement and the transactions contemplated hereby, including the Merger.
The Board of Directors of the Company, at a meeting duly called and held,
by unanimous vote (i) determined that this Agreement and the transactions
contemplated hereby, including the Merger, are advisable and fair to, and
in the best interests of, the shareholders of the Company, (ii) approved
this Agreement and the transactions contemplated hereby, including the
Merger, and (iii) resolved, subject to Section 5.4, to recommend that the
holders of the shares of Company Common Stock approve this Agreement and
the transactions contemplated hereby, including the Merger. The Company
hereby agrees to the inclusion in the Proxy Statement of the
recommendations of the Board of Directors of the Company described in this
Section 3.1(v) (subject to the right of the Board of Directors of the
Company to withdraw, amend or modify such recommendation in accordance with
Section 5.4).
(w) NO OTHER AGREEMENTS TO SELL THE COMPANY OR ITS ASSETS. The
Company has no legal obligation, absolute or contingent, to any other
Person to sell more than 5% of the assets of the Company, to sell more than
5% of the capital stock or other ownership interests of the Company or any
of its Subsidiaries that would be a "significant subsidiary", as defined in
Article 1, Rule 1-02 of Regulation S-K, promulgated pursuant to the
Securities Act, as such regulation is in effect on the date hereof
("Significant Subsidiaries"), or to effect any merger, consolidation or
other reorganization of the Company or any of its Significant Subsidiaries
or to enter into any agreement with respect thereto.
(x) TEXAS TAKEOVER STATUTE; STATE TAKEOVER STATUTES. The provisions
of Part 13 of the TBCA are inapplicable to the Merger, this Merger
Agreement and the Voting Agreements. No provision of the articles of
incorporation, by-laws or other governing instruments of the Company or any
of its Subsidiaries or any applicable law would, directly or indirectly,
restrict or impair the ability of the Company, Merger Sub or Parent to
consummate the Merger.
(y) YEAR 2000 COMPLIANCE. The software, operations, systems and
processes which, in whole or in part, are used, operated, relied upon, or
integral to, the Company's or any of its Subsidiaries' conduct of their
business, are in all material respects Year 2000 Compliant (as hereinafter
defined), to the extent that and except as disclosed in Section 3.1(y) of
the Company Disclosure Schedule. For purposes of this Agreement, "Year 2000
Compliant" means the ability to process (including calculate, compare,
sequence, display or store), transmit or receive data or date/time data
from, into and between the twentieth and twenty-first centuries, and the
years 1999 and 2000, and leap year calculations without error or
malfunction.
(z) INSURANCE POLICIES. Each of the Employment Practices Liability
Insurance Policy, Directors and Officers Liability Insurance Policy
including Company Reimbursement and Commercial General Liability Policy of
the Company is valid and binding and in full force and effect, all premiums
thereunder have been paid (within the applicable grace period) and neither
the Company nor any Subsidiary is in default
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in any material respect thereunder. Each of the other insurance policies
that insure the business, operations or employees of the Company or any
Subsidiary or affect or relate to the ownership, use or operation of any of
the properties of the Company or any Subsidiary is valid and binding and in
full force and effect, all premiums thereunder have been paid (within any
applicable grace period) and neither the Company nor any Subsidiary is in
default thereunder, except for any failures or defaults which would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company. No insurer under any such insurance policy has canceled or
generally disclaimed liability under any such policy or indicated any
intent to do so or to materially increase the premiums payable or not to
renew any such policy, except where such action would not, individually or
in the aggregate, have a Material Adverse Effect on the Company.
(aa) BOOKS AND RECORDS. The minute books and other similar records of
the Company and its Subsidiaries as made available to Parent prior to the
execution of this Agreement contain a true and complete record, in all
material respects, of all actions taken at all meetings and by all written
consents in lieu of meetings of the shareholders and the boards of
directors (or similar governing bodies) of the Company and its
Subsidiaries.
(bb) OPTION AGREEMENT. The Stock Option Agreement, dated as of June
26, 1997, between Lew W. Harpold and the Company is valid and binding and
in full force and effect and there are no other agreements, arrangements or
understandings between the Company or any of its Subsidiaries or Affiliates
and Mr. Harpold concerning the Company's right to acquire the shares of
stock that are the subject of such Stock Option Agreement. The Company can
validly transfer its rights under the Stock Option Agreement to the
Surviving Corporation pursuant to the Merger. The Company has informed Mr.
Harpold of the transactions contemplated by this Agreement and the
Company's plans to obtain new permits to be held by Randall's Beverage
Company, Inc. ("Beverage") to replace the Permits held by Food Depot, Inc.
The Company has obtained assurances from Mr. Harpold that he will not
interfere with the consummation of the transactions contemplated by the
Stock Option Agreement or the effort to obtain the new permits.
3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. Parent and
Merger Sub hereby, jointly and severally, represent and warrant to the Company
that:
(a) ORGANIZATION AND QUALIFICATION. Parent and each of its
Significant Subsidiaries is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, with the
corporate power and authority to own and operate its business as presently
conducted. Parent and each of its Significant Subsidiaries is duly
qualified as a foreign corporation or other entity to do business and is in
good standing in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except for such failures of Parent and any of its
Significant Subsidiaries to be so qualified as would not, individually or
in the aggregate, have a Material Adverse Effect on Parent. Parent has
previously made available to the Company true and correct copies of its
Certificate of Incorporation and Bylaws and the charter documents and
bylaws or other organizational documents of each of its Significant
Subsidiaries and Merger Sub, as currently in effect.
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(b) AUTHORIZATION; VALIDITY AND EFFECT OF AGREEMENT. Each of Parent
and Merger Sub has the requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by each of Parent and Merger Sub and the performance by each of
Parent and Merger Sub of its obligations hereunder and the consummation of
the transactions contemplated hereby have been duly authorized by the Board
of Directors of Parent and the Board of Directors of Merger Sub and all
other necessary corporate action on the part of Parent and Merger Sub, and
no other corporate proceedings on the part of Parent or Merger Sub are
necessary to authorize this Agreement and the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
each of Parent and Merger Sub and constitutes a legal, valid and binding
obligation of each of Parent and Merger Sub, enforceable against it in
accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing.
(c) CAPITALIZATION. The authorized capital stock of Parent consists
of 1,500 million shares of Parent Common Stock. As of July 21, 1999,
497,370,837 shares of Parent Common Stock were outstanding (after deducting
60,352,830 shares of Parent Common Stock held in the Company treasury). As
of July 21, 1999, (i) 37,737,147 shares of Parent Common Stock were
reserved for issuance and issuable upon or otherwise deliverable under
Parent's stock option plans (collectively, the "Parent Stock Plans") in
connection with the exercise of outstanding Parent Options and (ii)
6,429,533 shares of Parent Common Stock were reserved for issuance and
issuable upon exercise of warrants. All of the issued and outstanding
shares of Parent Common Stock are, and all shares of Parent Common Stock
which may be issued pursuant to the Parent Stock Plans, when issued in
accordance with the terms of those plans, will be, validly issued, fully
paid and non-assessable. Since July 21, 1999 no shares of Parent Common
Stock have been issued, other than upon exercise of stock options. Except
for options to purchase Parent Common Stock outstanding under the Parent
Stock Plans and the warrants referred to in clause (ii) above, there are no
outstanding bonds, debentures, notes or other indebtedness or other
securities of Parent or any Subsidiary having the right to vote (or
convertible into, exercisable, or exchangeable for, securities having the
right to vote) on any matters on which stockholders of Parent may vote. As
of the date hereof, except for options to purchase Parent Common Stock
outstanding under Parent Stock Plans referred to in clause (i) above and
the warrants referred to in clause (ii) above, and except as otherwise
disclosed in Section 3.2(c) of the disclosure schedule delivered by Parent
and Merger Sub to the Company prior to the execution of this Agreement (the
"Parent Disclosure Schedule"), there are no existing options, warrants,
calls, subscriptions, convertible securities or other securities,
agreements, commitments, or obligations which would require Parent or any
of its Subsidiaries to issue, deliver or sell or cause to be issued,
delivered or sold shares of Common Stock, Preferred Stock or any other
equity securities, or securities convertible into or exchangeable or
exercisable for shares of Common Stock, Preferred Stock or any other equity
securities of Parent or any of its Subsidiaries. Except as set forth in
Section 3.2(c) of the Parent Disclosure Schedule, Parent has no
commitments, obligations or understandings to purchase or redeem or
otherwise acquire any shares of Common Stock or the capital stock of any of
its Subsidiaries or to provide funds to or make any investment (in the form
of a loan,
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capital contribution or otherwise) in any such Subsidiary or any other
entity. Except as set forth in Section 3.2(c) of the Parent Disclosure
Schedule, there are no shareholders' agreements, voting trusts or other
agreements or understandings to which Parent is a party or by which it is
bound relating to the voting or registration of any shares of capital stock
of Parent or any preemptive rights with respect thereto.
(d) NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(i) Except as set forth in Section 3.2(d) of the Parent Disclosure
Schedule with respect to clause (C) below, neither the execution and
delivery of this Agreement nor the performance by each of Parent and
Merger Sub of its obligations hereunder, nor the consummation of the
transactions contemplated hereby, will: (A) conflict with Parent's
Certificate of Incorporation or Bylaws; (B) assuming satisfaction of the
requirements set forth in Section 3.2(d)(ii) below, violate any statute,
law, ordinance, rule or regulation, applicable to Parent or any of its
Subsidiaries or any of their properties or assets; or (C) violate,
breach, be in conflict with or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under,
or permit the termination of any provision of, or result in the
termination of, the acceleration of the maturity of, or the acceleration
of the performance of any obligation of Parent or any of its
Subsidiaries under, or cause an indemnity payment to be made by Parent
or any of its Subsidiaries under, or result in the creation or
imposition of any Encumbrance upon any properties, assets or business of
Parent or any of its Subsidiaries under, any note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization,
license, contract, instrument or other agreement or commitment or any
order, judgment or decree to which Parent or any of its Subsidiaries is
a party or by which Parent or any of its Subsidiaries or any of their
respective assets or properties is bound or encumbered, or give any
Person the right to require Parent or any of its Subsidiaries to
purchase or repurchase any notes, bonds or instruments of any kind
except, in the case of clauses (B) and (C), for such violations,
breaches, conflicts, defaults or other occurrences which, individually
or in the aggregate, would not have a Material Adverse Effect on Parent.
(ii) Except for (A) the pre-merger notification requirements of the
HSR Act, (B) Blue Sky Laws, (C) applicable requirements of the
Securities Act, (D) rules and regulations of the NYSE, (E) the filing of
the Articles of Merger pursuant to the TBCA, (F) with respect to matters
set forth in Sections 3.2(d)(i) or 3.2(d)(ii) of the Parent Disclosure
Schedule, and (G) applicable requirements, if any, of the Exchange Act,
no consent, approval or authorization of, permit from, notice to, or
declaration, filing or registration with, any governmental or regulatory
authority, or any other Person or entity is required to be made or
obtained by Parent or its Subsidiaries in connection with the execution,
delivery and performance of this Agreement by Parent and the
consummation by Parent of the transactions contemplated hereby, except
where the failure to obtain such consent, approval, authorization,
permit or declaration, to deliver such notice or to make such filing or
registration would not, individually or in the aggregate, have a
Material Adverse Effect on Parent.
(e) COMPLIANCE. Parent and each of its Subsidiaries is in compliance
with all foreign, federal, state and local laws and regulations applicable
to its operations or with respect to which compliance is a condition of
engaging in the business thereof,
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except to the extent that failure to comply would not, individually or in
the aggregate, have a Material Adverse Effect on Parent. To the knowledge
of Parent, neither Parent nor any of its Subsidiaries has received any
notice asserting a failure, or possible failure, to comply with any such
law or regulation, the subject of which notice has not been resolved as
required thereby or otherwise to the satisfaction of the party sending the
notice, except for such failure as would not, individually or in the
aggregate, have a Material Adverse Effect on Parent. Parent and its
Subsidiaries have all Permits from governmental agencies required to
conduct their respective businesses as they are now being conducted and
assuming that all necessary consents to transfer are obtained, all such
Permits will remain in effect after the Effective Time, except for such
failures to have such Permits that would not, individually or in the
aggregate, have a Material Adverse Effect on Parent.
(f) SEC DOCUMENTS.
(i) Parent has delivered or made available to Parent true and
complete copies of each registration statement, proxy or information
statement, form, report and other documents required to be filed by it
with the SEC since January 1, 1999 (collectively, the "Parent SEC
Reports"). As of their respective dates, the Parent SEC Reports (A)
complied (except to the extent revised or superseded by a subsequent
filing with the SEC prior to the date hereof), or, with respect to those
not yet filed, will comply, in all material respects with the applicable
requirements of the Securities Act and the Exchange Act and (B) did not
(except to the extent revised or superseded by a subsequent filing with
the SEC prior to the date hereof), or, with respect to those not yet
filed, will not, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Parent has filed all
required Parent SEC Reports required to be filed by it under the
Exchange Act since January 1, 1999. Parent has heretofore made available
or promptly will make available to the Company a complete and correct
copy of all amendments or modifications to any Parent SEC Report which
has been filed prior to the date hereof. For purposes of all the
representations and warranties of Parent and Merger Sub contained herein
(other than this paragraph (f)(i) and paragraph (f)(ii)), the term "the
Parent SEC Reports" shall refer only to those Parent SEC Reports filed
with the SEC prior to the date hereof.
(ii) Each of the consolidated balance sheets of Parent included in
or incorporated by reference into the Parent SEC Reports (including the
related notes and schedules) is in accordance in all material respects
with the books and records of Parent and presents fairly (except to the
extent revised or superseded by financial statements included in a
subsequent filing with the SEC prior to the date hereof), in all
material respects, the consolidated financial position of Parent and its
consolidated Subsidiaries as of its date, and each of the consolidated
statements of income, stockholders' equity and cash flows of Parent
included in or incorporated by reference into the Parent SEC Reports
(including any related notes and schedules) presents fairly (except to
the extent revised or superseded by financial statements included in a
subsequent filing with the SEC prior to the date hereof), in all
material respects, the results of operations, stockholders' equity or
cash flows, as the case may be, of Parent and its Subsidiaries for the
periods set forth therein (subject, in the case of unaudited statements,
to normal
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year-end adjustments, which are not expected to be material in amount),
in each case in accordance with GAAP consistently applied during the
periods involved, except as may be noted therein.
(iii) Except as set forth in Section 3.2(f)(iii) of the Parent
Disclosure Schedule and except as set forth in the Parent SEC Reports,
neither Parent nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or
otherwise) that would be required to be reflected on, or reserved
against in, a consolidated balance sheet of the Parent and its
Subsidiaries or in the notes thereto, prepared in accordance with GAAP
consistently applied, except for (A) liabilities or obligations that
were so reserved on, or reflected in (including the notes to), the
consolidated balance sheet of Parent as of March 27, 1999, (B)
liabilities or obligations arising in the ordinary course of business
(including trade indebtedness) since March 27, 1999, and (C) liabilities
or obligations which would not, individually or in the aggregate, have a
Material Adverse Effect on Parent.
(g) ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.2(g)
of the Parent Disclosure Schedule and except as set forth in the Parent SEC
Reports and except for the transactions expressly contemplated hereby,
since April 30, 1999, Parent and its Subsidiaries have conducted their
respective businesses only in the ordinary and usual course consistent with
past practices and there has not been any Material Adverse Change of
Parent. Except as set forth in Section 3.2(g) of the Parent Disclosure
Schedule and except as set forth in the Parent SEC Reports, from April 30,
1999 through the date of this Agreement, neither Parent nor any of its
Subsidiaries has taken any of the actions prohibited by Section 4.2 hereof.
(h) INFORMATION SUPPLIED. (i) None of the information supplied or to
be supplied by Parent for inclusion or incorporation by reference in (A)
the registration statement on Form S-4 to be filed with the SEC by Parent
in connection with the issuance of the Parent Common Stock in the Merger
will, at the time the Form S-4 (including any amendments or supplements
thereto) becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, (B) the Prospectus included in the Form S-4 will, on the date
it is first mailed to shareholders of the Company or at the time of the
Company Shareholders Meeting contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading and (C) the Proxy Statement
related to the Company Shareholders Meeting will, on the date it is first
mailed to shareholders of the Company or at the time of the Company
Shareholders Meeting, be false or misleading with respect to any material
fact, or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they are made, not misleading or necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Company Shareholders Meeting which has
become false or misleading. The Form S-4 and the Prospectus will comply as
to form in all material respects with the requirements of the Exchange Act
and the Securities Act and the rules and regulations of the SEC thereunder.
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(ii) Notwithstanding the foregoing, Parent makes no representations
or warranties with respect to information that has been or will be
supplied by the Company or its auditors, attorneys, financial advisers,
other consultants or advisers, specifically for use in the Form S-4, the
Prospectus, the Proxy Statement or in any other documents to be filed
with the SEC or any regulatory agency in connection with the
transactions contemplated hereby.
(i) BROKERS. The Company will not be liable for any brokerage,
finder's or other fee or commission to any consultant, broker, finder or
investment banker in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Parent or Merger
Sub.
(j) VOTE REQUIRED. No vote of the holders of any class or series of
Parent's capital stock is necessary to approve the issuance of shares of
Parent Common Stock pursuant to the Merger, this Agreement or any of the
transactions contemplated hereby, including the Merger.
(k) FINANCIAL RESOURCES. At the Effective Time of the Merger, Parent
and Merger Sub will have available all of the funds necessary for the
acquisition of all shares of Common Stock pursuant to the Merger, as the
case may be, and to perform their respective obligations under this
Agreement.
(l) NO PRIOR ACTIVITIES. Merger Sub has not incurred nor will it
incur any liabilities or obligations, except those incurred in connection
with its organization and with the negotiation of this Agreement and the
performance hereof, and the consummation of the transactions contemplated
hereby, including the Merger. Except as contemplated by this Agreement,
Merger Sub has not engaged in any business activities of any type or kind
whatsoever, or entered into any agreements or arrangements with any person
or entity, or become subject to or bound by any obligation or undertaking.
As of the date hereof, all of the issued and outstanding capital stock of
Merger Sub is owned beneficially and of record by Parent, free and clear of
all Encumbrances (other than those created by this Agreement and the
transactions contemplated hereby).
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 COVENANTS OF COMPANY. Except as set forth in Section 4.1 or Section
5.5 of the Company Disclosure Schedule, the Company covenants and agrees that,
during the period from the date hereof to the Effective Time (except as
otherwise specifically contemplated by the terms of this Agreement), unless
Parent shall otherwise consent, which consent shall not be unreasonably withheld
or delayed (i) the businesses of the Company and its Subsidiaries shall be
conducted, in all material respects, in the ordinary course and in a manner
consistent with past practice and, in all material respects, in compliance with
applicable laws; and (ii) the Company shall use its reasonable best efforts
consistent with the foregoing to preserve substantially intact the business
organization of the Company and its Subsidiaries, to keep available the services
of the present officers, employees and consultants of the Company and its
Subsidiaries and to preserve, in all material respects, the present
relationships of the Company and its Subsidiaries with customers, suppliers,
advertisers, distributors and other persons with which the Company or any of its
Subsidiaries has significant business relations. Without limiting the generality
of the
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foregoing, neither the Company nor any of its Subsidiaries shall (except as set
forth in Section 4.1 of the Company Disclosure Schedule and except as otherwise
specifically contemplated by the terms of this Agreement), between the date of
this Agreement and the Effective Time, directly or indirectly do, or propose or
commit to do, any of the following without the prior written consent of Parent,
which consent, only in the case of clause (g) below, shall not be unreasonably
withheld or delayed:
(a) make or commit to make any capital expenditures, including,
without limitation, for store remodels, in excess of $200,000 in the
aggregate, other than (i) expenditures for routine or emergency maintenance
and repair, or (ii) expenditures in amounts not exceeding those reflected
in capital expenditure budgets supplied to Parent prior to the date of this
Agreement (the "Capital Expenditures Budgets"); provided that such
expenditures shall be without significant acceleration; provided, further,
that Parent and the Company agree to confer and reasonably cooperate with
respect to significant capital expenditure items that are not fully
committed on the date of this Agreement;
(b) incur any indebtedness for borrowed money or guarantee such
indebtedness of another Person (other than the Company or a wholly-owned
Subsidiary of the Company) or enter into any "keep well" or other agreement
to maintain the financial condition of another Person (other than the
Company or a wholly-owned Subsidiary of the Company) or make any loans, or
advances of borrowed money or capital contributions to, or equity
investments in, any other Person (other than the Company or a wholly-owned
Subsidiary of the Company) or issue or sell any debt securities, other than
borrowings under existing agreements in the ordinary course of business
consistent with past practice or inter-company indebtedness between the
Company and any of its wholly-owned Subsidiaries or between such
wholly-owned Subsidiaries;
(c)(i)(x) amend its Articles of Incorporation or Bylaws or (y) amend
the charter or bylaws of any of its Subsidiaries; (ii) split, combine or
reclassify the outstanding shares of its capital stock or other ownership
interests or declare, set aside or pay any dividend payable in cash, stock
or property or make any other distribution with respect to such shares of
capital stock or other ownership interests; (iii) redeem, purchase or
otherwise acquire, directly or indirectly, any shares of its capital stock
or other ownership interests, other than in compliance with the Company
Plans; or (iv) except as permitted by Section 4.1(d), sell or pledge any
stock of any of its Subsidiaries;
(d)(i) other than upon exercise of outstanding Company Options or the
Investor Option (in each case disclosed in Section 3.1(c) of the Company
Disclosure Schedule), issue or sell or agree to issue or sell any
additional shares of, or grant, confer or award any options, warrants,
convertible securities or rights of any kind to acquire any shares of, its
capital stock of any class; (ii) other than as reflected in the Capital
Expenditures Budgets (subject to the provisos in paragraph (a) above),
enter into any agreement, contract or commitment to dispose of or acquire,
or relating to the disposition or acquisition of, a segment of its business
or to sell, lease, license, close, shut down or otherwise dispose of any
stores or to relocate any stores; (iii) other than as reflected in the
Capital Expenditures Budgets (subject to the provisos in paragraph (a)
above), except in the ordinary course of business consistent with past
practice and except for sales or dispositions of obsolete assets, sell,
pledge, dispose of or encumber any assets (including, without limitation,
any indebtedness owed to them or any claims held by them), including real
property; or (iv) other than as reflected in
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the Capital Expenditures Budgets (subject to the provisos in paragraph (a)
above) or as otherwise permitted by clause (a) of this Section 4.1, acquire
(by merger, consolidation, acquisition of stock or assets or otherwise) any
corporation, partnership or other business organization or division thereof
or any assets (other than inventory and other immaterial assets, including
real property, in each case in the ordinary course of business consistent
with past practice), including real property, or make any investment,
either by purchase of stock or other securities, or contribution to
capital, in any other Person, in any case, in an amount in excess of
$150,000, in the aggregate;
(e) other than pursuant to policies or agreements in effect on the
date hereof as disclosed in the Company SEC Reports or set forth in Section
3.1(l) or 5.5 of the Company Disclosure Schedule, grant any severance or
termination pay under its severance or termination pay policies or
agreements in effect on the date hereof or enter into any employment or
severance agreement with any officer, director or employee;
(f) except as set forth in Section 3.1(l) or 5.5 of the Company
Disclosure Schedule, adopt, amend or terminate any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any director, officer or employee
or increase in any manner the compensation or fringe benefits of any
director, officer or employee or grant, confer, award or pay any forms of
cash incentive, bonuses or other benefit not required by any existing plan,
arrangement or agreement, in each case except (i) for increases in salary
or bonus in the ordinary course of business with respect to employees of
the Company at the level of store director and below or (ii) as required by
law;
(g) enter into or amend any (i) Lease or (ii) contract, agreement,
commitment, understanding or other arrangement, in each case involving
annual expenditures or liabilities in excess of $250,000 or which is not
cancelable within one (1) year without penalty, cost or liability, other
than short-term promotional agreements with vendors entered into in the
ordinary course of business;
(h) enter into any collective bargaining agreements;
(i) change in any material respect in its tax or accounting policies
or make any material reclassification of assets or liabilities except as
required by law or GAAP;
(j) change or make any new Tax elections, change materially any method
of accounting with respect to Taxes, file any amended Tax Return, or settle
or compromise any material federal, state, local or foreign Tax liability;
(k) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), except the payment, discharge or satisfaction of (i)
liabilities or obligations in the ordinary course of business consistent
with past practice or in accordance with the terms thereof as in effect on
the date hereof or (ii) claims settled or compromised to the extent
permitted by Section 4.1(l), or waive, release, grant or transfer any
rights of material value or modify or change in any material respect any
existing material Contract, in each case, other than in the ordinary course
of business consistent with past practice;
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(l) settle or compromise any litigation, other than litigation not in
excess of amounts reserved for in the most recent consolidated financial
statements of the Company included in the Company SEC Reports or, if not so
reserved for, in an aggregate amount not in excess of $100,000 (provided in
either case such settlement documents do not involve any material
non-monetary obligations on the part of the Company and its Subsidiaries);
(m) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its Subsidiaries (other than the
Merger) or otherwise alter through merger, liquidation, reorganization,
restructuring or any other fashion the corporate structure and ownership of
any Subsidiary of the Company;
(n) make any payment to an Affiliate, except in accordance with the
terms of any contract or compensation to employees in the ordinary course
of business and in accordance with Section 4.1(f); or
(o) take, or offer or propose to take, or agree to take in writing or
otherwise, any of the actions described in Sections 4.1(a) through 4.1(n)
or any action which would result in any of the conditions set forth in
Article VI not being satisfied.
4.2 COVENANTS OF PARENT. Except as set forth in Section 4.2 of the Parent
Disclosure Schedule, Parent covenants and agrees that, during the period from
the date hereof to the Effective Time (except as otherwise specifically
contemplated by the terms of this Agreement), unless the Company shall otherwise
consent, which consent shall not be unreasonably withheld or delayed. Parent
shall, to the extent consistent with its reasonable commercial judgment and to
the extent material, use its reasonable best efforts to preserve substantially
intact the business organization of Parent and its Subsidiaries, to keep
available the services of the present officers, employees and consultants of
Parent and its Subsidiaries and to preserve, in all material respects, the
present relationships of Parent and its Subsidiaries with customers, suppliers,
advertisers, distributors and other persons with which Parent or any of its
Subsidiaries has significant business relations, except where the failure to not
do so would have a Material Adverse Effect on Parent. Without limiting the
generality of the foregoing, neither Parent nor any of its Subsidiaries shall
(except as set forth in Section 4.2 of the Parent Disclosure Schedule and except
as otherwise specifically contemplated by the terms of this Agreement), between
the date of this Agreement and the Effective Time, directly or indirectly do, or
propose or commit to do, any of the following without the prior written consent
of the Company:
(a) (i) amend its certificate of incorporation or bylaws in such a
manner as would cause holders of Company Common Stock that receive Parent
Common Stock pursuant to the Merger to be treated differently than other
holders of Parent Common Stock, or (ii) split, combine or reclassify the
outstanding shares of Parent's capital stock or other ownership interests
or declare, set aside or pay any dividend payable in cash, stock or
property or make any other distribution with respect to such shares of
capital stock or other ownership interests (except that a wholly-owned
Subsidiary may declare and pay a dividend to its parent);
(b) adopt a plan of complete or partial liquidation with respect to
Parent or resolutions providing for or authorizing such a liquidation or a
dissolution;
(c) in the case of Parent or any of its Subsidiaries, acquire or agree
to acquire by merging or consolidating with, or by purchasing a substantial
equity interest in or a
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substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization
or division thereof or otherwise acquire or agree to acquire any assets or
Facilities that operate within the Company's existing principal market
areas; or
(d) take, or offer or propose to take, or agree to take in writing or
otherwise, any of the actions described in Sections 4.2(a) through 4.2(c)
or any action which would result in any of the conditions set forth in
Article VI not being satisfied.
4.3 GOVERNMENTAL FILINGS. The Company and Parent shall file all reports
required to be filed by each of them with the SEC (and all other governmental
authorities) between the date of this Agreement and the Effective Time and shall
(to the extent (i) permitted by law or regulation or any applicable
confidentiality agreement or (ii) any privilege would not be waived or otherwise
lost as a result of such action) deliver to the other party copies of all such
reports, announcements and publications promptly after the same are filed.
Subject to applicable laws relating to the exchange of information, each of the
Company and Parent shall have the right to review in advance, and will consult
with the other with respect to, all the information relating to the other party
and each of their respective Subsidiaries, which appears in any filings,
announcements or publications made with, or written materials submitted to, any
third party or any governmental authority in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto agrees to act reasonably and as promptly as practicable. Each
party agrees that, to the extent practicable and as timely as practicable, it
will consult with, and provide all appropriate and necessary assistance to, the
other party with respect to the obtaining of all permits, consents, approvals
and authorizations of all third parties and governmental authorities necessary
or advisable to consummate the transactions contemplated by this Agreement and
each party will keep the other party apprised of the status of matters relating
to completion of the transactions contemplated hereby.
4.4 COVENANT REGARDING CERTAIN COMPANY PLANS OR OTHER ARRANGEMENTS. The
Company shall use its reasonable best efforts to (i) obtain from each individual
identified in Section 5.5 of the Company Disclosure Schedule a written release
and consent to the termination of all of such individual's severance benefits
under existing Company Plans and employment or severance agreements and
arrangements, (ii) seek approval by a separate vote of Company stockholders as
contemplated under Code Section 280G(b)(5)(A)(ii) and the proposed regulations
promulgated thereunder of (A) the severance arrangements described on Schedule
5.5 of the Company Disclosure Schedule and (B) the adjustment of the terms of
outstanding Company Options to provide for accelerated vesting or exercisability
of such Company Options. In implementing the documents and disclosure necessary
to effect the foregoing, the Company shall consult with Parent to finalize such
documents and disclosure, the terms of which shall be subject to approval by
Parent, which approval shall not be unreasonably withheld.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PREPARATION OF PROXY STATEMENT; FORM S-4; COMPANY SHAREHOLDERS MEETING.
(a)(i) Parent shall use its reasonable best efforts to, in cooperation with the
Company, prepare and file with the SEC a registration statement on Form S-4 with
respect to the issuance of Parent Common Stock in the Merger (the "Form S-4")
and a prospectus to
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be included in the Form S-4 as Parent's prospectus (such prospectus, and any
amendments or supplements thereto, the "Prospectus") within ten days following
the date hereof and (ii) as promptly as practicable following the date hereof,
the Company shall, in cooperation with Parent, prepare preliminary proxy
materials which shall constitute the Proxy Statement (such proxy statement, and
any amendments or supplements thereto, the "Proxy Statement"). The Form S-4 and
the Proxy Statement shall comply as to form in all material respects with the
applicable provisions of the Securities Act and the Exchange Act. Each of Parent
and the Company shall use all reasonable efforts to have the Form S-4 cleared by
the SEC as promptly as practicable after filing with the SEC and to keep the
Form S-4 effective as long as is necessary to consummate the Merger. Parent
shall, as promptly as practicable after receipt thereof, provide copies of any
written comments received from the SEC with respect to the Prospectus to the
Company and advise the Company of any oral comments with respect to the
Prospectus received from the SEC. Parent shall, at its expense, also take any
action (other than qualifying to do business in any jurisdiction in which it is
not now so qualified) required to be taken under any applicable state securities
laws in connection with the issuance of the shares of Parent Common Stock in the
Merger. Parent will provide the Company with a reasonable opportunity to review
and comment on any amendment or supplement to the Prospectus prior to filing
such with the SEC, and will provide the Company with a reasonable number of
copies of all such filings made with the SEC. No amendment or supplement to the
information supplied by the Company for inclusion in the Prospectus shall be
made without the approval of the Company, which approval shall not be
unreasonably withheld or delayed. Parent and the Company shall cooperate with
each other in order to cause the Proxy Statement and the Prospectus to be mailed
simultaneously to the Company's shareholders.
(b) Subject to Section 5.4, the Company shall, as promptly as
practicable following the execution of this Agreement, duly call, give
notice of, convene and hold a meeting of its shareholders (the "Company
Shareholders Meeting") for the purpose of obtaining the Required Company
Vote with respect to the transactions contemplated by this Agreement (that
the Company Shareholder Meeting will be scheduled such that it shall occur
as soon as practicable after the date on which the Form S-4 becomes
effective), shall take all lawful action to solicit the approval of this
Agreement by the Required Company Vote and the Board of Directors of the
Company shall recommend approval of this Agreement by the shareholders of
the Company. Without limiting the generality of the foregoing but subject
to its rights pursuant to Sections 5.4 and 7.1(f), the Company agrees that
its obligations pursuant to the first sentence of this Section 5.1(b) shall
not be affected by the commencement, public proposal, public disclosure or
communication to the Company of any Acquisition Proposal.
5.2 ACCESS TO INFORMATION. Upon reasonable notice, each party shall (and
shall cause its Subsidiaries to) afford to the officers, employees, accountants,
counsel, financial advisors and other representatives of the other party
reasonable access during normal business hours, during the period prior to the
Effective Time, to all its officers, employees, properties, offices, plants and
other facilities and to all books and records and, during such period, each
party shall (and shall cause its Subsidiaries to) furnish promptly to the other
party, consistent with its legal obligations, all other information concerning
its business, properties and personnel as such other party may reasonably
request; provided, however, that each party may restrict the foregoing access to
the extent that, in the reasonable judgment of such party, (i) providing such
access would result in the disclosure of any
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trade secrets of third parties or violate any of its obligations with respect to
confidentiality if such party shall have used all reasonable efforts to obtain
the consent of such third party to such access, (ii) such access relates to
Acquisition Proposals (as defined in Section 5.4) to the extent that any
confidentiality agreement in existence on the date hereof with such party
prohibits such party from making the books, records and other information
available to the other party; provided that the Company shall fulfill its
obligations under Section 5.4, (iii) any law, treaty, rule or regulation of any
governmental authority applicable to such party requires such party or its
Subsidiaries to restrict access to any properties or information or (iv)
providing such access would result in such party waiving or otherwise losing any
privilege with respect to any such information or if such information
constitutes attorney work product. The parties will hold any such information
which is non-public in confidence to the extent required by, and in accordance
with, the provisions of the letter dated May 20, 1999 between the Company and
Parent and the letter dated July 9, 1999 between the Company and Parent
(collectively, the "Confidentiality Agreements"). Any investigation by Parent or
the Company shall not affect the representations and warranties or the
conditions to the obligations of the Company or Parent, as the case may be.
5.3 REASONABLE BEST EFFORTS. (a) Subject to the terms and conditions of
this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the Merger and the other transactions contemplated by this Agreement
as soon as practicable after the date hereof. In furtherance and not in
limitation of the foregoing, each party hereto agrees to make an appropriate
filing of a Notification and Report Form pursuant to the HSR Act with respect to
the transactions contemplated hereby as promptly as practicable and in any event
within five business days of the date hereof and to supply as promptly as
practicable any additional information and documentary material that may be
requested pursuant to the HSR Act and to take all other actions necessary to
cause the expiration or termination of the applicable waiting periods under the
HSR Act as soon as practicable.
(b) Each of Parent and the Company shall, in connection with the
efforts referenced in Section 5.3(a) to obtain all requisite approvals and
authorizations for the transactions contemplated by this Agreement under
the HSR Act or any other Regulatory Law (as defined below), use its
reasonable best efforts to (i) cooperate in all respects with each other in
connection with any filing or submission and in connection with any
investigation or other inquiry, including any proceeding initiated by a
private party; (ii) promptly inform the other party of any communication
received by such party from, or given by such party to, the Antitrust
Division of the Department of Justice (the "DOJ"), the Federal Trade
Commission (the "FTC") or any other governmental authority and of any
material communication received or given in connection with any proceeding
by a private party, in each case regarding any of the transactions
contemplated hereby, and (iii) permit the other party to review any
communication given by it to, and consult with each other in advance of any
meeting or conference with, the DOJ, the FTC or any such other governmental
authority or, in connection with any proceeding by a private party, with
any other Person, and to the extent permitted by the DOJ, the FTC or such
other applicable governmental authority or other Person, give the other
party the opportunity to attend and participate in such meetings and
conferences. For purposes of this Agreement, "Regulatory Law" means the
Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the
Federal Trade Commission Act, as amended, and all other federal, state and
foreign, if any, statutes, rules, regulations, orders, decrees,
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administrative and judicial doctrines and other laws that are designed or
intended to prohibit, restrict or regulate actions having the purpose or
effect of monopolization or restraint of trade or lessening of competition
through merger or acquisition.
(c) In furtherance and not in limitation of the covenants of the
parties contained in Sections 5.3(a) and 5.3(b), if any administrative or
judicial action or proceeding, including any proceeding by a private party,
is instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as violative of any Regulatory Law, each of
Parent and the Company shall cooperate in all respects with each other and
use its respective reasonable best efforts to contest and resist any such
action or proceeding and to have vacated, lifted, reversed or overturned
any decree, judgment, injunction or other order, whether temporary,
preliminary or permanent, that is in effect and that prohibits, prevents or
restricts consummation of the transactions contemplated by this Agreement.
Notwithstanding the foregoing or any other provision of this Agreement,
nothing in this Section 5.3 shall limit a party's right to terminate this
Agreement pursuant to Section 7.1(b) or 7.1(c) so long as such party has up
to then complied in all respects with its obligations under this Section
5.3.
(d) If any objections are asserted with respect to the transactions
contemplated hereby under any Regulatory Law or if any suit is instituted
by any governmental authority or any private party challenging any of the
transactions contemplated hereby as violative of any Regulatory Law, each
of Parent and the Company shall use its reasonable best efforts to resolve
any such objections or challenge as such governmental authority or private
party may have to such transactions under such Regulatory Law so as to
permit consummation of the transactions contemplated by this Agreement.
(e) Each of Parent, Merger Sub and the Company shall use its
reasonable best efforts to cause the Merger to qualify and will not (both
before and after consummation of the Merger) take any actions which to its
knowledge could reasonably be expected to prevent the Merger from
qualifying, as a reorganization under the provisions of Section 368 of the
Code.
(f) The Company shall use its reasonable best efforts (i) to obtain
consents of all third parties necessary, proper or advisable for the
consummation of the transactions contemplated by this Agreement, including
estoppel certificates from lessors of the Company and its Subsidiaries;
provided that the Company shall not incur any significant expense or
liability or agree to any significant modification to any contractual
arrangement to obtain such consents or certificates, (ii) to provide any
notices to third parties required to be provided prior to the Effective
Time, including under any Leases or insurance policies and (iii) to comply
in all material respects with the terms of the insurance policies. In
connection with the foregoing, Parent will provide assistance as may be
reasonably requested by the Company.
(g) Upon the request of Parent, the Company shall provide, and shall
cause its officers, employees, legal advisers to provide, all reasonable
cooperation in connection with any redemption or purchase of the Company's
outstanding Senior Subordinated Notes and other financing arrangements of
the Company, it being understood that no such redemption or purchase shall
be effective until after the Effective Time.
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(h) Each of the parties shall execute any additional instruments
reasonably necessary to consummate the transactions contemplated hereby.
Subject to the terms and conditions of this Agreement, the parties agree to
use reasonable best efforts to cause the Effective Time to occur as soon as
practicable after the Company shareholder vote with respect to the Merger.
If at any time after the Effective Time any further action is necessary to
carry out the purposes of this Agreement, the proper officers and directors
of each party hereto shall take all such necessary action.
(i) The Company shall use its reasonable best efforts to complete
promptly following the date hereof the process of obtaining new Texas
Alcoholic Beverage Permits to be held by Randall's Beverage Company, Inc.
for each of the stores where beer and wine is currently sold, pursuant to
permits currently held by Food Depot, Inc.
(j) The Company shall use its reasonable best efforts to provide as of
the Closing Date a certificate or certificates complying with the Code and
Treasury Regulations duly executed and acknowledged certifying that the
transactions contemplated hereby are exempt from withholding under Section
1445 of the Code.
5.4 ACQUISITION PROPOSALS. The Company agrees that neither it nor any of
its Subsidiaries nor any of the officers and directors of it or its Subsidiaries
shall, and that it shall direct and use its best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, directly or indirectly, initiate, solicit or encourage or take any other
action to facilitate any inquiries or the making of any proposal or offer with
respect to a merger, reorganization, share exchange, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving, or any purchase or sale of all or any significant portion of the
assets of the Company and its Subsidiaries, taken as a whole, or 25% or more of
the equity securities of, it or any material equity interest in any of its
Significant Subsidiaries (any such proposal or offer (other than a proposal or
offer made by Parent or an affiliate thereof) being hereinafter referred to as
an "Acquisition Proposal"), provided, however, that the Company may take any of
the foregoing actions to the extent such actions are in connection with any
transaction permitted under Section 4.1(d)(ii), (d)(iii) or (d)(iv) so long as
the action is not reasonably expected to interfere with or delay the
consummation of the Merger. The Company further agrees that neither it nor any
of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall direct and use its best efforts to cause
its and its Subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, have any discussion with or
provide any confidential information or data to any Person relating to an
Acquisition Proposal, or engage in any negotiations concerning an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal or accept an Acquisition Proposal. Notwithstanding the
foregoing, the Company or its Board of Directors shall be permitted to (A) to
the extent applicable, comply with Rule 14e-2(a) promulgated under the Exchange
Act with regard to an Acquisition Proposal; provided that the Company or its
Board of Directors shall not be permitted to recommend any such Acquisition
Proposal unless it would be permitted to do so in accordance with clause (B)
below, (B) in response to an unsolicited bona fide written Acquisition Proposal
by any Person, recommend such an unsolicited bona fide written Acquisition
Proposal to the shareholders of the Company, or withdraw or modify in any
adverse manner its approval or recommendation of this Agreement or (C) engage in
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any discussions or negotiations with, or provide any information to, any Person
in response to an unsolicited bona fide written Acquisition Proposal by any such
Person, if with respect to clause (B) or (C) (but not with respect to clause
(A)), (i) such Acquisition Proposal was not solicited, initiated, encouraged or
facilitated in violation of this Section 5.4, (ii) the Board of Directors of the
Company concludes in good faith, based upon the advice of its independent
financial advisor of national reputation and legal counsel, that such
Acquisition Proposal would reasonably be expected to result in or constitute a
Superior Proposal (as defined in Section 8.11), (iii) prior to providing any
information or data to any Person in connection with an Acquisition Proposal by
any such Person, the Board of Directors of the Company of Directors receives
from such Person an executed confidentiality agreement on terms and conditions
which, in the aggregate, are not more favorable to such Person than those
contained in the Confidentiality Agreements and (iv) the Board of Directors of
the Company notifies Parent promptly of the significant terms and conditions of
any proposals or offers. The Company agrees that it will advise Parent promptly
after the receipt of any Acquisition Proposal or any request for non-public
information relating to the Company or its Subsidiaries in connection with an
Acquisition Proposal, including the name of any Person making such Acquisition
Proposal or request for information, and of any significant modifications or
amendments related to any Acquisition Proposal. The Company agrees that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal. The Company agrees that it will take the necessary
steps to promptly inform the individuals or entities referred to in the first
sentence of this Section 5.4 of the obligations undertaken in this Section 5.4.
Nothing in this Section 5.4 shall (x) permit the Company to terminate this
Agreement (except as specifically provided in Article VII hereof) or (y) affect
any other obligation of the Company under this Agreement.
5.5 EMPLOYEE BENEFITS MATTERS. (a) Each Company Plan (as identified in
Section 3.1(l) of the Company Disclosure Schedule) shall be the obligation of
the Surviving Corporation as of the Effective Time and for at least 12 months
thereafter (the "Benefits Period"), Parent shall, or shall cause the Surviving
Corporation to, maintain the Company Plans as in effect immediately prior to the
Effective Time (other than Company Plans that provide for the grant of equity
securities or equity-based awards and other than such changes as are required by
applicable law). In addition, for 12 months following the Benefits Period,
Parent shall, or shall cause the Surviving Corporation to provide to Company
Employees employee benefits that are, in the aggregate, no less favorable than
the benefits provided to the Company Employees under the Company Plans
immediately prior to the Effective Time (other than Company Plans that provide
for the grant of equity securities or equity-based awards). Notwithstanding the
foregoing, Parent or the Surviving Corporation may cancel, merge or amend the
ESOP (as defined in Section 3.1(l)(ii)) at any time after the Effective Time;
provided, however, that in the event of any such cancellation, merger or
amendment at any time during the Benefits Period, Parent shall, or shall cause
the Surviving Corporation to provide to the Company Employees, during the
remainder of the Benefits Period (under the ESOP or any other employee benefit
plan of Parent (or any of its affiliates) in which the Company Employees
participate) benefits, which are substantially equivalent to the benefits that
the Company Employees received under the ESOP immediately prior to such
cancellation merger or amendment.
(b) Parent shall maintain or cause to be maintained the severance plans and
arrangements and employment agreements identified in Section 5.5 of the Company
Disclosure Schedule in accordance with the terms of Section 5.5 of the Company
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Disclosure Schedule and for so long as such plans, arrangements and agreement by
their terms provide; provided, however, that nothing herein shall prevent the
amendment or termination of any such plan, arrangement or agreement in
accordance with the terms thereof.
(c) With respect to the annual bonuses otherwise payable to Company
Employees in respect of Fiscal Year 2000 (collectively, the "Bonuses") pursuant
to the applicable annual incentive compensation Company Plans (the "Bonus
Plans"), Parent shall, or shall cause the Surviving Corporation, to provide each
Company Employee who (i) immediately prior to the Effective Time, was eligible
to receive a Bonus and (ii) except as otherwise provided below, is still
employed by Parent or the Surviving Corporation as of December 31, 1999,
Bonuses, in accordance with the following provisions:
(A) With respect to Company Employees who are Store Level employees
(as such term is defined in the applicable Bonus Plan, the "Store
Employees"), as of the Effective Time, Parent shall, or shall cause the
Surviving Corporation, to continue to provide the Store Employees such
Bonus amounts as are accrued and payable quarterly (in respect of the
Company's Fiscal Year) through December 31, 1999, pursuant to the terms of
the applicable Bonus Plan; and
(B) With respect to Company Employees who are Corporate employees (as
such term is defined in the applicable Bonus Plan, the "Corporate
Employees"), Parent shall, or shall cause the Surviving Corporation, to
provide each Corporate Employee with a Bonus amount, determined based on
performance targets that are (I) established by the Surviving Corporation
pursuant to the terms of the applicable Bonus Plan, adjusted to reflect the
performance of the Surviving Corporation from the Effective Time through
December 31, 1999 and (II) subject to such reasonable adjustment as shall
be mutually and reasonably agreed upon by the Company and Parent no later
than the date of the Effective Time; provided, that such Bonus amount shall
be calculated and paid as soon as soon as practicable after December 31,
1999 (but in no event later than twenty (20) Business Days thereafter);
provided, further, that with respect to any Corporate Employee whose
employment with the Surviving Corporation is terminated by the Surviving
Corporation without Cause or by the Corporate Employee for Good Reason (as
such terms are defined in the applicable Company Severance Plans, as
referenced on Schedule 5.5(c) attached hereto), such Employee shall receive
an amount equal to the targeted Bonus payment to be made to Corporate
Employees who remain employed by the Surviving Corporation through December
31, 1999 (as calculated pursuant to subsections (I) and (II) hereof),
prorated from the Effective Time through the date of termination of
employment. Such Bonus payment shall be made to any such terminated
Corporate Employee no later than fifteen (15) Business Days after such
termination of employment. Notwithstanding the foregoing, prior to the
Effective Time, Parent shall provide to the chief executive officer of the
Company a list of Company Employees who Parent, in good faith, determines
shall not be retained by Parent or the Surviving Corporation after the
Effective Time (the "Listed Employees"); and in the event and to the extent
that any Listed Employee's employment is terminated by Parent or the
Surviving Corporation within 20 Business Days after the Effective Time,
such Listed Employee shall not be entitled to receive the Bonus amount
otherwise provided for in this Section 5.5(d)(B).
(d) Parent shall, or shall cause the Surviving Corporation to, honor the
Onstead Agreement (as defined below) and to expressly assume and maintain the
executive post-
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retirement medical program provided for the benefit of Mr. Robert Onstead and
his Spouse (as such term is defined in the Onstead Agreement), for their
lifetimes, pursuant to the Employment, Consulting and Retirement Agreement
between Robert Onstead and the Company, dated April 1, 1997 (the "Onstead
Agreement").
5.6 FEES AND EXPENSES. Whether or not the Merger is consummated, all
Expenses (as defined below) incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
Expenses, except (a) if the Merger is consummated, the Surviving Corporation
shall pay, or cause to be paid, any and all property or transfer taxes imposed
on the Company or its Subsidiaries and any real property transfer tax imposed on
any holder of shares of capital stock of the Company resulting from the Merger,
(b) Expenses incurred in connection with the filing, printing and mailing of the
Proxy Statement, which shall be paid by the Company, (c) Expenses incurred in
connection with the filing, printing and mailing of the Prospectus, which shall
be paid by Parent and (d) as provided in Section 7.2. As used in this Agreement,
"Expenses" includes all out-of-pocket expenses (including, without limitation,
all fees and expenses of counsel, accountants, investment bankers, experts and
consultants to a party hereto and its affiliates) incurred by a party or on its
behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement and the transactions
contemplated hereby, including the preparation, printing, filing and mailing of
the Proxy Statement and Prospectus and the solicitation of shareholder approvals
and all other matters related to the transactions contemplated hereby.
5.7 DIRECTORS' AND OFFICERS' INSURANCE. From and after the Effective Time,
Parent agrees that it will cause the Surviving Corporation to indemnify and hold
harmless each present and former director and officer of the Company and other
persons entitled to indemnification under the articles of incorporation and
by-laws of the Company as in effect on the date hereof, against any costs or
expenses (including reasonable attorneys' fees) judgments, fines, losses,
claims, damages or liabilities (collectively, "Costs") (but only to the extent
such Costs are not otherwise covered by insurance and paid) incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent permitted under applicable law (and Parent shall, or shall cause the
Surviving Corporation to, also advance expenses as incurred to the fullest
extent Parent or the Surviving Corporation is permitted under applicable law
provided the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to indemnification). Parent shall cause the Surviving Corporation to
pay all reasonable expenses, including reasonable attorneys' fees, that may be
incurred by any party in enforcing this Section 5.7. Parent shall cause the
Surviving Corporation to and the Surviving Corporation shall (i) include and
maintain in effect in its articles of incorporation and by-laws, the same
provisions regarding elimination of liability of directors and indemnification
of officers, directors, employees and other persons contained in the certificate
of incorporation and by-laws of the Company and (ii) maintain for a period of at
least six years, the current policies of directors' and officers' liability
insurance and fiduciary liability insurance maintained by the Company (provided
that the Surviving Corporation may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions which are, in the
aggregate, no less advantageous to the insured) with respect to claims arising
from facts or events that occurred on or before the Effective Time; including,
without limitation, in respect of the transactions contemplated by this
Agreement; provided, however, that in no
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event shall the Surviving Corporation be required to expend in any one year an
amount in excess of 150% of the annual premiums currently paid by the Company
for such insurance; and, provided, further, that if the annual premiums of such
insurance coverage exceed such amount, the Surviving Corporation shall be
obligated to obtain a policy with the greatest coverage available for a cost not
exceeding such amount. The provisions of clause (ii) of the immediately
preceding sentence shall be deemed to have been satisfied if prepaid policies
have been obtained by the Surviving Corporation for purposes of this Section
5.7, which policies (together with the Company's existing policy) provide such
directors and officers with the coverage described in clause (ii) for an
aggregate period of not less than six years with respect to claims arising from
facts or events that occurred on or before the Effective Time, including,
without limitation, in respect of the transactions contemplated by this
Agreement. If the Surviving Corporation or any of its successors or assigns (i)
consolidates with or merges with or into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties and assets
to any Person, then, and in each such case, to the extent necessary, proper
provision shall be made so that the successors and assigns of the Surviving
Corporation assume the obligation s set forth in this Section 5.7. The parties
acknowledge and agree that to the extent the Surviving Corporation fails to
comply with its indemnification obligations pursuant to this Section 5.7, Parent
shall fulfill the obligations of the Surviving Corporation hereunder.
5.8 PUBLIC ANNOUNCEMENTS. The initial press release shall be a joint press
release and thereafter Parent and the Company shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to the Merger and shall not issue any such press release or make any
such public statement prior to such consultation, except as may, upon the advice
of outside legal counsel, be required by law or any listing agreement with its
securities exchange.
5.9 LISTING OF SHARES OF PARENT COMMON STOCK. Parent shall use its best
efforts to cause the shares of Parent Common Stock to be issued in the Merger
and the shares of Parent Common Stock to be reserved for issuance upon exercise
of Company Options to be approved for listing, upon official notice of issuance,
on the NYSE.
5.10 AFFILIATE LETTER. On or prior to the date of the Company Shareholders
Meeting, the Company will deliver to Parent a letter (the "Company Affiliate
Letter") identifying all persons who are "affiliates" of the Company for
purposes of Rule 145 under the Securities Act ("Rule 145"). On or prior to the
Closing Date, the Company will use all reasonable efforts to cause each person
identified as an "affiliate" in the Company Affiliate Letter to deliver a
written agreement (an "Affiliate Agreement"), substantially in the form of
Exhibit 5.10 hereto, in connection with restrictions on affiliates under Rule
145.
5.11 SHAREHOLDER AGREEMENT. At the Effective Time, (i) the Voting,
Repurchase and Shareholders Agreement, dated as April 1, 1997, among the
Company, RFM Acquisition LLC and the shareholders signatories thereto will
terminate, except Section 6.2 thereof, which shall terminate two years after the
Effective Time, and Article I thereof and the remainder of Article VI thereof,
which shall survive the Effective Time and (ii) the Registration Rights
Agreement, dated as of June 27, 1997, between the Company and RFM Acquisition
LLC will terminate.
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
obligations of the Company, Parent and Merger Sub to effect the Merger are
subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) SHAREHOLDER APPROVAL. The Company shall have obtained the
Required Company Vote in connection with the adoption of this Agreement by
the shareholders of the Company.
(b) NO INJUNCTIONS OR RESTRAINTS, ILLEGALITY. No statute, rule,
regulation, executive order, decree, ruling, shall have been adopted or
promulgated, and no temporary restraining order, preliminary or permanent
injunction or other order issued by a court or other U.S. governmental
authority of competent jurisdiction shall be in effect, having the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger; provided, however, that the provisions of this Section 6.1(b) shall
not be available to any party whose failure to fulfill its obligations
pursuant to Section 5.3 shall have been the cause of, or shall have
resulted in, such order or injunction.
(c) HSR ACT. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired.
(d) NYSE LISTING. The shares of Parent Common Stock to be issued in
the Merger and the shares of Parent Common Stock to be reserved for
issuance upon exercise of Company Options shall have been approved for
listing on the NYSE, subject to official notice of issuance.
(e) EFFECTIVENESS OF THE FORM S-4. The Form S-4 shall have been
declared effective by the SEC under the Securities Act. No stop order
suspending the effectiveness of the Form S-4 shall have been issued by the
SEC and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to effect the Merger are subject to the
satisfaction of, or waiver by Parent, on or prior to the Closing Date of the
following additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. (x) Each of the representations
and warranties of the Company set forth in this Agreement that is qualified
as to Material Adverse Effect shall have been true and correct as of the
date hereof and at and as of the Closing Date as if made at and as of the
Closing Date, and (y) each of the representations and warranties of the
Company that is not so qualified shall have been true and correct in all
material respects as of the date hereof and at and as of the Closing Date
as if made at and as of the Closing Date (except, in each case, for those
representations and warranties which address matters only as of a
particular date, in which case, they shall be true and correct, or true and
correct in all material respects, as applicable, as of such date), provided
that clause (y) of this paragraph (a) shall be deemed satisfied so long as
such failures of such representations and warranties referred to therein to
be so true and correct, would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Company.
Notwithstanding the foregoing, the representation and warranty contained in
the last sentence of Section 3.1(u) shall be true and correct at and as of
the Closing Date as
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if made at and as of the Closing Date. Parent shall have received a
certificate of the chief executive officer and the chief financial officer
of the Company to the effect of the foregoing.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed or complied with all agreements and covenants required to be
performed by it under this Agreement at or prior to the Closing Date that
are qualified as to materiality and shall have performed or complied in all
material respects with all other agreements and covenants required to be
performed by it under this Agreement at or prior to the Closing Date that
are not so qualified as to materiality, and Parent shall have received a
certificate of the chief executive officer and the chief financial officer
of the Company to such effect.
(c) TAX OPINION. Parent shall have received from Latham & Watkins,
counsel to Parent, on the Closing Date, a written opinion dated as of such
date substantially in the form of Exhibit 6.2(c)(1). In rendering such
opinion, counsel to Parent shall be entitled to rely upon representations
of officers of Parent and the Company substantially in the form of Exhibits
6.2(c)(2) and 6.2(c)(3) (allowing for such amendments to the
representations as counsel to Parent deems necessary).
(d) AFFILIATE AGREEMENTS. Each of (i) the letter agreement, dated as
of April 1, 1997, between RFM Acquisition LLC and the Company and (ii) the
letter agreement, dated as of June 18, 1997, between RFM Acquisition LLC
and the Company shall be terminated concurrent with the Effective Time and
the Company shall have no liability or obligation of any nature, whether or
not accrued, contingent or otherwise thereunder. Immediately following the
Effective Time, the Company shall have no liability or obligation for the
annual $1,000,000 fee payable to KKR or any of its Affiliates, other than
for the unpaid pro rata portion of such annual fee through the Effective
Time.
(e) MATERIAL ADVERSE CHANGE. Since April 3, 1999, there has not been
a Material Adverse Change of the Company.
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations
of the Company to effect the Merger are subject to the satisfaction of, or
waiver by the Company, on or prior to the Closing Date of the following
additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. (x) Each of the representations
and warranties of Parent and Merger Sub set forth in this Agreement that is
qualified as to Material Adverse Effect shall have been true and correct as
of the date hereof and at and as of the Closing Date as if made at and as
of the Closing Date, and (y) each of the representations and warranties of
each of Parent and Merger Sub that is not so qualified shall have been true
and correct in all material respects as of the date hereof and at and as of
the Closing Date as if made at and as of the Closing Date (except, in each
case, for those representations and warranties which address matters only
as of a particular date, in which case, they shall be true and correct, or
true and correct in all material respects, as applicable, as of such date),
provided that clause (y) of this paragraph (a) shall be deemed satisfied so
long as such failures of such representations and warranties referred to
therein to be so true and correct, would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on the
Parent. The Company shall have received a certificate of the chief
executive officer and the chief financial officer of Parent to the effect
of the foregoing.
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(b) PERFORMANCE OF OBLIGATIONS OF PARENT. Parent shall have performed
or complied with all agreements and covenants required to be performed by
it under this Agreement at or prior to the Closing Date that are qualified
as to materiality and shall have performed or complied in all material
respects with all agreements and covenants required to be performed by it
under this Agreement at or prior to the Closing Date that are not so
qualified as to materiality, and the Company shall have received a
certificate of the chief executive officer and the chief financial officer
of Parent to such effect.
(c) TAX OPINION. The Company shall have received from Simpson Thacher
& Bartlett, counsel to the Company, on the Closing Date, a written opinion
dated as of such date substantially in the form of Exhibit 6.3(c)(1). In
rendering such opinion, counsel to the Company shall be entitled to rely
upon representations of officers of Parent and the Company substantially in
the form of Exhibits 6.2(c)(2) and 6.2(c)(3) (allowing for such amendments
to the representations as counsel to the Company deems necessary).
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, by action taken or authorized by the Board of Directors of the
terminating party or parties, and except as provided below, whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of the Company:
(a) By mutual written consent of Parent and the Company, by action of
their respective Boards of Directors;
(b) By either the Company or Parent if the Effective Time shall not
have occurred on or before December 31, 1999 (the "Termination Date");
provided, however, that the right to terminate this Agreement under this
Section 7.1(b) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the primary cause of the
failure of the Effective Time to occur on or before the Termination Date;
(c) By either the Company or Parent if any U.S. governmental authority
shall have issued an order, decree or ruling or taken any other action
(which the parties shall have used their reasonable best efforts to resist,
resolve or lift, as applicable, in accordance with Section 5.3) permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable; provided, however, that
the right to terminate this Agreement under this Section 7.1(c) shall not
be available to any party whose failure to comply with Section 5.3 has been
the primary cause of such action;
(d) By either the Company or Parent if the approval by the
shareholders of the Company required for the consummation of the Merger
shall not have been obtained by reason of the failure to obtain the
Required Company Vote at a duly held meeting of shareholders of the Company
or at any adjournment thereof;
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(e) By Parent if the Board of Directors of the Company or any
committee thereof (i) shall withdraw or modify in any adverse manner its
approval or recommendation of this Agreement pursuant to Section 5.4, (ii)
shall approve or recommend a Superior Proposal pursuant to Section 5.4 or
(iii) shall resolve to take any of the actions specified in clauses (i) or
(ii) above; or
(f) By the Company upon two Business Days' prior notice to Parent, if
the Board of Directors of the Company shall approve a Superior Proposal;
provided, however, that (i) the Company shall have complied in all material
respects with Section 5.4, and (ii) the Board of Directors of the Company
shall have concluded in good faith, after giving effect to any concessions
which are offered by Parent during such two-Business Day period, on the
basis of the advice of its independent financial advisor of national
reputation and outside counsel, that such proposal is a Superior Proposal;
provided, however, that such termination under this Section 7.1(f) shall
not be effective until the Company has made payment of the full Termination
Fee to Parent required by Section 7.2(b).
7.2 EFFECT OF TERMINATION. (a) In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.1, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Parent or the Company or their respective officers or
directors except with respect to the second to last sentence of Section 5.2(a),
Section 5.6, this Section 7.2 and Article VIII, provided that the termination of
this Agreement shall not relieve any party from any liability for any
intentional material breach of any covenant or agreement in this Agreement
occurring prior to termination.
(b) Parent and the Company agree that (i) if the Company shall
terminate this Agreement pursuant to Section 7.1(f), (ii) if Parent shall
terminate this Agreement pursuant to Section 7.1(e) (iii) if (x) the
Company or Parent shall terminate this Agreement pursuant to Section
7.1(d), (y) at the time of the event giving rise to such termination there
shall exist an Acquisition Proposal with respect to the Company and (z)
within 12 months of the termination of this Agreement, the Company either
(A) enters into a definitive agreement with respect to, or consummates, the
Acquisition Proposal described in clause (y) above or (B) consummates a
Superior Proposal (whether or not such Superior Proposal was commenced,
publicly disclosed, publicly proposed or otherwise communicated to the
Company prior to such termination), then the Company shall pay to Parent an
amount equal to $45 million (the "Termination Fee").
(c) The Termination Fee required to be paid pursuant to (i) Section
7.2(b)(i) shall be paid on the date of such termination, (ii) Section
7.2(b)(ii) shall be made to Parent not later than two Business Days
following such termination, and (iii) payment required to be made pursuant
to Section 7.2(b)(iii) shall be made to Parent not later than two Business
Days after the consummation of the transaction contemplated thereby. All
payments under this Section 7.2 shall be made by wire transfer of
immediately available funds to an account designated by the party entitled
to receive payment.
7.3 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the shareholders of the Company, but, after any such approval, no amendment
shall be made which by law
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requires further approval by such shareholders without such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party. The failure of
any party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and other agreements in this
Agreement or in any instrument delivered pursuant to this Agreement, including
any rights arising out of any breach of such representations, warranties,
covenants and other agreements, shall survive the Effective Time, except for
those covenants and agreements contained herein and therein that by their terms
apply or are to be performed in whole or in part after the Effective Time and
this Article VIII.
8.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (a) on the date of delivery if delivered
personally, or by telecopy or telefacsimile, upon confirmation of receipt, (b)
on the first Business Day following the date of dispatch if delivered by a
recognized next-day courier service, or (c) on the fifth Business Day following
the date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice:
(a) if to Parent or Merger Sub, to
Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton, California 94588
Attention: Michael C. Ross, Esq.
Facsimile No.: 925-467-3231
with a copy to
Latham & Watkins
505 Montgomery Street, 19th Floor
San Francisco, California 94111
Attention: Scott R. Haber, Esq.
Facsimile No.: 415-395-8095
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(b) if to the Company to
Randall's Food Markets, Inc.
3663 Briarpark Drive
Houston, Texas 77042
Attention: Michael Calbert
Facsimile No.: 713-268-3490
with a copy to
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: David J. Sorkin, Esq.
Facsimile No.: 212-455-2502
8.3 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents, glossary of defined terms and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation".
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. (a) This Agreement and
the letter agreement dated as of the date hereof between Parent and RFM
Acquisition LLC constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, other than the Confidentiality Agreements,
which shall survive the execution and delivery of this Agreement.
(b) This Agreement shall be binding upon and inure solely to the
benefit of each party hereto, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other Person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 1.9 (with respect to the payment of amounts
due thereunder), Section 1.10 (with respect to the payment of amounts due
thereunder) and Section 5.7 (which are intended to be for the benefit of
the Persons covered thereby and may be enforced by such Persons).
8.6 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas.
8.7 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as
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closely as possible in an acceptable manner in order that the transactions
contemplated hereby are consummated as originally contemplated to the greatest
extent possible.
8.8 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto, in whole
or in part (whether by operation of law or otherwise), without the prior written
consent of the other party, and any attempt to make any such assignment without
such consent shall be null and void, except that Merger Sub may assign, in its
sole discretion, any or all of its rights, interests and obligations under this
Agreement to any direct wholly owned Subsidiary of Parent without the consent of
the Company, but no such assignment shall relieve Parent or Merger Sub of any of
its obligations under this Agreement. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
8.9 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
8.10 INTENTIONALLY OMITTED.
8.11 DEFINITIONS. As used in this Agreement:
(a) "Action" means any action, order, writ, injunction, judgment or
decree outstanding or claim, suit, litigation, proceeding, arbitration or
investigation by or before any court, governmental or other regulatory or
administrative agency or commission or any other Person.
(b) "Affiliate" means, with respect to any Person, any other Person
that directly, or through one or more intermediaries, controls or is
controlled by or is under common control with such Person.
(c) "Board of Directors" means the Board of Directors of any specified
Person and any committees thereof.
(d) "Business Day" means any day on which banks are not required or
authorized to close in the City of New York.
(e) "Contract" means any note, bond, mortgage, indenture, guarantee,
other evidence of indebtedness, lease, license, contract, agreement on
other instrument or obligation (written or oral) to which a Person or any
of its Subsidiaries is a party or by which any of them or any of their
properties or assets may be bound which (i) does not terminate or is
otherwise not cancelable within one (1) year without penalty, cost or
liability or (ii) involves the payment or receipt of money in excess of,
with respect to the Company, $100,000.
(f) "Encumbrances" shall mean any claim, lien, pledge, option, charge,
easement, security interest, deed of trust, mortgage, right-of-way,
covenant, condition, restriction, encumbrance or other rights of third
parties.
(g) "Environmental Claim" shall mean any written notice, claim,
demand, action, suit, complaint, proceeding or other written communication
by any person alleging liability or potential liability (including
liability or potential liability for
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investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damage, personal injury, fines or penalties)
arising out of, relating to, based on or resulting from (a) the presence,
discharge, emission, release or threatened release of any Hazardous
Materials at any location, whether or not owned, leased or operated by the
Company or any of its Subsidiaries or (b) circumstances forming the basis
of any violation or alleged violation of any applicable Environmental Law
or applicable Environmental Permit or (c) otherwise relating to Liabilities
under any applicable Environmental Laws.
(h) "Environmental Laws" shall mean any federal, state or local law,
statute, ordinance, order, decree, rule or regulation relating to releases,
discharges, emissions or disposals to air, water, land or groundwater of
Hazardous Materials; to the use handling or disposal of polychlorinated
biphenyls, asbestos or urea formaldehyde or any other Hazardous Material;
to the treatment, storage, disposal or management of Hazardous Materials;
to the protection of human health (as relating to the environment) or the
environment; to exposure to toxic, hazardous or other controlled,
prohibited or regulated substances; and to the transportation, release or
any other use of Hazardous Materials, including the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et
seq. ("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C.
6901, et seq. ("RCRA"), the Toxic Substances Control Act, 15 U.S.C. 2601,
et seq. ("TSCA"), the Occupational, Safety and Health Act, 29 U.S.C. 651,
et seq., the Clean Air Act, 42 U.S.C. 7401, et seq., the Federal Water
Pollution Control Act, 33 U.S.C. 1251, et seq., the Safe Drinking Water
Act, 42 U.S.C. 300f, et seq., the Hazardous Materials Transportation act,
49 U.S.C. 1802 et seq. ("HMTA") and the Emergency Planning and Community
Right to Know Act, 42 U.S.C. 11001 et seq. ("EPCRA"), and other comparable
state and local laws and all rules and regulations promulgated pursuant
thereto or published thereunder.
(i) "Environmental Permits" shall mean all permits, licenses,
registrations and other governmental authorizations required for the
Company and its Subsidiaries and the operations of Company's and its
Subsidiaries' facilities and otherwise to conduct their business under
applicable Environmental Laws.
(j) "Hazardous Materials" shall mean each and every element, compound,
chemical mixture, contaminant, pollutant, material, waste or other
substance which is defined or identified as hazardous or toxic under
Environmental Laws or the release of which is regulated pursuant to or that
could reasonably be expected to form the basis for liability under any
applicable Environmental Laws. Without limiting the generality of the
foregoing, the term includes: "hazardous substances" as defined in CERCLA;
"extremely hazardous substances" as defined in EPCRA; "hazardous waste" as
defined in RCRA; "hazardous materials" as defined in HMTA; "chemical
substance or mixture" as defined in TSCA; crude oil, petroleum products or
any fraction thereof; radioactive materials including source, byproduct or
special nuclear materials; and asbestos or asbestos-containing materials.
(k) "Intellectual Property" shall mean any copyright, patent, trade
name, trademark or service mark or any registration (granted or pending) or
applications therefor.
(l) "Leases" shall mean, with respect to any Person, all leases
(including subleases, licenses, any occupancy agreement and any other
agreement) of real or
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personal property, in each case to which such Person or any of its
Subsidiaries is a party, whether as lessor, lessee, guarantor or otherwise,
or by which any of them or their respective properties or assets are bound,
or which otherwise relate to the operation of their respective businesses.
(m) "Material Adverse Effect" or "Material Adverse Change" means, with
respect to any Person, any change, circumstance or effect that is or is
reasonably likely to be materially adverse to the assets, liabilities,
business, financial condition, results of operations or prospects of such
entity and its Subsidiaries taken as a whole or which could reasonably be
expected to materially impair or materially delay the ability of such
Person to consummate the transactions contemplated by this Agreement, other
than any change, circumstance or effect relating to (i) the economy or
securities markets in general, or (ii) the industries in which Parent or
the Company operate and not specifically relating to Parent or the Company.
(n) "Permitted Encumbrances" shall mean any Encumbrances resulting
from (i) all statutory or other liens for Taxes or assessments which are
not yet due or delinquent or the validity of which are being contested in
good faith by appropriate proceedings for which adequate reserves are being
maintained in other accordance with GAAP; (ii) all cashiers', landlords',
workers' and repairers' liens, and other similar liens imposed by law,
incurred in the ordinary course of business; (iii) Encumbrances identified
on title policies or preliminary title reports or other documents or
writings delivered or made available for inspection to Parent prior to the
date hereof; and (iv) all other liens and mortgages, covenants,
imperfections in title, charges, easements, restrictions and other
Encumbrances which, in the case of any such Encumbrances pursuant to clause
(i) through (iv), do not, individually or in the aggregate, materially
detract from or materially interfere with the present use of the asset
subject thereto or affected thereby.
(o) "Person" means an individual, corporation, limited liability
company, partnership, association, trust, unincorporated organization,
other entity or group (as defined in the Exchange Act).
(p) "Subsidiary" when used with respect to any party means any
corporation or other organization, whether incorporated or unincorporated,
(i) of which such party or any other Subsidiary of such party is a general
partner (excluding partnerships, the general partnership interests of which
held by such party or any Subsidiary of such party do not have a majority
of the voting interests in such partnership) or (ii) at least a majority of
the securities or other interests of which having by their terms ordinary
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or
by any one or more of its Subsidiaries, or by such party and one or more of
its Subsidiaries.
(q) "Superior Proposal" means a bona fide written Acquisition Proposal
which the Board of Directors of the Company concludes in good faith (based
upon the advice of its independent financial advisor of national reputation
and legal counsel), taking into account the legal, financial, including the
ability of the Person making the Acquisition Proposal to finance the
transaction contemplated thereby, regulatory, including antitrust, and
other aspects of the proposal, including the tax consequences of the
proposal to the shareholders of the Company and the potential appreciation
and liquidity of any securities to be received by the shareholders of the
Company in
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connection with the proposed transaction, and the Person making the
proposal, would, if consummated, result in a transaction that is more
favorable to all the Company's shareholders (in their capacities as
shareholders), from a financial point of view, than the transactions
contemplated by this Agreement (provided that for purposes of this
definition the term Acquisition Proposal shall have the meaning assigned to
such term in Section 5.4 except that the reference to "25%" in the
definition of "Acquisition Proposal" shall be deemed to be a reference to
"50%" and "Acquisition Proposal" shall only be deemed to refer to a
transaction involving the Company, or with respect to assets (including the
shares of any Subsidiary of the Company), to assets of the Company and its
Subsidiaries, taken as a whole, and not any of its Subsidiaries alone).
(r) "Tax" or "Taxes" shall mean all federal, state, local, foreign and
other taxes, levies, imposts, assessments, impositions or other similar
government charges, including, without limitation, income, estimated
income, business, occupation, franchise, real property, payroll, personal
property, sales, transfer, stamp, use, escheat, employment-related,
commercial rent or withholding, net worth, occupancy, premium, gross
receipts, profits, windfall profits, deemed profits, license, lease,
severance, capital, production, corporation, ad valorem, excise, duty,
utility, environmental, value-added, recapture or other taxes, including
interest, penalties and additions (to the extent applicable) thereto,
whether disputed or not.
(s) "Tax Authority" or "Taxing Authority" shall mean any domestic,
foreign, federal, national, state, county or municipal or other local
government, any subdivision, agency, commission or authority thereof, or
any quasi-governmental body exercising any taxing authority or any other
authority exercising Tax regulatory authority.
(t) "Tax Return" shall mean any report, return, document, declaration
or other information or filing and any schedule or attachment thereto or
amendment thereof, required to be supplied to any Taxing Authority or
jurisdiction (foreign or domestic) with respect to Taxes, including,
without limitation, information returns, any documents with respect to or
accompanying payments of estimated Taxes, or with respect to or
accompanying requests for the extension of time in which to file any such
report, return, document, declaration or other information.
(u) "the other party" means, with respect to the Company, Parent and
means, with respect to Parent, the Company.
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IN WITNESS WHEREOF, Parent, the Company and Merger Sub have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first above-written.
SAFEWAY INC.
By: /s/ MICHAEL C. ROSS
-----------------------------------
Title: Senior Vice President and
Secretary
SI MERGER SUB, INC.
By: /s/ MICHAEL C. ROSS
-----------------------------------
Title: Vice President and
Secretary
RANDALL'S FOOD MARKETS, INC.
By: /s/ R. RANDALL ONSTEAD, JR.
-----------------------------------
Title: Chief Executive Officer
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ANNEX B
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of July 22, 1999, by and
among RFM Acquisition LLC, a Delaware limited liability company ("Shareholder"),
Safeway Inc., a Delaware corporation ("Parent"), and SI Merger Sub, Inc., a
Texas corporation and a wholly owned subsidiary of Parent ("Merger Sub").
WHEREAS, Shareholder has beneficial ownership of the number of shares of
common stock, par value $0.25 per share, of Randall's Food Markets, Inc., a
Texas corporation (the "Company"), set forth opposite the name of Shareholder on
the signature page hereof (such class of stock sometimes referred to herein as
the "Company Common Stock," and the shares of Company Common Stock, including
such shares that are acquired after the date hereof, including without
limitation, as a result of a stock dividend, stock split, recapitalization,
combination, reclassification, exchange, or change of such shares, or upon
exercise or conversion of any securities, that are, from time to time,
beneficially owned by Shareholder sometimes referred to herein as the "Shares");
WHEREAS, simultaneously with the execution and delivery hereof, Parent,
Merger Sub and the Company have entered into an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of the date hereof, which Merger Agreement
has been approved by the Board of Directors of the Company, and has been
approved by the Board of Directors of Parent and Merger Sub. The directors of
the Company unanimously voted in favor of the adoption of the Merger Agreement
and the recommendation that shareholders of the Company approve the merger of
the Company with and into Merger Sub (the "Merger") as contemplated by the
Merger Agreement;
WHEREAS, in consideration for Shareholder entering into this Agreement,
Parent has agreed to amend that certain Registration Rights Agreement, dated as
of November 25, 1986, among Parent, KKR Partners II, L.P., SSI Associates, L.P.,
Dart/ SSI Associates, L.P., SSI Equity Associates, L.P., KKR Associates and SSI
Partners, L.P.; and
WHEREAS, as a condition to entering into the Merger Agreement, Parent and
Merger Sub have required that Shareholder agree, and in order to induce Parent
and Merger Sub to enter into the Merger Agreement, Shareholder has agreed to
enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereby agree as follows:
SECTION 1. Capitalized Terms. For purposes of this Agreement:
"Acquisition Proposal" shall have the meaning set forth in the Merger
Agreement.
"Effective Time" shall have the meaning set forth in the Merger
Agreement.
"Governmental Entity" shall mean any governmental or regulatory
authority, agency, court, commission, body or other governmental entity.
"Lien" shall mean any security interest, claim, pledge, charge,
restriction on transfer, option, proxy, consent, voting trust, voting agreement
or other encumbrance of any nature whatsoever.
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SECTION 2. Representations and Warranties of Shareholder. Shareholder
represents and warrants to Parent and Merger Sub as follows:
(a) Shareholder is a limited liability company duly organized, validly
existing and in good standing under the laws of the jurisdiction under which it
is organized.
(b) Shareholder has all necessary power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated hereby.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by Shareholder, and no other proceedings on the part of Shareholder
are necessary to authorize this Agreement or to consummate the transactions so
contemplated.
(d) This Agreement has been duly and validly executed and delivered by
Shareholder and, assuming this Agreement constitutes a valid and binding
obligation of each of Parent and Merger Sub, constitutes a legal, valid and
binding agreement of Shareholder enforceable against Shareholder in accordance
with its terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(e) The execution, delivery and performance by Shareholder of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) contravene or conflict with its organizational documents, (ii)
assuming that all consents, authorizations and approvals contemplated by
subsection (f) below have been obtained and all filings described therein have
been made, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to Shareholder or any of its properties; or (iii) conflict
with, or result in the breach or termination of or constitute a default (with or
without the giving of notice or the lapse of time or both) under, or give rise
to any right of termination, cancellation, or loss of any benefit to which
Shareholder is entitled under any provision of any agreement, contract, license
or other instrument binding upon Shareholder or any of its properties, or allow
the acceleration of the performance of any obligation of Shareholder under any
indenture, mortgage, deed of trust, lease, license, contract, instrument or
other agreement to which Shareholder is a party or by which Shareholder, its
assets or properties is subject or bound, other than such contraventions,
conflicts, violations, breaches, defaults or other occurrences that would not
reasonably be expected to prevent, delay or impair Shareholder's ability to
consummate the transactions contemplated by this Agreement.
(f) The execution, delivery and performance by Shareholder of this
Agreement and the consummation of the transactions contemplated hereby by
Shareholder require no filings, notices, declarations, consents or other actions
to be made by Shareholder with, nor are any approvals or other confirmations or
consents required to be obtained by Shareholder from any Governmental Entity
(except those the failure of which to make, give or obtain, individually or in
the aggregate, would not reasonably be expected to prevent, delay or impair,
Shareholder's ability to consummate the transactions contemplated by this
Agreement), other than filings, notices, approvals, confirmations, consents,
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declarations or decisions required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(g) As of the date hereof, there is no action, suit, claim,
investigation or proceeding pending, or to the knowledge of Shareholder,
threatened against Shareholder or its properties before any court or arbitrator
or any Governmental Entity which challenges or seeks to prevent, enjoin, alter
or delay the Merger or any of the other transactions contemplated hereby or by
the Merger Agreement. As of the date hereof, Shareholder is not, and none of its
properties is, subject to any order, writ, judgment, injunction, decree,
determination or award which would prevent, delay or impair the consummation of
the transactions contemplated hereby.
(h) Shareholder is, and at the Effective Time will be, the sole record
and beneficial owner of and has, and at the Effective Time Shareholder will
have, good and valid title to the Shares, free and clear of any Liens, except
for any Liens arising hereunder. Shareholder has, and at the Effective Time will
have, the power to vote, dispose of and otherwise transfer the Shares without
the approval, consent or other action of any person (other than a member acting
in such capacity).
(i) Except as set forth on Schedule 2(i) hereto, there are no options or
rights to acquire, or understandings or arrangements to which Shareholder is a
party relating to the Shares, other than this Agreement.
(j) The Shares and the Investor Option (as defined in the Merger
Agreement) represent all of the shares of Company Common Stock beneficially
owned (within the meaning of Rule 13d-3 under the Exchange Act) by Shareholder.
(k) Shareholder understands and acknowledges that Parent is entering
into, and causing Merger Sub to enter into, the Merger Agreement in reliance
upon Shareholder's execution and delivery of this Agreement.
SECTION 3. Representations and Warranties of Parent and Merger Sub. Parent
and Merger Sub represent and warrant to Shareholder as follows:
(a) Each of Parent and Merger Sub is duly organized, validly existing
and in good standing under the laws of the jurisdiction under which it is
organized.
(b) Each of Parent and Merger Sub has all necessary power and authority
to execute and deliver this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by each of Parent and Merger Sub, and no other proceedings on the
part of Parent or Merger Sub are necessary to authorize this Agreement or to
consummate the transactions so contemplated.
(d) The execution, delivery and performance by each of Parent and Merger
Sub of this Agreement and the consummation of the transactions contemplated
hereby do not and will not (i) contravene or conflict with Parent's Certificate
of Incorporation or Bylaws, (ii) assuming that all consents, authorizations and
approvals contemplated by subsection (e) below have been obtained and all
filings described therein have been made, contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to Parent or any of its
properties; or (iii) conflict with, or result in the breach or termination of or
constitute a default (with or without the giving of notice or the lapse of time
or both) under, or give
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rise to any right of termination, cancellation, or loss of any benefit to which
Parent is entitled under any provision of any agreement, contract, license or
other instrument binding upon Parent or any of its properties, or allow the
acceleration of the performance of any obligation of Parent under any indenture,
mortgage, deed of trust, lease, license, contract, instrument or other agreement
to which Parent is a party or by which Parent, its assets or properties is
subject or bound, other than such contraventions, conflicts, violations,
breaches, defaults or other occurrences that would not reasonably be expected to
prevent, delay or impair Parent's ability to consummate the transactions
contemplated by this Agreement.
(e) The execution, delivery and performance by each of Parent and Merger
Sub of this Agreement and the consummation of the transactions contemplated
hereby by each of Parent and Merger Sub require no filings, notices,
declarations, consents or other actions to be made by Parent or Merger Sub with,
nor are any approvals or other confirmations or consents required to be obtained
by Parent or Merger Sub from any Governmental Entity (except those the failure
of which to make, give or obtain, individually or in the aggregate, would not
reasonably be expected to prevent, delay or impair, Parent's or Merger Sub's
ability to consummate the transactions contemplated by this Agreement), other
than filings, notices, approvals, confirmations, consents, declarations or
decisions as set forth in Section 3.2(d) of the Merger Agreement and Section
3.2(d) of the Parent Disclosure Schedule (as defined in the Merger Agreement).
SECTION 4. Agreement to Vote; Proxy.
(a) Shareholder agrees with, and covenants to, Parent and Merger Sub as
follows:
(i) At any meeting of shareholders of the Company called to vote upon
the Merger, the Merger Agreement or the other transactions contemplated by the
Merger Agreement or at which a vote, consent or other approval with respect to
the Merger, the Merger Agreement or the other transactions contemplated by the
Merger Agreement is sought, Shareholder shall vote (or cause to be voted) or
shall consent, execute a consent or cause to be executed a consent in respect of
the Shares in favor of the Merger, the execution and delivery by the Company of
the Merger Agreement and the approval of the terms thereof and each of the other
transactions contemplated by the Merger Agreement.
(ii) At any meeting of shareholders of the Company or at any adjournment
thereof or in any other circumstances upon which their vote, consent or other
approval is sought, Shareholder shall vote (or cause to be voted) the Shares
against (x) any Acquisition Proposal or (y) any amendment of the Company's
Articles of Incorporation or By-laws which amendment would in any manner prevent
or materially impede, interfere with or delay the Merger, the Merger Agreement
or any of the other transactions contemplated by the Merger Agreement.
(b) Shareholder hereby grants to, and appoints, Steve Burd and Michael Ross
and any other individual who is designated by Parent, until the termination of
this Agreement pursuant to Section 15, an irrevocable proxy, coupled with an
interest, and attorney-in-fact (with full power of substitution), for and in the
name, place and stead of Shareholder, with respect to the Shares, to vote the
Shares, or grant or execute a consent or approval, in the complete discretion of
Parent or Merger Sub, as the case may be, at any meeting of shareholders of the
Company or at any adjournment thereof or in any other circumstances upon which
their vote, consent or other approval is sought in accordance with paragraph (a)
of this Section 4. Such irrevocable proxy is executed and intended to be
irrevocable in accordance with the provisions of the Texas Business Corporation
Act.
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Shareholder agrees that this Agreement, including the provisions of this Section
4 will be recorded in the books and records of the Company.
SECTION 5. Additional Covenants.
(a) Disposition of Shares. Except pursuant to this Agreement, Shareholder
shall not, without the prior written consent of Parent, directly or indirectly,
during the term of this Agreement (i) grant or enter into any Lien, power of
attorney or other agreement or arrangement with respect to the voting of the
Shares, (ii) sell, assign, transfer, encumber or otherwise dispose of, or enter
into any contract, option or other arrangement or understanding with respect to
the direct or indirect sale, assignment, transfer, encumbrance or other
disposition of any of the Shares (except for a sale, assignment or transfer to
an affiliate of Shareholder who or which agrees to be bound by all of the
provisions of this Agreement with respect to such transferred Shares) or (iii)
take any other action that would in any way restrict, limit or interfere with
the performance of its obligations hereunder or the transactions contemplated
hereby. Shareholder hereby irrevocably waives any rights of appraisal or rights
to dissent from the Merger that Shareholder may have. Shareholder agrees, and
shall cause its affiliates to agree, to exercise any rights that Shareholder or
any of such affiliates may have to cause any shareholders of the Company,
including those shareholders party to that certain Voting, Repurchase and
Shareholder's Agreement dated as of April 1, 1997 or any Stockholder's Agreement
with Shareholder, to vote any shares held by such shareholder in favor of the
Merger and to waive any rights of appraisal or rights of dissent from the Merger
that such shareholder may have.
(b) Shareholder Profit
(i) In the event that the Merger Agreement shall have been terminated at
any time pursuant to Section 7.1(d), (e), or (f) thereof (provided, with respect
to a termination pursuant to Section 7.1(d), a termination fee could become
payable to Parent pursuant to Section 7.2 of the Merger Agreement), Shareholder
shall pay to Parent an amount equal to 50% of the profit (determined in
accordance with this Section 5(b)) of Shareholder (i) from the sale or other
disposition of any Shares within 12 months of the termination of this Agreement
pursuant to an Acquisition Proposal, (ii) from the sale or other disposition of
any Shares (including a distribution to Shareholder's members, unless such
distributee agrees to be bound by the terms of this Agreement) within 12 months
of the termination of this Agreement which is not pursuant to a bona fide public
offering of shares of Company Common Stock which sale or disposition is made at
such time as an Acquisition Proposal is pending or (iii) from the sale of other
disposition of any Shares pursuant to a Superior Proposal (as defined in the
Merger Agreement) at any time so long as the agreement with respect to such
Superior Proposal is entered into within 12 months of the termination of this
Agreement. Payment shall be made promptly upon the receipt of the proceeds from
such sale or other disposition.
(ii) For purposes of this Section 5(b), the profit of Shareholder shall
equal (A) the aggregate consideration received by Shareholder for the Shares
that were sold or disposed of, valuing any non-cash consideration (including any
residual interest in the Company) at its fair market value on the date of such
consummation, less (B) $41.75 per Share multiplied by the number of Shares sold
or disposed of less (C) all out-of-pocket transaction costs incurred by
Shareholder directly in connection with such sale or disposition. With respect
to a distribution of Shares to members at such time as an Acquisition Proposal
is pending with respect to which a payment is required under Section 5(b)(i)
above, the aggregate consideration shall be deemed to be the amount proposed to
be paid pursuant to the Acquisition Proposal.
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(iii) For purposes of this Section 5(b), the fair market value of any
non-cash consideration consisting of:
(A) securities listed on a national securities exchange or traded
or quoted on the Nasdaq shall be equal to the average closing price per share of
such security as reported on the composite trading system of such exchange or by
Nasdaq for the five trading days ending on the trading day immediately prior to
the date of the value determination; and
(B) consideration which is other than cash or securities of the
form specified in clause (A) of this Section 5(b)(iii) shall be determined by a
nationally recognized independent investment banking firm mutually agreed upon
by the parties within 10 business days of the event requiring selection of such
banking firm; provided, however, that if the parties are unable to agree within
two business days after the date of such event as to the investment banking
firm, then the parties shall each select one firm, and those firms shall select
a third investment banking firm, which third firm shall make such determination;
provided further, that the fees and expenses of such investment banking firm
shall be borne equally by Parent and Shareholder. The determination of the
investment-banking firm shall be binding upon the parties.
(iv) Any payment of profit under this Section 5(b) shall be paid in the
same proportion of cash and non-cash consideration as the aggregate
consideration received by Shareholder in the Acquisition Proposal or other
disposition.
(v) Shareholder shall not engage in any transaction with respect to the
Shares with the primary purpose of depriving Parent of the intended benefits of
this Agreement.
(c) Governmental Filings. Shareholder shall promptly make any and all
filings that Shareholder is required to make with any Governmental Entity with
respect to the transactions contemplated by this Agreement or the Merger
Agreement. Shareholder further agrees to use its reasonable best efforts to
obtain all approvals required by any Governmental Entity to consummate the
transactions contemplated hereby.
(d) Investor Option. At the Effective Time, Shareholder shall deliver to
Parent the Investor Option for sale to Parent in accordance with Section 1.10 of
the Merger Agreement.
(e) Termination of Agreements. Each of (i) the letter agreement, dated as
of April 1, 1997 between Shareholder and the Company and (ii) the letter
agreement, dated as of June 18, 1997, between Shareholder and the Company shall
be terminated concurrent with the Effective Time and the Company shall have no
liability or obligation of any nature, whether or not accrued, contingent or
otherwise thereunder.
SECTION 6. No Solicitations. Shareholder and its affiliates (other than the
Company and its subsidiaries) will immediately cease any existing discussions or
negotiations with any third parties conducted on or prior to the date hereof
with respect to any Acquisition Proposal. Shareholder agrees that it will not,
and will use its best efforts to cause such affiliates not to, directly or
indirectly, solicit, initiate, encourage or take any other action to facilitate
any inquiries or proposals with respect to, or that could reasonably be expected
to lead to, an Acquisition Proposal or engage in negotiations or discussions
concerning, or provide any confidential information relating to, any Acquisition
Proposal or agree to approve or recommend or participate in any Acquisition
Proposal. Shareholder agrees that it and any of such affiliates will promptly
advise Parent of, and communicate to Parent the terms of, any such inquiry or
proposal it or any of such affiliates may receive, and will
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promptly advise Parent if it or any of such affiliates provides any such
information to any such person.
SECTION 7. Actions by Board. No action taken by the Board of Directors of
the Company shall modify, alter, change or otherwise affect the obligations of
Shareholder hereunder.
SECTION 8. Governing Law. This Agreement shall be governed by the internal
laws of the State of Texas without regard to the principles of conflicts of law.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING
OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH
PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY
OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH
WAIVERS, (ii) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH
WAIVERS, (iii) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (iv) IT HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 8.
SECTION 9. Notices. Notices under this Agreement shall be deemed to be duly
given when delivered in person, by cable, telegram, telex or facsimile, by
overnight courier or by registered or certified mail (postage prepaid, return
receipt requested) in writing as follows:
If to Parent or Merger Sub, to:
Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton, CA 94588
Telecopy No.: (925) 467-3231
Attention: Michael C. Ross, General Counsel
With a copy to:
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, CA 94111-2562
Telecopy No.: (415) 395-8095
Attention: Scott R. Haber
If to Shareholder, to:
RFM Acquisition LLC
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
New York, NY 10019
Telecopy No.: (212) 750-0003
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Attention: Paul Raether
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3954
Telecopy No.: (212) 455-2502
Attention: David J. Sorkin
SECTION 10. Entire Agreement; Amendments. This Agreement constitutes the
entire understanding of the parties with respect to the subject matter hereof.
There are no restrictions, agreements, promises, warranties, covenants or
undertakings with respect to the subject matter hereof other than those
expressly set forth herein or therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to its subject
matter and is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder. This Agreement may be amended only by a
written instrument duly executed by Parent, Merger Sub and Shareholder.
SECTION 11. Assignment. Notwithstanding any other provision of this
Agreement, this Agreement shall not be assignable by any party hereto except by
Parent or Merger Sub to any direct or indirect wholly owned subsidiary of
Parent; provided, however, that no such assignment shall relieve either Parent
or Merger Sub from its obligations hereunder. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
against, (i) as to Shareholder, Shareholder and Shareholder's beneficiaries and
representatives, and (ii) Parent and Merger Sub and their successors and
permitted assigns. Shareholder agrees that this Agreement and the obligations of
Shareholder hereunder shall attach to such Shareholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of such
Shares shall pass, whether by operation of law or otherwise, including
Shareholder's heirs, guardians, administrators or successors.
SECTION 12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity and enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or entity
or any circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid and unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons, entities or circumstances shall not be affected by
such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any other jurisdiction.
SECTION 13. Stop Transfer Order. In furtherance of this Agreement,
concurrently herewith Shareholder shall and hereby does authorize Parent and
Merger Sub to notify the Company's transfer agent that there is a stop transfer
order with respect to all of the Shares subject to the terms of this Agreement
(and that this Agreement places limits on the voting and transfer of the
Shares). Shareholder further agrees to cause the Company not to register the
transfer of any certificate representing any of Shareholder's Shares unless such
transfer is made in accordance with the terms of this Agreement.
SECTION 14. Further Action. From time to time, at the request of Parent or
Merger Sub and without further consideration, Shareholder shall execute and
deliver to Parent and
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Merger Sub such documents and take such action as Parent or Merger Sub may
reasonably request in order to consummate the transactions contemplated hereby.
SECTION 15. Termination. Except for Section 5(b), this Agreement shall
terminate and be of no further force and effect upon the earliest to occur of
(a) the Effective Time and (b) sixty (60) days after the termination of the
Merger Agreement pursuant to its terms; provided, however, that nothing herein
shall relieve any party for liability for any breach hereof. Section 5(b) shall
terminate in accordance with its terms.
SECTION 16. Survival. None of the representations, warranties, covenants
and other agreements in this Agreement or in any instrument delivered pursuant
to this Agreement, including any rights arising out of any breach of such
representations and warranties, covenants and other agreements, shall survive
the termination of this Agreement pursuant to Section 15, except for this
Section 16 and Sections 8, 9, 11, 18, 19 and 20.
SECTION 17. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 18. Specific Performance. Shareholder, Parent and Merger Sub
acknowledge that this Agreement and the Shares are unique and that no party will
have an adequate remedy at law if any other party breaches any covenant herein
or fails to perform its obligations hereunder. Accordingly, Shareholder, Parent
and Merger Sub agree that the others shall have the right, in addition to any
other rights which it may have, to specific performance and equitable injunctive
relief if any party shall fail or threaten to fail to perform any of its
obligations under this Agreement.
SECTION 19. Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense.
SECTION 20. Shareholder Capacity. Shareholder signs solely in its capacity
as the record holder and beneficial owner of the Shares and nothing herein shall
limit or affect any actions taken or to be taken by any officer, director or
financial advisor of the Company or its subsidiaries in his, her or its capacity
as an officer, director or financial advisor of the Company, subject to the
Merger Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its representatives thereunto duly authorized, all as
of the day and year first above written.
SAFEWAY INC.
By: /s/ MICHAEL C. ROSS
--------------------------------------
Name: Michael C. Ross
- --------------------------------------------------------------------------------
Title: Senior Vice President and
Secretary
--------------------------------------
SI MERGER SUB, INC.
By: /s/ MICHAEL C. ROSS
--------------------------------------
Name: Michael C. Ross
--------------------------------------
Title: Vice President and
Secretary
--------------------------------------
RFM ACQUISITION LLC
By: /s/ JAMES H. GREENE, JR.
--------------------------------------
Name: James H. Greene, Jr.
--------------------------------------
Title: President
--------------------------------------
Shareholder Holds:
18,579,686 Shares of Common Stock
Option to Purchase 3,606,881 Shares of Common Stock
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ANNEX C
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of July 22, 1999, by and
among Onstead Interests, Ltd., a Texas limited partnership ("Shareholder"),
Safeway Inc., a Delaware corporation ("Parent"), and SI Merger Sub, Inc., a
Texas corporation and a wholly owned subsidiary of Parent ("Merger Sub").
WHEREAS, Shareholder has beneficial ownership of the number of shares of
common stock, par value $0.25 per share, of Randall's Food Markets, Inc., a
Texas corporation (the "Company"), set forth opposite the name of Shareholder on
the signature page hereof (such class of stock sometimes referred to herein as
the "Company Common Stock," and the shares of Company Common Stock, including
such shares that are acquired after the date hereof, including without
limitation, as a result of a stock dividend, stock split, recapitalization,
combination, reclassification, exchange, or change of such shares, or upon
exercise or conversion of any securities, that are, from time to time,
beneficially owned by Shareholder sometimes referred to herein as the "Shares");
WHEREAS, simultaneously with the execution and delivery hereof, Parent,
Merger Sub and the Company have entered into an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of the date hereof, which Merger Agreement
has been approved by the Board of Directors of the Company, and has been
approved by the Board of Directors of Parent and Merger Sub. The directors of
the Company unanimously voted in favor of the adoption of the Merger Agreement
and the recommendation that shareholders of the Company approve the merger of
the Company with and into Merger Sub (the "Merger") as contemplated by the
Merger Agreement; and
WHEREAS, as a condition to entering into the Merger Agreement, Parent and
Merger Sub have required that Shareholder agree, and in order to induce Parent
and Merger Sub to enter into the Merger Agreement, Shareholder has agreed to
enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereby agree as follows:
SECTION 1. Capitalized Terms. For purposes of this Agreement:
"Acquisition Proposal" shall have the meaning set forth in the Merger
Agreement.
"Effective Time" shall have the meaning set forth in the Merger
Agreement.
"Governmental Entity" shall mean any governmental or regulatory
authority, agency, court, commission, body or other governmental entity.
"Lien" shall mean any security interest, claim, pledge, charge,
restriction on transfer, option, proxy, consent, voting trust, voting agreement
or other encumbrance of any nature whatsoever.
SECTION 2. Representations and Warranties of Shareholder. Shareholder
represents and warrants to Parent and Merger Sub as follows:
(a) Shareholder is a limited partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction under which it
is organized.
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(b) Shareholder has all necessary power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated hereby.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by Shareholder, and no other proceedings on the part of Shareholder
are necessary to authorize this Agreement or to consummate the transactions so
contemplated.
(d) This Agreement has been duly and validly executed and delivered by
Shareholder and, assuming this Agreement constitutes a valid and binding
obligation of each of Parent and Merger Sub, constitutes a legal, valid and
binding agreement of Shareholder enforceable against Shareholder in accordance
with its terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(e) The execution, delivery and performance by Shareholder of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) contravene or conflict with its organizational documents, (ii)
assuming that all consents, authorizations and approvals contemplated by
subsection (f) below have been obtained and all filings described therein have
been made, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to Shareholder or any of its properties; or (iii) conflict
with, or result in the breach or termination of or constitute a default (with or
without the giving of notice or the lapse of time or both) under, or give rise
to any right of termination, cancellation, or loss of any benefit to which
Shareholder is entitled under any provision of any agreement, contract, license
or other instrument binding upon Shareholder or any of its properties, or allow
the acceleration of the performance of any obligation of Shareholder under any
indenture, mortgage, deed of trust, lease, license, contract, instrument or
other agreement to which Shareholder is a party or by which Shareholder, its
assets or properties is subject or bound, other than such contraventions,
conflicts, violations, breaches, defaults or other occurrences that would not
reasonably be expected to prevent, delay or impair Shareholder's ability to
consummate the transactions contemplated by this Agreement.
(f) The execution, delivery and performance by Shareholder of this
Agreement and the consummation of the transactions contemplated hereby by
Shareholder require no filings, notices, declarations, consents or other actions
to be made by Shareholder with, nor are any approvals or other confirmations or
consents required to be obtained by Shareholder from any Governmental Entity
(except those the failure of which to make, give or obtain, individually or in
the aggregate, would not reasonably be expected to prevent, delay or impair,
Shareholder's ability to consummate the transactions contemplated by this
Agreement), other than filings, notices, approvals, confirmations, consents,
declarations or decisions required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(g) As of the date hereof, there is no action, suit, claim,
investigation or proceeding pending, or to the knowledge of Shareholder,
threatened against Shareholder or its properties before any court or arbitrator
or any Governmental Entity which challenges or seeks to prevent, enjoin, alter
or delay the Merger or any of the other transactions
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contemplated hereby or by the Merger Agreement. As of the date hereof,
Shareholder is not, and none of its properties is, subject to any order, writ,
judgment, injunction, decree, determination or award which would prevent, delay
or impair the consummation of the transactions contemplated hereby.
(h) Shareholder is, and at the Effective Time will be, the sole record
and beneficial owner of and has, and at the Effective Time Shareholder will
have, good and valid title to the Shares, free and clear of any Liens, except
for any Liens arising hereunder. Shareholder has, and at the Effective Time will
have, the power to vote, dispose of and otherwise transfer the Shares without
the approval, consent or other action of any person (other than a general
partner acting in such capacity).
(i) Except as set forth on Schedule 2(i) hereto, there are no options or
rights to acquire, or understandings or arrangements to which Shareholder is a
party relating to the Shares, other than this Agreement.
(j) The Shares represent all of the shares of Company Common Stock
beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by
Shareholder.
(k) Shareholder understands and acknowledges that Parent is entering
into, and causing Merger Sub to enter into, the Merger Agreement in reliance
upon Shareholder's execution and delivery of this Agreement.
SECTION 3. Representations and Warranties of Parent and Merger Sub. Parent
and Merger Sub represent and warrant to Shareholder as follows:
(a) Each of Parent and Merger Sub is duly organized, validly existing
and in good standing under the laws of the jurisdiction under which it is
organized.
(b) Each of Parent and Merger Sub has all necessary power and authority
to execute and deliver this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by each of Parent and Merger Sub, and no other proceedings on the
part of Parent or Merger Sub are necessary to authorize this Agreement or to
consummate the transactions so contemplated.
(d) The execution, delivery and performance by each of Parent and Merger
Sub of this Agreement and the consummation of the transactions contemplated
hereby do not and will not (i) contravene or conflict with Parent's Certificate
of Incorporation or Bylaws, (ii) assuming that all consents, authorizations and
approvals contemplated by subsection (e) below have been obtained and all
filings described therein have been made, contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to Parent or any of its
properties; or (iii) conflict with, or result in the breach or termination of or
constitute a default (with or without the giving of notice or the lapse of time
or both) under, or give rise to any right of termination, cancellation, or loss
of any benefit to which Parent is entitled under any provision of any agreement,
contract, license or other instrument binding upon Parent or any of its
properties, or allow the acceleration of the performance of any obligation of
Parent under any indenture, mortgage, deed of trust, lease, license, contract,
instrument or other agreement to which Parent is a party or by which Parent, its
assets or properties is subject or bound, other than such contraventions,
conflicts, violations, breaches, defaults or
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other occurrences that would not reasonably be expected to prevent, delay or
impair Parent's ability to consummate the transactions contemplated by this
Agreement.
(e) The execution, delivery and performance by each of Parent and Merger
Sub of this Agreement and the consummation of the transactions contemplated
hereby by each of Parent and Merger Sub require no filings, notices,
declarations, consents or other actions to be made by Parent or Merger Sub with,
nor are any approvals or other confirmations or consents required to be obtained
by Parent or Merger Sub from any Governmental Entity (except those the failure
of which to make, give or obtain, individually or in the aggregate, would not
reasonably be expected to prevent, delay or impair, Parent's or Merger Sub's
ability to consummate the transactions contemplated by this Agreement), other
than filings, notices, approvals, confirmations, consents, declarations or
decisions as set forth in Section 3.2(d) of the Merger Agreement and Section
3.2(d) of the Parent Disclosure Schedule (as defined in the Merger Agreement).
SECTION 4. Agreement to Vote; Proxy.
(a) Shareholder agrees with, and covenants to, Parent and Merger Sub as
follows:
(i) At any meeting of shareholders of the Company called to vote upon
the Merger, the Merger Agreement or the other transactions contemplated by the
Merger Agreement or at which a vote, consent or other approval with respect to
the Merger, the Merger Agreement or the other transactions contemplated by the
Merger Agreement is sought, Shareholder shall vote (or cause to be voted) or
shall consent, execute a consent or cause to be executed a consent in respect of
the Shares in favor of the Merger, the execution and delivery by the Company of
the Merger Agreement and the approval of the terms thereof and each of the other
transactions contemplated by the Merger Agreement.
(ii) At any meeting of shareholders of the Company or at any adjournment
thereof or in any other circumstances upon which their vote, consent or other
approval is sought, Shareholder shall vote (or cause to be voted) the Shares
against (x) any Acquisition Proposal or (y) any amendment of the Company's
Articles of Incorporation or By-laws which amendment would in any manner prevent
or materially impede, interfere with or delay the Merger, the Merger Agreement
or any of the other transactions contemplated by the Merger Agreement.
(b) Shareholder hereby grants to, and appoints, Steve Burd and Michael Ross
and any other individual who is designated by Parent, until the termination of
this Agreement pursuant to Section 15, an irrevocable proxy, coupled with an
interest, and attorney-in-fact (with full power of substitution), for and in the
name, place and stead of Shareholder, with respect to the Shares, to vote the
Shares, or grant or execute a consent or approval, in the complete discretion of
Parent or Merger Sub, as the case may be, at any meeting of shareholders of the
Company or at any adjournment thereof or in any other circumstances upon which
their vote, consent or other approval is sought in accordance with paragraph (a)
of this Section 4. Such irrevocable proxy is executed and intended to be
irrevocable in accordance with the provisions of the Texas Business Corporation
Act. Shareholder agrees that this Agreement, including the provisions of this
Section 4 will be recorded in the books and records of the Company.
SECTION 5. Additional Covenants.
(a) Disposition of Shares. Except pursuant to this Agreement, Shareholder
shall not, without the prior written consent of Parent, directly or indirectly,
during the term of this Agreement (i) grant or enter into any Lien, power of
attorney or other agreement or
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arrangement with respect to the voting of the Shares, (ii) sell, assign,
transfer, encumber or otherwise dispose of, or enter into any contract, option
or other arrangement or understanding with respect to the direct or indirect
sale, assignment, transfer, encumbrance or other disposition of any of the
Shares (except for a sale, assignment or transfer to an affiliate of Shareholder
who or which agrees to be bound by all of the provisions of this Agreement with
respect to such transferred Shares) or (iii) take any other action that would in
any way restrict, limit or interfere with the performance of its obligations
hereunder or the transactions contemplated hereby. Shareholder hereby
irrevocably waives any rights of appraisal or rights to dissent from the Merger
that Shareholder may have.
(b) Shareholder Profit
(i) In the event that the Merger Agreement shall have been terminated at
any time pursuant to Section 7.1(d), (e), or (f) thereof (provided, with respect
to a termination pursuant to Section 7.1(d), a termination fee could become
payable to Parent pursuant to Section 7.2 of the Merger Agreement), Shareholder
shall pay to Parent an amount equal to 50% of the profit (determined in
accordance with this Section 5(b)) of Shareholder (i) from the sale or other
disposition of any Shares within 12 months of the termination of this Agreement
pursuant to an Acquisition Proposal, (ii) from the sale or other disposition of
any Shares (including a distribution to Shareholder's partners, unless such
distributee agrees to be bound by the terms of this Agreement) within 12 months
of the termination of this Agreement which is not pursuant to a bona fide public
offering of shares of Company Common Stock which sale or disposition is made at
such time as an Acquisition Proposal is pending or (iii) from the sale of other
disposition of any Shares pursuant to a Superior Proposal (as defined in the
Merger Agreement) at any time so long as the agreement with respect to such
Superior Proposal is entered into within 12 months of the termination of this
Agreement. Payment shall be made promptly upon the receipt of the proceeds from
such sale or other disposition.
(ii) For purposes of this Section 5(b), the profit of Shareholder shall
equal (A) the aggregate consideration received by Shareholder for the Shares
that were sold or disposed of, valuing any non-cash consideration (including any
residual interest in the Company) at its fair market value on the date of such
consummation, less (B) $41.75 per Share multiplied by the number of Shares sold
or disposed of less (C) all out-of-pocket transaction costs incurred by
Shareholder directly in connection with such sale or disposition. With respect
to a distribution of Shares to partners at such time as an Acquisition Proposal
is pending with respect to which payment is required under Section 5(b)(i)
above, the aggregate consideration shall be deemed to be the amount proposed to
be paid pursuant to the Acquisition Proposal.
(iii) For purposes of this Section 5(b), the fair market value of any
non-cash consideration consisting of:
(A) securities listed on a national securities exchange or traded
or quoted on the Nasdaq shall be equal to the average closing price per share of
such security as reported on the composite trading system of such exchange or by
Nasdaq for the five trading days ending on the trading day immediately prior to
the date of the value determination; and
(B) consideration which is other than cash or securities of the
form specified in clause (A) of this Section 5(b)(iii) shall be determined by a
nationally recognized independent investment banking firm mutually agreed upon
by the parties within 10 business days of the event requiring selection of such
banking firm; provided,
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however, that if the parties are unable to agree within two business days after
the date of such event as to the investment banking firm, then the parties shall
each select one firm, and those firms shall select a third investment banking
firm, which third firm shall make such determination; provided further, that the
fees and expenses of such investment banking firm shall be borne equally by
Parent and Shareholder. The determination of the investment-banking firm shall
be binding upon the parties.
(iv) Any payment of profit under this Section 5(b) shall be paid in the
same proportion of cash and non-cash consideration as the aggregate
consideration received by Shareholder in the Acquisition Proposal or other
disposition.
(v) Shareholder shall not engage in any transaction with respect to the
Shares with the primary purpose of depriving Parent of the intended benefits of
this Agreement.
(c) Governmental Filings. Shareholder shall promptly make any and all
filings that Shareholder is required to make with any Governmental Entity with
respect to the transactions contemplated by this Agreement or the Merger
Agreement. Shareholder further agrees to use its reasonable best efforts to
obtain all approvals required by any Governmental Entity to consummate the
transactions contemplated hereby.
SECTION 6. No Solicitations. Shareholder and its affiliates (other than the
Company and its subsidiaries) will immediately cease any existing discussions or
negotiations with any third parties conducted on or prior to the date hereof
with respect to any Acquisition Proposal. Shareholder agrees that it will not,
and will use its best efforts to cause such affiliates not to, directly or
indirectly, solicit, initiate, encourage or take any other action to facilitate
any inquiries or proposals with respect to, or that could reasonably be expected
to lead to, an Acquisition Proposal or engage in negotiations or discussions
concerning, or provide any confidential information relating to, any Acquisition
Proposal or agree to approve or recommend or participate in any Acquisition
Proposal. Shareholder agrees that it and any of such affiliates will promptly
advise Parent of, and communicate to Parent the terms of, any such inquiry or
proposal it or any of such affiliates may receive, and will promptly advise
Parent if it or any of such affiliates provides any such information to any such
person.
SECTION 7. Actions by Board. No action taken by the Board of Directors of
the Company shall modify, alter, change or otherwise affect the obligations of
Shareholder hereunder.
SECTION 8. Governing Law. This Agreement shall be governed by the internal
laws of the State of Texas without regard to the principles of conflicts of law.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING
OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH
PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY
OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH
WAIVERS, (ii) IT UNDERSTANDS AND HAS CONSIDERED THE
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IMPLICATIONS OF SUCH WAIVERS, (iii) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (iv)
IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 8.
SECTION 9. Notices. Notices under this Agreement shall be deemed to be duly
given when delivered in person, by cable, telegram, telex or facsimile, by
overnight courier or by registered or certified mail (postage prepaid, return
receipt requested) in writing as follows:
If to Parent or Merger Sub, to:
Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton, CA 94588
Telecopy No.: (925) 467-3231
Attention: Michael C. Ross, General Counsel
With a copy to:
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, CA 94111-2562
Telecopy No.: (415) 395-8095
Attention: Scott R. Haber
If to Shareholder, to:
Onstead Interests, Ltd.
c/o Robert R. Onstead
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Telecopy No.: (713) 917-1095
SECTION 10. Entire Agreement; Amendments. This Agreement constitutes the
entire understanding of the parties with respect to the subject matter hereof.
There are no restrictions, agreements, promises, warranties, covenants or
undertakings with respect to the subject matter hereof other than those
expressly set forth herein or therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to its subject
matter and is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder. This Agreement may be amended only by a
written instrument duly executed by Parent, Merger Sub and Shareholder.
SECTION 11. Assignment. Notwithstanding any other provision of this
Agreement, this Agreement shall not be assignable by any party hereto except by
Parent or Merger Sub to any direct or indirect wholly owned subsidiary of
Parent; provided, however, that no such assignment shall relieve either Parent
or Merger Sub from its obligations hereunder. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
against, (i) as to Shareholder, Shareholder and Shareholder's beneficiaries and
representatives, and (ii) Parent and Merger Sub and their successors and
permitted assigns. Shareholder agrees that this Agreement and the obligations of
Shareholder hereunder shall attach to such Shareholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of such
Shares shall pass,
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whether by operation of law or otherwise, including Shareholder's heirs,
guardians, administrators or successors.
SECTION 12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity and enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or entity
or any circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid and unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons, entities or circumstances shall not be affected by
such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any other jurisdiction.
SECTION 13. Stop Transfer Order. In furtherance of this Agreement,
concurrently herewith Shareholder shall and hereby does authorize Parent and
Merger Sub to notify the Company's transfer agent that there is a stop transfer
order with respect to all of the Shares subject to the terms of this Agreement
(and that this Agreement places limits on the voting and transfer of the
Shares). Shareholder further agrees to cause the Company not to register the
transfer of any certificate representing any of Shareholder's Shares unless such
transfer is made in accordance with the terms of this Agreement.
SECTION 14. Further Action. From time to time, at the request of Parent or
Merger Sub and without further consideration, Shareholder shall execute and
deliver to Parent and Merger Sub such documents and take such action as Parent
or Merger Sub may reasonably request in order to consummate the transactions
contemplated hereby.
SECTION 15. Termination. Except for Section 5(b), this Agreement shall
terminate and be of no further force and effect upon the earliest to occur of
(a) the Effective Time and (b) sixty (60) days after the termination of the
Merger Agreement pursuant to its terms; provided, however, that nothing herein
shall relieve any party for liability for any breach hereof. Section 5(b) shall
terminate in accordance with its terms.
SECTION 16. Survival. None of the representations, warranties, covenants
and other agreements in this Agreement or in any instrument delivered pursuant
to this Agreement, including any rights arising out of any breach of such
representations and warranties, covenants and other agreements, shall survive
the termination of this Agreement pursuant to Section 15, except for this
Section 16 and Sections 8, 9, 11, 18, 19 and 20.
SECTION 17. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 18. Specific Performance. Shareholder, Parent and Merger Sub
acknowledge that this Agreement and the Shares are unique and that no party will
have an adequate remedy at law if any other party breaches any covenant herein
or fails to perform its obligations hereunder. Accordingly, Shareholder, Parent
and Merger Sub agree that the others shall have the right, in addition to any
other rights which it may have, to specific performance and equitable injunctive
relief if any party shall fail or threaten to fail to perform any of its
obligations under this Agreement.
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SECTION 19. Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense.
SECTION 20. Shareholder Capacity. Shareholder signs solely in its capacity
as the record holder and beneficial owner of the Shares and nothing herein shall
limit or affect any actions taken or to be taken by any officer, director or
financial advisor of the Company or its subsidiaries in his, her or its capacity
as an officer, director or financial advisor of the Company, subject to the
Merger Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its representatives thereunto duly authorized, all as
of the day and year first above written.
SAFEWAY INC.
By: /s/ MICHAEL C. ROSS
--------------------------------------
Name: Michael C. Ross
--------------------------------------
Title: Senior Vice President and
Secretary
--------------------------------------
SI MERGER SUB, INC.
By: /s/ MICHAEL C. ROSS
--------------------------------------
Name: Michael C. Ross
--------------------------------------
Title: Vice President and
Secretary
--------------------------------------
ONSTEAD INTERESTS, LTD.
By: ONSTEAD SERVICES LLC
By:/s/ ROBERT R. ONSTEAD
--------------------------------------
Name: Robert R. Onstead
--------------------------------------
Title: Managing Member
Shareholder Holds:
6,009,470 Shares of Common Stock
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ANNEX D
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of July 22, 1999, by and
among R. Randall Onstead, Jr. an individual ("Shareholder"), Safeway Inc., a
Delaware corporation ("Parent"), and SI Merger Sub, Inc., a Texas corporation
and a wholly owned subsidiary of Parent ("Merger Sub").
WHEREAS, Shareholder has beneficial ownership of the number of shares of
common stock, par value $0.25 per share, of Randall's Food Markets, Inc., a
Texas corporation (the "Company"), set forth opposite the name of Shareholder on
the signature page hereof (such class of stock sometimes referred to herein as
the "Company Common Stock," and the shares of Company Common Stock, including
such shares that are acquired after the date hereof, including without
limitation, as a result of a stock dividend, stock split, recapitalization,
combination, reclassification, exchange, or change of such shares, or upon
exercise or conversion of any securities, that are, from time to time,
beneficially owned by Shareholder sometimes referred to herein as the "Shares");
WHEREAS, simultaneously with the execution and delivery hereof, Parent,
Merger Sub and the Company have entered into an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of the date hereof, which Merger Agreement
has been approved by the Board of Directors of the Company, and has been
approved by the Board of Directors of Parent and Merger Sub. The directors of
the Company unanimously voted in favor of the adoption of the Merger Agreement
and the recommendation that shareholders of the Company approve the merger of
the Company with and into Merger Sub (the "Merger") as contemplated by the
Merger Agreement; and
WHEREAS, as a condition to entering into the Merger Agreement, Parent and
Merger Sub have required that Shareholder agree, and in order to induce Parent
and Merger Sub to enter into the Merger Agreement, Shareholder has agreed to
enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereby agree as follows:
SECTION 1. Capitalized Terms. For purposes of this Agreement:
"Acquisition Proposal" shall have the meaning set forth in the Merger
Agreement.
"Effective Time" shall have the meaning set forth in the Merger
Agreement.
"Governmental Entity" shall mean any governmental or regulatory
authority, agency, court, commission, body or other governmental entity.
"Lien" shall mean any security interest, claim, pledge, charge,
restriction on transfer, option, proxy, consent, voting trust, voting agreement
or other encumbrance of any nature whatsoever.
SECTION 2. Representations and Warranties of Shareholder. Shareholder
represents and warrants to Parent and Merger Sub as follows:
(a) Shareholder has all necessary power and authority to execute and
deliver this Agreement, to perform his obligations hereunder and to consummate
the transactions contemplated hereby.
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(b) This Agreement has been duly and validly executed and delivered by
Shareholder and, assuming this Agreement constitutes a valid and binding
obligation of each of Parent and Merger Sub, constitutes a legal, valid and
binding agreement of Shareholder enforceable against Shareholder in accordance
with its terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(c) The execution, delivery and performance by Shareholder of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) assuming that all consents, authorizations and approvals
contemplated by subsection (d) below have been obtained and all filings
described therein have been made, contravene or conflict with or constitute a
violation of any provision of any law, regulation, judgment, injunction, order
or decree binding upon or applicable to Shareholder or any of his properties; or
(ii) conflict with, or result in the breach or termination of or constitute a
default (with or without the giving of notice or the lapse of time or both)
under, or give rise to any right of termination, cancellation, or loss of any
benefit to which Shareholder is entitled under any provision of any agreement,
contract, license or other instrument binding upon Shareholder or any of his
properties, or allow the acceleration of the performance of any obligation of
Shareholder under any indenture, mortgage, deed of trust, lease, license,
contract, instrument or other agreement to which Shareholder is a party or by
which Shareholder, his assets or properties is subject or bound, other than such
contraventions, conflicts, violations, breaches, defaults or other occurrences
that would not reasonably be expected to prevent, delay or impair Shareholder's
ability to consummate the transactions contemplated by this Agreement.
(d) The execution, delivery and performance by Shareholder of this
Agreement and the consummation of the transactions contemplated hereby by
Shareholder require no filings, notices, declarations, consents or other actions
to be made by Shareholder with, nor are any approvals or other confirmations or
consents required to be obtained by Shareholder from any Governmental Entity
(except those the failure of which to make, give or obtain, individually or in
the aggregate, would not reasonably be expected to prevent, delay or impair,
Shareholder's ability to consummate the transactions contemplated by this
Agreement), other than filings, notices, approvals, confirmations, consents,
declarations or decisions required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(e) As of the date hereof, there is no action, suit, claim,
investigation or proceeding pending, or to the knowledge of Shareholder,
threatened against Shareholder or his properties before any court or arbitrator
or any Governmental Entity which challenges or seeks to prevent, enjoin, alter
or delay the Merger or any of the other transactions contemplated hereby or by
the Merger Agreement. As of the date hereof, Shareholder is not, and none of his
properties is, subject to any order, writ, judgment, injunction, decree,
determination or award which would prevent, delay or impair the consummation of
the transactions contemplated hereby.
(f) Shareholder is, and at the Effective Time will be, the sole record
and beneficial owner of and has, and at the Effective Time Shareholder will
have, good and valid title to the Shares, free and clear of any Liens, except
for any Liens arising hereunder. Shareholder has, and at the Effective Time will
have, the power to vote,
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dispose of and otherwise transfer the Shares without the approval, consent or
other action of any person.
(g) Except as set forth on Schedule 2(g) hereto, there are no options or
rights to acquire, or understandings or arrangements to which Shareholder is a
party relating to the Shares, other than this Agreement.
(h) The Shares represent all of the shares of Company Common Stock
beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by
Shareholder.
(i) Shareholder understands and acknowledges that Parent is entering
into, and causing Merger Sub to enter into, the Merger Agreement in reliance
upon Shareholder's execution and delivery of this Agreement.
SECTION 3. Representations and Warranties of Parent and Merger Sub. Parent
and Merger Sub represent and warrant to Shareholder as follows:
(a) Each of Parent and Merger Sub is duly organized, validly existing
and in good standing under the laws of the jurisdiction under which it is
organized.
(b) Each of Parent and Merger Sub has all necessary power and authority
to execute and deliver this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by each of Parent and Merger Sub, and no other proceedings on the
part of Parent or Merger Sub are necessary to authorize this Agreement or to
consummate the transactions so contemplated.
(d) The execution, delivery and performance by each of Parent and Merger
Sub of this Agreement and the consummation of the transactions contemplated
hereby do not and will not (i) contravene or conflict with Parent's Certificate
of Incorporation or Bylaws, (ii) assuming that all consents, authorizations and
approvals contemplated by subsection (e) below have been obtained and all
filings described therein have been made, contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to Parent or any of its
properties; or (iii) conflict with, or result in the breach or termination of or
constitute a default (with or without the giving of notice or the lapse of time
or both) under, or give rise to any right of termination, cancellation, or loss
of any benefit to which Parent is entitled under any provision of any agreement,
contract, license or other instrument binding upon Parent or any of its
properties, or allow the acceleration of the performance of any obligation of
Parent under any indenture, mortgage, deed of trust, lease, license, contract,
instrument or other agreement to which Parent is a party or by which Parent, its
assets or properties is subject or bound, other than such contraventions,
conflicts, violations, breaches, defaults or other occurrences that would not
reasonably be expected to prevent, delay or impair Parent's ability to
consummate the transactions contemplated by this Agreement.
(e) The execution, delivery and performance by each of Parent and Merger
Sub of this Agreement and the consummation of the transactions contemplated
hereby by each of Parent and Merger Sub require no filings, notices,
declarations, consents or other actions to be made by Parent or Merger Sub with,
nor are any approvals or other confirmations or consents required to be obtained
by Parent or Merger Sub from any Governmental Entity (except those the failure
of which to make, give or obtain, individually or in the aggregate,
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would not reasonably be expected to prevent, delay or impair, Parent's or Merger
Sub's ability to consummate the transactions contemplated by this Agreement),
other than filings, notices, approvals, confirmations, consents, declarations or
decisions as set forth in Section 3.2(d) of the Merger Agreement and Section
3.2(d) of the Parent Disclosure Schedule (as defined in the Merger Agreement).
SECTION 4. Agreement to Vote; Proxy.
(a) Shareholder agrees with, and covenants to, Parent and Merger Sub as
follows:
(i) At any meeting of shareholders of the Company called to vote upon
the Merger, the Merger Agreement or the other transactions contemplated by the
Merger Agreement or at which a vote, consent or other approval with respect to
the Merger, the Merger Agreement or the other transactions contemplated by the
Merger Agreement is sought, Shareholder shall vote (or cause to be voted) or
shall consent, execute a consent or cause to be executed a consent in respect of
the Shares in favor of the Merger, the execution and delivery by the Company of
the Merger Agreement and the approval of the terms thereof and each of the other
transactions contemplated by the Merger Agreement.
(ii) At any meeting of shareholders of the Company or at any adjournment
thereof or in any other circumstances upon which their vote, consent or other
approval is sought, Shareholder shall vote (or cause to be voted) the Shares
against (x) any Acquisition Proposal or (y) any amendment of the Company's
Articles of Incorporation or By-laws which amendment would in any manner prevent
or materially impede, interfere with or delay the Merger, the Merger Agreement
or any of the other transactions contemplated by the Merger Agreement.
(b) Shareholder hereby grants to, and appoints, Steve Burd and Michael Ross
and any other individual who is designated by Parent, until the termination of
this Agreement pursuant to Section 15, an irrevocable proxy, coupled with an
interest, and attorney-in-fact (with full power of substitution), for and in the
name, place and stead of Shareholder, with respect to the Shares, to vote the
Shares, or grant or execute a consent or approval, in the complete discretion of
Parent or Merger Sub, as the case may be, at any meeting of shareholders of the
Company or at any adjournment thereof or in any other circumstances upon which
their vote, consent or other approval is sought in accordance with paragraph (a)
of this Section 4. Such irrevocable proxy is executed and intended to be
irrevocable in accordance with the provisions of the Texas Business Corporation
Act. Shareholder agrees that this Agreement, including the provisions of this
Section 4 will be recorded in the books and records of the Company.
SECTION 5. Additional Covenants.
(a) Disposition of Shares. Except pursuant to this Agreement, Shareholder
shall not, without the prior written consent of Parent, directly or indirectly,
during the term of this Agreement (i) grant or enter into any Lien, power of
attorney or other agreement or arrangement with respect to the voting of the
Shares, (ii) sell, assign, transfer, encumber or otherwise dispose of, or enter
into any contract, option or other arrangement or understanding with respect to
the direct or indirect sale, assignment, transfer, encumbrance or other
disposition of any of the Shares (except for a sale, assignment or transfer to
an affiliate of Shareholder who or which agrees to be bound by all of the
provisions of this Agreement with respect to such transferred Shares) or (iii)
take any other action that would in any way restrict, limit or interfere with
the performance of his obligations hereunder or the transactions contemplated
hereby. Shareholder hereby irrevocably waives any rights of appraisal or rights
to dissent from the Merger that Shareholder may have.
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(b) Shareholder Profit
(i) In the event that the Merger Agreement shall have been terminated at
any time pursuant to Section 7.1(d), (e), or (f) thereof (provided, with respect
to a termination pursuant to Section 7.1(d), a termination fee could become
payable to Parent pursuant to Section 7.2 of the Merger Agreement), Shareholder
shall pay to Parent an amount equal to 50% of the profit (determined in
accordance with this Section 5(b)) of Shareholder (i) from the sale or other
disposition of any Shares within 12 months of the termination of this Agreement
pursuant to an Acquisition Proposal, (ii) from the sale or other disposition of
any Shares within 12 months of the termination of this Agreement which is not
pursuant to a bona fide public offering of shares of Company Common Stock which
sale or disposition is made at such time as an Acquisition Proposal is pending
or (iii) from the sale of other disposition of any Shares pursuant to a Superior
Proposal (as defined in the Merger Agreement) at any time so long as the
agreement with respect to such Superior Proposal is entered into within 12
months of the termination of this Agreement. Payment shall be made promptly upon
the receipt of the proceeds from such sale or other disposition.
(ii) For purposes of this Section 5(b), the profit of Shareholder shall
equal (A) the aggregate consideration received by Shareholder for the Shares
that were sold or disposed of, valuing any non-cash consideration (including any
residual interest in the Company) at its fair market value on the date of such
consummation, less (B) $41.75 per Share multiplied by the number of Shares sold
or disposed of less (C) all out-of-pocket transaction costs incurred by
Shareholder directly in connection with such sale or disposition.
(iii) For purposes of this Section 5(b), the fair market value of any
non-cash consideration consisting of:
(A) securities listed on a national securities exchange or traded
or quoted on the Nasdaq shall be equal to the average closing price per share of
such security as reported on the composite trading system of such exchange or by
Nasdaq for the five trading days ending on the trading day immediately prior to
the date of the value determination; and
(B) consideration which is other than cash or securities of the
form specified in clause (A) of this Section 5(b)(iii) shall be determined by a
nationally recognized independent investment banking firm mutually agreed upon
by the parties within 10 business days of the event requiring selection of such
banking firm; provided, however, that if the parties are unable to agree within
two business days after the date of such event as to the investment banking
firm, then the parties shall each select one firm, and those firms shall select
a third investment banking firm, which third firm shall make such determination;
provided further, that the fees and expenses of such investment banking firm
shall be borne equally by Parent and Shareholder. The determination of the
investment-banking firm shall be binding upon the parties.
(iv) Any payment of profit under this Section 5(b) shall be paid in the
same proportion of cash and non-cash consideration as the aggregate
consideration received by Shareholder in the Acquisition Proposal or other
disposition.
(v) Shareholder shall not engage in any transaction with respect to the
Shares with the primary purpose of depriving Parent of the intended benefits of
this Agreement.
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(c) Governmental Filings. Shareholder shall promptly make any and all
filings that Shareholder is required to make with any Governmental Entity with
respect to the transactions contemplated by this Agreement or the Merger
Agreement. Shareholder further agrees to use his reasonable best efforts to
obtain all approvals required by any Governmental Entity to consummate the
transactions contemplated hereby.
SECTION 6. No Solicitations. Shareholder and his affiliates (other than the
Company and its subsidiaries) will immediately cease any existing discussions or
negotiations with any third parties conducted on or prior to the date hereof
with respect to any Acquisition Proposal. Shareholder agrees that he will not,
and will use his best efforts to cause such affiliates not to, directly or
indirectly, solicit, initiate, encourage or take any other action to facilitate
any inquiries or proposals with respect to, or that could reasonably be expected
to lead to, an Acquisition Proposal or engage in negotiations or discussions
concerning, or provide any confidential information relating to, any Acquisition
Proposal or agree to approve or recommend or participate in any Acquisition
Proposal. Shareholder agrees that it and any of such affiliates will promptly
advise Parent of, and communicate to Parent the terms of, any such inquiry or
proposal it or any of such affiliates may receive, and will promptly advise
Parent if it or any of such affiliates provides any such information to any such
person.
SECTION 7. Actions by Board. No action taken by the Board of Directors of
the Company shall modify, alter, change or otherwise affect the obligations of
Shareholder hereunder.
SECTION 8. Governing Law. This Agreement shall be governed by the internal
laws of the State of Texas without regard to the principles of conflicts of law.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING
OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH
PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY
OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH
WAIVERS, (ii) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH
WAIVERS, (iii) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (iv) IT HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 8.
SECTION 9. Notices. Notices under this Agreement shall be deemed to be duly
given when delivered in person, by cable, telegram, telex or facsimile, by
overnight courier
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or by registered or certified mail (postage prepaid, return receipt requested)
in writing as follows:
If to Parent or Merger Sub, to:
Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton, CA 94588
Telecopy No.: (925) 467-3231
Attention: Michael C. Ross, General Counsel
With a copy to:
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, CA 94111-2562
Telecopy No.: (415) 395-8095
Attention: Scott R. Haber
If to Shareholder, to:
R. Randall Onstead, Jr.
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Telecopy No.: (713) 917-1095
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3954
Telecopy No.: (212) 455-2502
Attention: David J. Sorkin
SECTION 10. Entire Agreement; Amendments. This Agreement constitutes the
entire understanding of the parties with respect to the subject matter hereof.
There are no restrictions, agreements, promises, warranties, covenants or
undertakings with respect to the subject matter hereof other than those
expressly set forth herein or therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to its subject
matter and is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder. This Agreement may be amended only by a
written instrument duly executed by Parent, Merger Sub and Shareholder.
SECTION 11. Assignment. Notwithstanding any other provision of this
Agreement, this Agreement shall not be assignable by any party hereto except by
Parent or Merger Sub to any direct or indirect wholly owned subsidiary of
Parent; provided, however, that no such assignment shall relieve either Parent
or Merger Sub from its obligations hereunder. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
against, (i) as to Shareholder, Shareholder and Shareholder's beneficiaries and
representatives, and (ii) Parent and Merger Sub and their successors and
permitted assigns. Shareholder agrees that this Agreement and the obligations of
Shareholder hereunder shall attach to such Shareholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of such
Shares shall pass, whether by operation of law or otherwise, including
Shareholder's heirs, guardians, administrators or successors.
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SECTION 12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity and enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or entity
or any circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid and unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons, entities or circumstances shall not be affected by
such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any other jurisdiction.
SECTION 13. Stop Transfer Order. In furtherance of this Agreement,
concurrently herewith Shareholder shall and hereby does authorize Parent and
Merger Sub to notify the Company's transfer agent that there is a stop transfer
order with respect to all of the Shares subject to the terms of this Agreement
(and that this Agreement places limits on the voting and transfer of the
Shares). Shareholder further agrees to cause the Company not to register the
transfer of any certificate representing any of Shareholder's Shares unless such
transfer is made in accordance with the terms of this Agreement.
SECTION 14. Further Action. From time to time, at the request of Parent or
Merger Sub and without further consideration, Shareholder shall execute and
deliver to Parent and Merger Sub such documents and take such action as Parent
or Merger Sub may reasonably request in order to consummate the transactions
contemplated hereby.
SECTION 15. Termination. Except for Section 5(b), this Agreement shall
terminate and be of no further force and effect upon the earliest to occur of
(a) the Effective Time and (b) sixty (60) days after the termination of the
Merger Agreement pursuant to its terms; provided, however, that nothing herein
shall relieve any party for liability for any breach hereof. Section 5(b) shall
terminate in accordance with its terms.
SECTION 16. Survival. None of the representations, warranties, covenants
and other agreements in this Agreement or in any instrument delivered pursuant
to this Agreement, including any rights arising out of any breach of such
representations and warranties, covenants and other agreements, shall survive
the termination of this Agreement pursuant to Section 15, except for this
Section 16 and Sections 8, 9, 11, 18, 19 and 20.
SECTION 17. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 18. Specific Performance. Shareholder, Parent and Merger Sub
acknowledge that this Agreement and the Shares are unique and that no party will
have an adequate remedy at law if any other party breaches any covenant herein
or fails to perform its obligations hereunder. Accordingly, Shareholder, Parent
and Merger Sub agree that the others shall have the right, in addition to any
other rights which it may have, to specific performance and equitable injunctive
relief if any party shall fail or threaten to fail to perform any of its
obligations under this Agreement.
SECTION 19. Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense.
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SECTION 20. Shareholder Capacity. Shareholder signs solely in his capacity
as the record holder and beneficial owner of the Shares and nothing herein shall
limit or affect any actions taken or to be taken by any officer, director or
financial advisor of the Company or its subsidiaries in his, her or its capacity
as an officer, director or financial advisor of the Company, subject to the
Merger Agreement.
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IN WITNESS WHEREOF, each of the parties has executed or caused this
Agreement to be executed on its behalf by its representatives thereunto duly
authorized, all as of the day and year first above written.
SAFEWAY INC.
By: /s/ MICHAEL C. ROSS
--------------------------------------
Name: Michael C. Ross
- --------------------------------------------------------------------------------
Title: Senior Vice President and
Secretary
--------------------------------------
SI MERGER SUB, INC.
By: /s/ MICHAEL C. ROSS
--------------------------------------
Name: Michael C. Ross
- --------------------------------------------------------------------------------
Title: Vice President and
Secretary
--------------------------------------
R. RANDALL ONSTEAD, JR.
/s/ R. RANDALL ONSTEAD, JR.
--------------------------------------
Shareholder Holds:
203,336 Shares of Common Stock
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ANNEX E
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
AMENDMENT, dated as of July 22, 1999 (this "Amendment"), among Safeway Inc.
(successor to Safeway Stores Holdings Corporation), a Delaware corporation (the
"Company"), KKR Partners II, L.P., a Delaware limited partnership ("KKR
Partners"), SSI Associates, L.P., a Delaware limited partnership ("SSI
Associates"), Dart/SSI Associates, L.P., a Delaware limited partnership
("Dart/SSI"), SSI Equity Associates, L.P., a Delaware limited partnership ("SSI
Equity"), KKR Associates, a New York limited partnership ("KKR Associates"), SSI
Partners, L.P., a Delaware limited partnership ("SSI Partners"), and RFM
Acquisition LLC, a Delaware limited liability company ("RFM").
WITNESSETH:
WHEREAS, the Company, KKR Partners, SSI Associates, Dart/SSI, SSI Equity,
KKR Associates and SSI Partners are party to a Registration Rights Agreement,
dated as of November 25, 1986 (as amended, supplemented and modified to date,
the "Registration Rights Agreement");
WHEREAS, pursuant to the Registration Rights Agreement, the Company has
granted certain registration rights to the stockholders party thereto;
WHEREAS, contemporaneously with the execution and delivery of this
Amendment, the Company, SI Merger Sub, Inc., a Texas corporation ("Merger Sub"),
and Randall's Food Markets, Inc., a Texas corporation, are entering into an
Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement");
WHEREAS, pursuant to the Merger Agreement, RFM will receive shares of
common stock, par value $.01 per share, of the Company (such shares, the "New
Shares");
WHEREAS, contemporaneously with the execution and delivery of this
Amendment and as a condition to entering into the Merger Agreement, RFM has
agreed to enter into a Voting Agreement (the "Voting Agreement") with the
Company and Merger Sub, dated as of the date hereof; and
WHEREAS, in consideration for RFM entering into the Voting Agreement, the
Company has agreed to enter into this Amendment to grant to RFM registration
rights with respect to the New Shares.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and in consideration of the premises, the parties
hereto hereby agree as follows:
SECTION I.
AMENDMENTS
1.1 Defined Terms. Unless otherwise defined herein, capitalized terms
which are defined in the Registration Rights Agreement are used herein as
defined therein.
1.2 Amendment to Section 2 (Definitions).
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(a) Section 2 of the Registration Rights Agreement is hereby amended
by inserting the following new definition in the appropriate alphabetical
order:
Randall's Merger Agreement -- that certain Agreement and Plan of
Merger, dated as of July 22, 1999, among the Company, SI Merger Sub, Inc.
and Randall's Food Markets, Inc.
(b) Section 2 of the Registration Rights Agreement is hereby amended
by deleting therefrom the definition of the following defined term in its
entirety and inserting in lieu thereof the following new definition in the
appropriate alphabetical order:
Registrable Securities -- Any Common Stock issued or issuable (a)
pursuant to, or acquired upon exercise of Warrants issued or issuable
pursuant to, a Purchase Agreement, any Common Stock which may be issued or
distributed in respect thereof by way of stock dividend or stock split or
other distribution, recapitalization or reclassification, and any Warrants
issued or issuable pursuant to a Purchase Agreement; provided such Warrants
are sold to the underwriters pursuant to an agreement which requires such
underwriters to exercise the Warrants and to include the Common Stock
acquired thereby in the registered public offering or (b) to RFM
Acquisition LLC in connection with the merger pursuant to the Randall's
Merger Agreement. As to any particular Registrable Securities, once issued
such Securities shall cease to be Registrable Securities when (i) a
registration statement with respect to the sale of such Securities shall
have become effective under the Securities Act and such Securities shall
have been disposed of in accordance with such registration statement, (ii)
they shall have been distributed to the public pursuant to Rule 144 (or any
successor provision) under the Securities Act, (iii) they shall have been
otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent disposition of them shall not require registration or
qualification of them under the Securities Act or any state securities or
blue sky law then in force, or (iv) they shall have ceased to be
outstanding.
1.3 Amendment to Section 4. Subsection 4(c) of the Registration Rights
Agreement is hereby amended by deleting from the second line thereof "six (6)"
and inserting in lieu thereof: "eight (8)".
SECTION II.
OTHER AGREEMENTS
2.1 Agreement to be Bound. RFM hereby agrees to be bound by the provisions
of the Registration Rights Agreement applicable to a Holder.
2.2 Acknowledgment of the Company. The Company hereby acknowledges and
agrees that, pursuant to this Amendment and the Registration Rights Agreement as
amended hereby, RFM shall be a Holder (as defined in the Registration Rights
Agreement) and entitled to all rights of a Holder under the Registration Rights
Agreement.
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SECTION III.
MISCELLANEOUS
3.1 Conditions to Effectiveness of Amendment. This Amendment shall become
effective upon the Effective Time (as defined in the Merger Agreement).
3.2 Successors and Assigns; Participations and Assignments. This Amendment
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
3.3 Counterparts. This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts (including by
facsimile transmission), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
3.4 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
3.5 Integration. This Amendment represents the agreement of the parties
hereto with respect to the subject matter hereof and thereof, and there are no
promises, undertakings, representations or warranties by the parties hereto
relative to the subject matter hereof and thereof not expressly set forth or
referred to herein.
3.6 Continuing Effect; No Other Amendments. Except as expressly amended
hereby, all of the terms and provisions of the Registration Rights Agreement are
and shall remain in full force and effect. The amendments provided for herein
are limited to the specific subsections of the Registration Rights Agreement
specified herein and shall not constitute a consent, amendment or waiver of, or
an indication of the willingness of the parties thereto to consent to, amend or
waive, any other provisions of the Registration Rights Agreement or the same
subsections for any other date or time period (whether or not such other
provisions or compliance with such subsections for another date or time period
are affected by the circumstances addressed in this Amendment).
3.7 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED THEREIN.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
SAFEWAY INC.
(successor to Safeway Stores Holdings
Corporation)
By: /s/ MICHAEL C. ROSS
-----------------------------------
Name: Michael C. Ross
Title: Senior Vice President and
Secretary
KKR PARTNERS II, L.P.
By: KKR Associates,
the General Partner
By: /s/ JAMES H. GREENE, JR.
-----------------------------------
Name: James H. Greene, Jr.
Title: General Partner
SSI ASSOCIATES, L.P.
By: KKR Associates,
the General Partner
By: /s/ JAMES H. GREENE, JR.
-----------------------------------
Name: James H. Greene, Jr.
Title: General Partner
DART/SSI ASSOCIATES, L.P.
By: SSI Associates, L.P. and
KKR Partners II, L.P.,
the General Partners
By: KKR Associates,
the General Partner
By: /s/ JAMES H. GREENE, JR.
-----------------------------------
Name: James H. Greene, Jr.
Title: General Partner
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<PAGE> 155
SSI EQUITY ASSOCIATES, L.P.
By: SSI Partners, L.P.,
the General Partner
By: /s/ JAMES H. GREENE, JR.
-----------------------------------
Name: James H. Greene, Jr.
Title: Authorized Signatory
SSI PARTNERS, L.P.
By: /s/ JAMES H. GREENE, JR.
-----------------------------------
Name: James H. Greene, Jr.
Title: Authorized Signatory
RFM ACQUISITION LLC
By: /s/ JAMES H. GREENE, JR.
-----------------------------------
Name: James H. Greene, Jr.
Title: President
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<PAGE> 156
ANNEX F
<TABLE>
<S> <C>
Investment Banking
Corporate and Institutional
Client Group
World Financial Center
North Tower
New York, New York 10281-1320
[MERRILL LYNCH LOGO] 212 449 1000
</TABLE>
July 22, 1999
The Board of Directors
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas 77042
Members of the Board of Directors:
Randall's Food Markets, Inc. (the "Company"), Safeway, Inc. (the
"Acquiror") and SI Merger Sub, Inc., a newly formed, wholly owned subsidiary of
the Acquiror (the "Acquisition Sub"), entered into an Agreement and Plan of
Merger, dated July 22, 1999 (the "Agreement"), pursuant to which the Company
would be merged, in a tax free reorganization, with and into the Acquisition Sub
in a merger transaction (the "Merger Transaction") in which each outstanding
share of common stock, par value $.25 per share, of the Company (the "Company
Shares"), other than Company Shares held in treasury or held by Acquiror,
Acquisition Sub, the Company or any wholly-owned subsidiary of Acquiror or the
Company, or as to which dissenter's rights have been perfected, would be
converted into the right to receive (i) $25.05 in cash and (ii) 0.3204 shares
(the "Exchange Ratio") of common stock, par value $.01 per share, of Acquiror
(the "Acquiror Common Stock," and collectively the "Consideration").
You have asked us whether, in our opinion, the Consideration to be received
by the holders of the Company Shares pursuant to the Merger Transaction is fair
from a financial point of view to such holders, other than the Acquiror and its
affiliates.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and Acquiror that we deemed to be
relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Company furnished to us by the Company;
(3) Conducted discussions with members of senior management of the
Company concerning the matters described in clauses 1 and 2 above;
(4) Conducted discussions with senior management of Acquiror to
discuss certain publicly available business and financial information and
financial forecasts relating to Acquiror;
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(5) Reviewed the results of operations of the Company and Acquiror and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Merger Transaction
with the financial terms of certain other transactions that we deemed to be
relevant;
(7) Reviewed the market prices and valuation multiples for the
Acquiror Common Stock and compared them with those of certain publicly
traded companies that we deemed to be relevant;
(8) Participated in certain discussions among representatives of the
Company and the Acquiror and their financial and legal advisors;
(9) Reviewed the Agreement;
(10) Reviewed the potential pro forma impact of the Merger; and
(11) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or Acquiror or been furnished with any such
evaluation or appraisal. We have not been furnished any non-public information
concerning Acquiror, including any financial forecasts. In addition, we have not
assumed any obligation to conduct, and we have not conducted, any physical
inspection of the properties or facilities of the Company or Acquiror. With
respect to the financial forecast information furnished to or discussed with us
by the Company, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgment of the Company's
management as to the expected future financial performance of the Company.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory approvals or other consents or approvals (contractual or
otherwise) for the Merger Transaction, no restrictions, including any
divestiture requirements or amendments or modifications, will be imposed that
will have a material adverse effect on the contemplated benefits of the Merger
Transaction.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors of the Company to solicit,
nor have we solicited, third-party indications of interest for the acquisition
of all or any part of the Company.
We are acting as financial advisor to the Independent Members of the Board
of Directors of the Company in connection with the Merger Transaction. However,
this opinion is for the use and benefit of the Board of Directors of the
Company. We will receive a fee from the Company for our services. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We have, in the past, provided financial advisory and financing
services to the Acquiror, and/or its affiliates and
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may continue to do so and have received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of our business, we may
actively trade securities of the Company, as well as securities of the Acquiror
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
Our opinion does not address the merits of the underlying decision by the
Company to engage in the Merger Transaction and does not constitute a
recommendation to any shareholder as to how such shareholder should vote on the
proposed Merger Transaction or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Acquiror Common Stock will trade following the announcement or consummation of
the Merger Transaction.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration to be received by the holders of the
Company Shares pursuant to the Merger Transaction is fair from a financial point
of view to the holders of such shares, other than the Acquiror and its
affiliates.
Very truly yours,
/s/ MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
--------------------------------------
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
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<PAGE> 159
ANNEX G
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and
the shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise
provided in the articles of incorporation) of all, or substantially all,
the property and assets, with or without good will, of a corporation if
special authorization of the shareholders is required by this Act and the
shareholders hold shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:
(1) the shares held by the shareholder are part of a class or series,
shares of which are on the record date fixed to determine the shareholders
entitled to vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation
system) or designated as a national market security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc., or successor entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger
or plan of exchange to accept for the shareholder's shares any
consideration that is different than the consideration (other than cash in
lieu of fractional shares that the shareholder would otherwise be entitled
to receive) to be provided to any other holder of shares of the same class
or series of shares held by such shareholder; and
(3) the shareholder is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any
consideration other than:
(a) shares of a domestic or foreign corporation that, immediately
after the effective time of the merger or exchange, will be part of a
class or series, shares of which are:
(i) listed, or authorized for listing upon official notice of
issuance, on a national securities exchange;
(ii) approved for quotation as a national market security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc., or successor entity; or
(iii) held of record by not less than 2,000 holders;
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<PAGE> 160
(b) cash in lieu of fractional shares otherwise entitled to be
received; or
(c) any combination of the securities and cash distributed in
Subdivisions (a) and (b) of this subsection.
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTION
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1)(a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a copy
of this Article and any articles or documents filed by the corporation with
the Secretary of State to effect the action. If the shareholder shall not
have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
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(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
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the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
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B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
G-5
<PAGE> 164
ANNEX H
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 1-41
SAFEWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3019135
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5918 STONERIDGE MALL ROAD
PLEASANTON, CALIFORNIA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 467-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<C> <S> <C>
Common Stock, $0.01 par value per share New York Stock Exchange
9.30% Senior Secured Debentures due 2007 New York Stock Exchange
10% Senior Notes due 2002 New York Stock Exchange
9.35% Senior Subordinated Notes due 1999 New York Stock Exchange
10% Senior Subordinated Notes due 2001 New York Stock Exchange
9.65% Senior Subordinated Debentures due 2004 New York Stock Exchange
9.875% Senior Subordinated Debentures due 2007 New York Stock Exchange
6.85% Senior Notes due 2004 New York Stock Exchange
7.00% Senior Notes due 2007 New York Stock Exchange
7.45% Senior Debentures due 2027 New York Stock Exchange
5.75% Notes due 2000 New York Stock Exchange
5.875% Notes due 2001 New York Stock Exchange
6.05% Notes due 2003 New York Stock Exchange
6.50% Notes due 2008 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the voting stock held by non-affiliates of
Registrant as of March 16, 1999, was $25.0 billion.
As of March 16, 1999, there were issued and outstanding 495.6 million shares
of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the extent
specified herein:
<TABLE>
<CAPTION>
DOCUMENT DESCRIPTION 10-K PART
-------------------- ---------
<S> <C>
1998 Annual Report to Stockholders I, II, III, IV
1999 Proxy Statement dated March 24, 1999 III
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
H-1
<PAGE> 165
SAFEWAY INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES
GENERAL
Information appearing on pages 4 through 14 of the Company's 1998 Annual
Report to Stockholders is incorporated herein by this reference.
CAPITAL EXPENDITURES
Information appearing under the caption "Capital Expenditure Program" on
page 14 of the Company's 1998 Annual Report to Stockholders is incorporated
herein by this reference.
Safeway's new stores, remodels, and closures during the last five years
were as follows:
<TABLE>
<CAPTION>
TOTAL
FIVE
YEARS 1998 1997 1996 1995 1994
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
New stores:
New locations................... 73 28 15 14 10 6
Replacements.................... 92 18 22 16 22 14
--- ----- ----- ----- ----- -----
165 46 37 30 32 20
=== ===== ===== ===== ===== =====
Remodels: (Note A)
Expansions...................... 111 28 34 29 13 7
"Four-Wall" remodels............ 624 206 147 112 95 64
--- ----- ----- ----- ----- -----
735 234 181 141 108 71
=== ===== ===== ===== ===== =====
Dominick's stores acquired........ 113 113 -- -- -- --
Vons stores acquired.............. 316 -- 316 -- -- --
Closures.......................... 175 30 37 37 35 36
Stores at year-end................ 1,497 1,368 1,052 1,059 1,062
</TABLE>
- ---------------
Note A. Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Note L to the consolidated financial statements, included on page 36 of the
Company's 1998 Annual Report to Stockholders, is incorporated herein by this
reference.
TRADEMARKS
Safeway Inc. ("Safeway" or the "Company") has invested significantly in the
development and protection of the "Safeway" name. The right to use the "Safeway"
name is considered to be an important asset. Safeway also owns approximately 100
other trademarks registered or pending in the United States Patent and Trademark
Office, including its product line names such as Safeway, Safeway SELECT,
Lucerne and Mrs. Wright's, and the marks Vons, Pavilions and Dominick's. Each
trademark registration is for an initial period of 10 or 20 years and is
renewable for as long as the use of the trademark continues. Safeway considers
certain of its trademarks to be of material importance to its business and
actively defends and enforces such trademarks. Safeway has also registered
certain of its trademarks in Canada.
H-2
<PAGE> 166
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
WORKING CAPITAL
At year-end 1998, working capital deficit was composed of $2.3 billion of
current assets and $2.9 billion of current liabilities. Normal operating
fluctuations in these substantial balances can result in changes to cash flow
from operations presented in the Consolidated Statements of Cash Flows that are
not necessarily indicative of long-term operating trends. There are no unusual
industry practices or requirements relating to working capital items.
COMPETITION
Food retailing is intensely competitive. The number of competitors and the
amount of competition experienced by Safeway's stores vary by market area. The
principal competitive factors that affect the Company's business are location,
quality, service, price and consumer loyalty to other brands and stores.
Local, regional, and national food chains as well as independent food
stores and markets comprise the Company's principal competition, although
Safeway also faces substantial competition from convenience stores, liquor
retailers, membership warehouse clubs, specialty retailers, supercenters, and
large-scale drug and pharmaceutical chains. Safeway and its competitors engage
in price competition which, from time to time, has adversely affected operating
margins in many of the Company's markets.
RAW MATERIALS
Various agricultural commodities constitute the principal raw materials
used by the Company in the manufacture of its food products. Management believes
that raw materials for its products are not in short supply, and all are readily
available from a wide variety of independent suppliers.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company's compliance with the federal, state, and local provisions
which have been enacted or adopted regulating the discharge of materials into
the environment or otherwise relate to the protection of the environment has not
had and is not expected to have a material adverse effect upon the financial
position or results of operations of the Company.
EMPLOYEES
At year-end 1998, Safeway had approximately 170,000 full and part-time
employees. Approximately 90% of Safeway's employees in the United States and
Canada are covered by collective bargaining agreements negotiated with local
unions affiliated with one of 12 different international unions. There are
approximately 400 such agreements, typically having three-year terms, with some
agreements having terms of up to five years. Accordingly, Safeway renegotiates a
significant number of these agreements every year.
In the last three years there have been three significant work stoppages.
During the second quarter of 1997, Safeway was engaged in a 75-day labor dispute
affecting 74 stores in the Alberta, Canada operating area. The Company continued
to operate the affected stores with a combination of replacement workers,
management, and employees who
H-3
<PAGE> 167
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
returned to work. During the second and third quarters of 1996, Safeway was
engaged in a labor dispute in British Columbia which lasted 40 days and affected
86 stores. Under Provincial law in British Columbia, replacement workers could
not be hired, and therefore all the affected stores were closed throughout the
strike-lockout. Separately, the Company was engaged in a strike-lockout in the
Denver operating area which lasted 44 days also during the second and third
quarters of 1996. All of the Denver stores operated during the strike-lockout,
largely with replacement workers. These work stoppages were resolved in a manner
that management considered generally satisfactory. Safeway estimates that the
Alberta strike reduced 1997 net income by approximately $0.04 per share and that
the combined impact of the disputes in Denver and British Columbia reduced 1996
earnings by approximately $0.07 per share.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Note L to the consolidated financial statements, included on page 36 of the
Company's 1998 Annual Report to Stockholders and incorporated herein by this
reference, contains financial information by geographic area.
ITEM 3. LEGAL PROCEEDINGS
Information about legal proceedings appearing under the caption "Legal
Matters" as reported in Note K to the consolidated financial statements on pages
35 and 36 of the Company's 1998 Annual Report to Stockholders is incorporated
herein by this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter of 1998.
H-4
<PAGE> 168
SAFEWAY INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of the current executive officers of the Company and
their positions as of March 16, 1999, are set forth below. Unless otherwise
indicated, each of the executive officers served in various managerial
capacities with the Company over the past five years. None of the executive
officers named below is related to any other executive officer or director by
blood, marriage or adoption. Officers serve at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
YEAR FIRST ELECTED
------------------
NAME AND ALL POSITIONS WITH THE COMPANY PRESENT
HELD AT MARCH 16, 1999 AGE OFFICER OFFICE
--------------------------------------- --- ------- -------
<S> <C> <C> <C>
Steven A. Burd.............................................. 49 1992 1993
Chairman, President and
Chief Executive Officer
Kenneth W. Oder............................................. 51 1993 1993
Executive Vice President Labor Relations, Human Resources,
Law, Public Affairs and Information Technology
David G. Weed............................................... 47 1992 1998
Executive Vice President and
Chief Financial Officer
David F. Bond(1)............................................ 45 1997 1997
Senior Vice President Finance
and Control
David T. Ching(2)........................................... 46 1994 1994
Senior Vice President and
Chief Information Officer
Dick W. Gonzales(3)......................................... 52 1998 1998
Senior Vice President
Human Resources
Lyman C. Gordon............................................. 52 1993 1998
Senior Vice President
Strategic Development
Lawrence V. Jackson(4)...................................... 45 1997 1997
Senior Vice President
Supply Operations
Melissa C. Plaisance........................................ 39 1993 1995
Senior Vice President Finance
and Public Affairs
Larree M. Renda............................................. 40 1991 1994
Senior Vice President
Corporate Retail Operations
Michael C. Ross............................................. 51 1993 1993
Senior Vice President
Secretary and General Counsel
</TABLE>
H-5
<PAGE> 169
SAFEWAY INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
<TABLE>
<CAPTION>
YEAR FIRST ELECTED
------------------
NAME AND ALL POSITIONS WITH THE COMPANY PRESENT
HELD AT MARCH 16, 1999 AGE OFFICER OFFICE
--------------------------------------- --- ------- -------
<S> <C> <C> <C>
Gary D. Smith............................................... 56 1988 1995
Senior Vice President and Director of Marketing
Richard A. Wilson........................................... 65 1988 1988
Vice President Tax
Donald P. Wright............................................ 46 1991 1991
Senior Vice President
Real Estate and Engineering
</TABLE>
- ---------------
(1) Mr. Bond was previously a partner at the accounting firm of Deloitte &
Touche LLP.
(2) During 1994, Mr. Ching was the General Manager -- North America for the
British American Consulting Group. From 1979 to 1994, he was employed by
Lucky Stores, Inc., where he was the Senior Vice President of Information
Systems beginning in 1989.
(3) Mr. Gonzales held the positions of Group Vice President -- Human Resources,
and Senior Vice President -- Human Resources at The Vons Companies, Inc.
from 1993 to 1998.
(4) Mr. Jackson was previously the Senior Vice President, Worldwide Operations
of PepsiCo Food Systems, a division of PepsiCo, Inc., from 1995 - 97, and
Vice President and General manager of Pepsi-Cola Company, a unit of PepsiCo,
Inc., from 1992 - 95.
Section 16(a) Beneficial Ownership. Information appearing under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1999
Proxy Statement is incorporated herein by this reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value, is listed on the New York
Stock Exchange. Information as to quarterly sales prices for the Company's
common stock appears in Note N to the consolidated financial statements on page
38 of the Company's 1998 Annual Report to Stockholders and is incorporated
herein by this reference. There were 9,979 stockholders of record as of March
16, 1999; however, approximately 88% of the Company's outstanding stock is held
in "street name" by depositories or nominees on behalf of beneficial holders.
The price per share of common stock, as reported on the New York Stock Exchange
Composite Tape, was $55 13/16 at the close of business on March 16, 1999.
Holders of common stock are entitled to receive dividends if, as, and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued. The Company has not paid dividends on common stock through 1998 and
has no current plans for dividend payments.
H-6
<PAGE> 170
SAFEWAY INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
The "Five-Year Summary Financial Information" included on page 15 of the
Company's 1998 Annual Report to Stockholders is incorporated herein by this
reference. The Five-Year Summary should be read in conjunction with the
Company's consolidated financial statements and accompanying notes incorporated
by reference in Item 8, Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information appearing under the caption "Financial Review" on pages 16
through 18 and under the captions "Capital Expenditure Program" and "Market Risk
from Financial Instruments" on page 14 of the Company's 1998 Annual Report to
Stockholders is incorporated herein by this reference.
Information regarding the terms of outstanding indebtedness appearing in
Note C to the consolidated financial statements on pages 28 and 29 of the
Company's 1998 Annual Report to Stockholders is incorporated herein by this
reference.
Information appearing under the caption "Year 2000 Compliance" on page 18
of the Company's 1998 Annual Report to Stockholders is incorporated herein by
this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information appearing under the caption "Market Risk from Financial
Instruments" on page 14 of the Company's 1998 Annual Report to Stockholders is
incorporated herein by this reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Pages 19 through 39 of the Company's 1998 Annual Report to Stockholders,
which include the consolidated financial statements and the Independent
Auditors' Report as listed in Item 14(a)1, are incorporated herein by this
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
Directors of the Company. Information on the nominees for election as
Directors and the continuing Directors of the Company, which appears under the
caption "Election of Directors" in the Company's 1999 Proxy Statement, is
incorporated herein by this reference.
Executive Officers of the Company. See PART I under the caption "Executive
Officers of the Company".
H-7
<PAGE> 171
SAFEWAY INC. AND SUBSIDIARIES
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the captions "Executive Compensation" and
"Pension Plans" in the Company's 1999 Proxy Statement is incorporated herein by
this reference. Information appearing under the captions "Report of the
Compensation and Stock Option Committee; Report of the Section 162(m) Committee"
and "Stock Performance Graph" in the Company's 1999 Proxy Statement is not
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Beneficial Ownership of
Securities" in the Company's 1999 Proxy Statement is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note J to the consolidated financial statements, included on page 34 of the
Company's 1998 Annual Report to Stockholders, and the captions "Certain
Relationships and Transactions" and "Compensation Committee Interlocks and
Insider Participation" in the Company's 1999 Proxy Statement contain information
about certain relationships and related transactions and are incorporated herein
by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements of the Company are incorporated by
reference in PART II, Item 8:
Consolidated Statements of Income for fiscal 1998, 1997, and 1996.
Consolidated Balance Sheets as of the end of fiscal 1998 and 1997.
Consolidated Statements of Cash Flows for fiscal 1998, 1997, and 1996.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for fiscal 1998, 1997, and 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Consolidated Financial Statement Schedules:
None required
H-8
<PAGE> 172
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
3. The following exhibits are filed as part of this report:
<TABLE>
<S> <C>
Exhibit 2.1 Agreement and Plan of Merger, dated as of October 13,
1998, by and among Safeway Inc., Windy City Acquisition
Corp. and Dominick's Supermarkets, Inc. (incorporated
by reference to Exhibit (c)(1) of the Schedule 14D-1 of
Safeway Inc., dated October 19, 1998).
Exhibit 2.2 Stockholders Agreement, dated as of October 13, 1998,
by and among Safeway Inc., Windy City Acquisition Corp.
and each of the stockholders of Dominick's
Supermarkets, Inc. (incorporated by reference to
Exhibit (c)(2) of the Schedule 14D-1 of Safeway Inc.,
dated October 19, 1998).
Exhibit 2.3 Agreement and Plan of Merger Dated as of August 6, 1998
among Carr-Gottstein Foods Co., Safeway Inc. and ACG
Merger Sub, Inc. and Stockholder Support Agreement
dated August 6, 1998 entered into by Green Equity
Investors, L.P. for the benefit of Safeway Inc.
(incorporated by reference to Exhibit 2.1 of the
Registrant's Form 10-Q for the quarterly period ended
September 12, 1998).
Exhibit 2.4 Amended and Restated Stock Purchase Agreement, dated as
of January 8, 1997 by and between Safeway Inc. and SSI
Associates, L.P. (incorporated by reference to Exhibit
2.1 to Registrant's Current Report on Form 8-K dated
January 8, 1997).
Exhibit 3.1 Restated Certificate of Incorporation of the Company
and Certificate of Amendment of Restated Certificate of
Incorporation by the Company (incorporated by reference
to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 15, 1996)
and Certificate of Amendment of Restated Certificate of
Incorporation of Safeway Inc. (incorporated by
reference to Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
20, 1998).
Exhibit 3.2 Form of By-laws of the Company as amended (incorporated
by reference to Exhibit 3.2 to Registration Statement
No. 33-33388), and Amendment to the Company's By-laws
effective March 8, 1993 (incorporated by reference to
Exhibit 3.2 to Registrant's Form 10-K for the year
ended January 2, 1993).
Exhibit 4(i).1 Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4(i).2 to Registration Statement
No. 33-33388).
Exhibit 4(i).2 Registration Rights Agreement dated November 25, 1986
between the Company and certain limited partnerships
(incorporated by reference to Exhibit 4(i).4 to
Registration Statement No. 33-33388).
</TABLE>
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<PAGE> 173
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C>
Exhibit 4(i).3 Indenture dated as of November 20, 1991 between the
Company and The Bank of New York, as Trustee, relating
to the Company's Senior Subordinated Debt Securities
(incorporated by reference to Exhibit 4.1 of
Registrant's Form 8-K dated November 13, 1991), as
supplemented by the Supplemental Indenture dated as of
September 4, 1997 (incorporated by reference to Exhibit
4(i).3 to Registrant's Form 10-K for the year ended
January 3, 1998).
Exhibit 4(i).4 Form of Officers' Certificate establishing the terms of
the 10% Senior Subordinated Notes due December 1, 2001,
including the form of Note (incorporated by reference
to Exhibit 4.4 of Registrant's Form 8-K dated November
13, 1991).
Exhibit 4(i).5 Form of Officers' Certificate establishing the terms of
the 9.65% Senior Subordinated Debentures due January
15, 2004, including the form of Debenture (incorporated
by reference to Exhibit 4.1 of Registrant's Form 8-K
dated January 15, 1992).
Exhibit 4(i).6 Indenture dated as of February 1, 1992 between the
Company and The First National Bank of Chicago, as
Trustee, relating to the Company's 9.30% Senior Secured
Debentures due 2007, including the form of Debenture
and the forms of Deed of Trust and Environmental
Indemnity Agreement attached as exhibits thereto
(incorporated by reference to Exhibit 4(i).14 of
Registrant's Form 10-K for the year ended December 28,
1991), as supplemented by the Supplemental Indenture
dated as of September 4, 1997 (incorporated by
reference to Exhibit 4(i).6 to Registrant's Form 10-K
for the year ended January 3, 1998).
Exhibit 4(i).7 Indenture dated as of March 15, 1992 between the
Company and Harris Trust and Savings Bank, as Trustee,
relating to the Company's Senior Subordinated Debt
Securities (incorporated by reference to Exhibit 4.1 of
Registrant's Form 8-K dated March 17, 1992), as
supplemented by the Supplemental Indenture dated as of
September 4, 1997 (incorporated by reference to Exhibit
4(i).7 to Registrant's Form 10-K for the year ended
January 3, 1998).
Exhibit 4(i).8 Form of Officers' Certificate establishing the terms of
the 9.35% Senior Subordinated Notes due March 15, 1999
and the 9.875% Senior Subordinated Debentures due March
15, 2007, including the form of Note and form of
Debenture (incorporated by reference to Exhibit 4.2 of
Registrant's Form 8-K dated March 17, 1992).
</TABLE>
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SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C>
Exhibit 4(i).9 Indenture dated as of September 1, 1992 between the
Company and The Chase Manhattan Bank (National
Association), as Trustee, relating to the Company's
Debt Securities (incorporated by reference to Exhibit
4.1 of Registrant's Form 8-K dated September 16, 1992),
as supplemented by the Supplemental Indenture dated as
of September 4, 1997 (incorporated by reference to
Exhibit 4(i).9 to Registrant's Form 10-K for the year
ended January 3, 1998).
Exhibit 4(i).10 Form of Officers' Certificate relating to the Company's
Fixed Rate Medium-Term Notes and the Company's Floating
Rate Medium-Term Notes, form of Fixed Rate Note and
form of Floating Rate Note (incorporated by reference
to Exhibits 4.2, 4.3 and 4.4 of Registrant's Form 8-K
dated September 16, 1992).
Exhibit 4(i).11 Form of Officers' Certificate establishing the terms of
a separate series of Safeway Inc.'s Medium-Term Notes
entitled 10% Senior Notes due November 1, 2002,
including the form of Note (incorporated by reference
to Exhibits 4.1 and 4.2 of Registrant's Form 8-K dated
November 5, 1992).
Exhibit 4(i).12 Form of Officers' Certificate establishing the terms of
a separate series of Safeway Inc.'s Medium-Term Notes
entitled Medium-Term Notes due June 1, 2003 (Series
OPR-1), including the form of Note (incorporated by
reference to Exhibits 4.1 and 4.2 of Registrant's Form
8-K dated June 1, 1993).
Exhibit 4(i).13 Common Stock Purchase Warrants to purchase 14,148,969
shares of Safeway Inc. common stock (incorporated by
reference to Exhibit 4(i).13 to Registrant's Form 10-K
for the year ended January 3, 1998) and Amendment to
Safeway Inc. Common Stock Purchase Warrant dated as of
January 29, 1999 (incorporated by reference to Exhibit
A to Registrant's Form 8-K dated February 11, 1999).
Exhibit 4(i).14 Credit Agreement dated as of April 8, 1997 among
Safeway Inc., The Vons Companies, Inc. and Canada
Safeway Limited as Borrowers; Bankers Trust Company as
Administrative Agent; The Chase Manhattan Bank as
Syndication Agent; The Bank of Nova Scotia and Bank of
America National Trust and Savings Association as
Documentation Agents; the agents listed therein as
Agents; and the lenders listed therein as Lenders.
(incorporated by reference to Exhibit 4(i).1 of the
Registrant's Form 10-Q for the quarterly period ended
March 22, 1997).
Exhibit 4(i).15 Indenture, dated as of September 10, 1997, between
Safeway Inc. and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.1 to
Registrant's Form 8-K dated September 10, 1997).
</TABLE>
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SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C>
Exhibit 4(i).16 Form of Officers' Certificate establishing the terms of
the Registrant's 6.85% Senior Notes due 2004, the
Registrant's 7.00% Senior Notes due 2007 and the
Company's 7.45% Senior Debentures due 2027, including
the forms of Notes (incorporated by reference to
Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to Registrant's
Form 8-K dated September 10, 1997).
Exhibit 4(i).17 Form of Officers' Certificate establishing the terms of
the Registrant's 5.75% Notes due 2000, 5.875% Notes due
2001, 6.05% Notes due 2003, and 6.50% Notes due 2008,
including forms of Notes (incorporated by reference to
Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to Registrant's
Form 8-K dated November 9, 1998).
Exhibit 4(i).18 The 1996 Equity Participation Plan of Dominick's
Supermarkets, Inc. (incorporated by reference to
Exhibit 10.13 to Dominick's Supermarkets, Inc.'s Form
10-K, Number 1-12353).
Exhibit 4(i).19 The 1995 Amended and Restated Stock Option Plan of
Dominick's Supermarkets, Inc. (incorporated by
reference to Exhibit 10.12 to Dominick's Supermarkets,
Inc.'s Form 10-K, Number 1-12353).
Exhibit 4(i).20 Form of Amendment to Stock Option Agreements under The
1996 Equity Participation Plan of Dominick's
Supermarkets, Inc., and the 1995 Amended and Restated
Stock Option Plan of Dominick's Supermarkets, Inc.
(incorporated by reference to Exhibit 4.5 to
Registrant's Registration on Form S-8 No. 333-67575
dated November 19, 1998).
Exhibit 4(iii) Registrant agrees to provide the Securities and
Exchange Commission, upon request, with copies of
instruments defining the rights of holders of long-term
debt of the Registrant and all of its subsidiaries for
which consolidated financial statements are required to
be filed with the Securities and Exchange Commission.
Exhibit 10(iii).1* Safeway Inc. Outside Director Equity Purchase Plan
(incorporated by reference to Exhibit 4.1 to
Registration Statement No. 33-36753), and First
Amendment to the Safeway Inc. Outside Director Equity
Purchase Plan dated as of July 5, 1994 (incorporated by
reference to Exhibit 10(iii).1 to Registrant's Form
10-Q for the quarterly period ended September 10,
1994).
Exhibit 10(iii).2* Share Appreciation Rights Plan of Canada Safeway
Limited (incorporated by reference to Exhibit
10(iii).17 to Registrant's Form 10-K for the year ended
December 29, 1990) and Amendment No. 1 thereto dated
December 13, 1991 (incorporated by reference to Exhibit
10(iii).17 to Registrant's Form 10-K for the year ended
December 28, 1991).
</TABLE>
H-12
<PAGE> 176
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C>
Exhibit 10(iii).3* Share Appreciation Rights Plan of Lucerne Foods Ltd.
(incorporated by reference to Exhibit 10(iii).18 to
Registrant's Form 10-K for the year ended December 29,
1990) and Amendment No. 1 thereto dated December 13,
1991 (incorporated by reference to Exhibit 10(iii).18
to Registrant's Form 10-K for the year ended December
28, 1991).
Exhibit 10(iii).4* Stock Option Plan for Consultants of Safeway Inc.
(incorporated by reference to Exhibit 10(iii).7 to
Registrant's Form 10-Q for the quarterly period ending
June 19, 1993).
Exhibit 10(iii).5* First Amendment to the Stock Option Plan for
Consultants of Safeway Inc. (incorporated by reference
to Exhibit 10(iii).7 to Registrant's Form 10-K for the
year ended January 1, 1994).
Exhibit 10(iii).6* 1994 Amended and Restated Stock Option and Incentive
Plan for Key Employees of Safeway Inc. (incorporated by
reference to Exhibit 10(iii).8 to Registrant's Form
10-K for the year ended January 1, 1994) and First
Amendment thereto dated March 1, 1995 (incorporated by
reference to Exhibit 10(iii).7 of Registrant's Form
10-K/A for the year ended December 31, 1994).
Exhibit 10(iii).7* Operating Performance Bonus Plan for Executive Officers
of Safeway Inc. (incorporated by reference to Exhibit
10(iii).9 to Registrant's Form 10-K for the year ended
January 1, 1994); First Amendment thereto dated January
1, 1997. (incorporated by reference to Exhibit
10(iii).12 of Registrant's Form 10-K for the year ended
December 28, 1996); Second Amendment thereto dated
October 7, 1997; and Third Amendment thereto dated
March 10, 1998 (incorporated by reference to Exhibit
10(iii).7 of Registrant's Form 10-K for the year ended
January 2, 1998).
Exhibit 10(iii).8* Capital Performance Bonus Plan for Executive Officers
of Safeway Inc. (incorporated by reference to Exhibit
10(iii).8 of Registrant's Form 10-K for the year ended
January 2, 1998).
Exhibit 10(iii).9* Retirement Restoration Plan of Safeway Inc.
(incorporated by reference to Exhibit 10(iii).11 to
Registrant's Form 10-K for the year ended January 1,
1994).
Exhibit 10(iii).10* Deferred Compensation Plan for Safeway Directors
(incorporated by reference to Exhibit 10(iii).11 of
Registrant's Form 10-K for the year ended December 31,
1994).
Exhibit 10(iii).11* Form of stock option agreement for former directors of
The Vons Companies, Inc. (incorporated by reference to
Exhibit 10(iii).12 of Registrant's Form 10-K for the
year ended December 28, 1996).
Exhibit 10(iii).12* The Vons Companies, Inc. Management Stock Option Plan
(incorporated by reference to Exhibit 10.3 to The Vons
Companies, Inc. Annual Report on Form 10-K for the
twenty-seven weeks ended January 3, 1988).
</TABLE>
H-13
<PAGE> 177
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C>
Exhibit 10(iii).13* The Vons Companies, Inc. 1990 Stock Option and
Restricted Stock Plan (incorporated by reference to
Appendix A to The Vons Companies, Inc. Proxy Statement
for its May 17, 1990 Annual Meeting of Shareholders).
Exhibit 10(iii).14* Amendment, dated February 17, 1993, to The Vons
Companies, Inc. 1990 Stock Option and Restricted Stock
Plan (incorporated by reference to Exhibit 10.13.1 to
The Vons Companies, Inc. Form 10-Q for the quarterly
period ended March 28, 1993).
Exhibit 10(iii).15* Amendment, effective as of December 13, 1996, to The
Vons Companies, Inc. 1990 Stock Option and Restricted
Stock Plan (incorporated by reference to Exhibit 10.7.2
to The Vons Companies, Inc. Form 10-K for the fiscal
year ended December 29, 1996).
Exhibit 10(iii).16* Form of Amendments, dated April 8, 1997, to The Vons
Companies, Inc. Management Stock Option Plan and The
Vons Companies, Inc. 1990 Stock Option and Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to
Registrant's Form S-4 filed on March 5, 1997). Exhibit
11.1 Computation of Earnings per Share (incorporated by
reference to page 37 of the Company's 1998 Annual
Report to Stockholders).
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 13.1 Registrant's 1998 Annual Report to Stockholders
(considered filed to the extent specified in Item 1,
Item 2, Item 3, Item 5, Item 6, Item 7, Item 8, Item 13
and Exhibit 11.1 above).
Exhibit 22.1 Schedule of Subsidiaries
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule (electronic filing only).
</TABLE>
- ---------------
* Management contract, or compensatory plan or arrangement.
(b) Reports on Form 8-K:
On October 19, 1998 the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that on that date it had entered into an agreement
and plan of merger with Dominick's Supermarkets, Inc. pursuant to which it would
acquire all of the outstanding shares of Dominick's common stock at $49 per
share, or a total of approximately $1.2 billion.
On November 9, 1998, the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that on that date it had completed an underwritten
offering of $400 million aggregate principal amount of its 5.75% Notes due 2000,
$400 million aggregate principal amount of its 5.875% Notes due 2001, $350
million aggregate principal amount of its 6.05% Notes due 2003, and $250 million
aggregate principal amount of its 6.50% Senior Debentures due 2008 under its
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on October 20, 1998 (File no. 333-65903).
H-14
<PAGE> 178
SAFEWAY INC. AND SUBSIDIARIES
On November 24, 1998, the Company filed a Current Report on Form 8-K
stating under "Item 5. Other Events" that it had completed the previously
announced acquisition of Dominick's Supermarkets, Inc.
H-15
<PAGE> 179
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
By: /s/ STEVEN A. BURD Date: March 24, 1999
-----------------------------------
SAFEWAY INC.
Steven A. Burd
President and Chief Executive
Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
/s/ DAVID G. WEED /s/ DAVID F. BOND
- --------------------------------------- ---------------------------------------
David G. Weed David F. Bond
Executive Vice President and Senior Vice President
Chief Financial Officer Finance and Control
Date: March 24, 1999 Date: March 24, 1999
</TABLE>
<TABLE>
<CAPTION>
DIRECTOR DATE
-------- ----
<S> <C>
/s/ STEVEN A. BURD March 24, 1999
- ---------------------------------------
Steven A. Burd
/s/ JAMES H. GREENE, JR. March 24, 1999
- ---------------------------------------
James H. Greene, Jr.
/s/ PAUL HAZEN March 24, 1999
- ---------------------------------------
Paul Hazen
/s/ HENRY R. KRAVIS March 24, 1999
- ---------------------------------------
Henry R. Kravis
/s/ ROBERT I. MACDONNELL March 24, 1999
- ---------------------------------------
Robert I. MacDonnell
/s/ PETER A. MAGOWAN March 24, 1999
- ---------------------------------------
Peter A. Magowan
/s/ GEORGE R. ROBERTS March 24, 1999
- ---------------------------------------
George R. Roberts
/s/ WILLIAM Y. TAUSCHER March 24, 1999
- ---------------------------------------
William Y. Tauscher
</TABLE>
H-16
<PAGE> 180
EXHIBIT 13.1
1998 ANNUAL REPORT TO STOCKHOLDERS
SAFEWAY POST-IPO TIMELINE
[LINE GRAPH]
YEAR-END SAFEWAY STOCK PRICE (ADJUSTED FOR SPLITS)
<TABLE>
<S> <C> <C> <C>
1990 $ 3 3/32 1995 $12 7/8
1991 4 1/2 1996 20 5/8
1992 3 1/4 1997 31 7/16
1993 5 5/16 1998 60 15/16
1994 7 31/32
</TABLE>
1990
Completed initial public offering (IPO) of Safeway common stock.
Adopted new company name: Safeway Inc.
Announced five-year $3.2 billion capital expenditure program.
Honored by the President's Citation Program for Private Sector Initiatives, for
an unprecedented sixth consecutive year.
Identical-store sales gain slowed to 2.5% from 4.6% a year earlier.
Operating cash flow improved to 5.68% of sales.
Capital expenditures rose 30.3% to $490 million.
[Photograph of Assorted Stock Certificates]
[PHOTOGRAPH OF SAFEWAY STORE CONSTRUCTION SITE]
1991
Began construction of new 1.8 million sq. ft. distribution center in northern
California.
Sold an additional 70 million shares of common stock.
Retired $565 million of 14.5% LBO-related debt.
Total sales surpassed $15 billion mark.
Identical-store sales essentially flat compared to 1990.
Operating and administrative (O&A) expense-to-sales margin rose to 23.51%.
Operating cash flow as percentage of sales increased to 5.74%.
Capital expenditures increased to $635 million.
1992
Identical-store sales declined 1.6%.
O&A expense increased to 24.47% of sales.
Operating cash flow declined to 5.07% of sales from 5.74% in 1991 as
recession-weary consumers "traded down" to less profitable product mix.
H-17
<PAGE> 181
Opened new distribution center in northern California.
Steve Burd, long-time consultant to Safeway, named president.
In fourth quarter, implemented strategy to reduce costs, increase sales and
improve returns on capital.
Completed refinancing of $1 billion of subordinated debt.
[PHOTOGRAPH OF SAFEWAY TRUCKS AT DISTRIBUTION CENTER]
[PHOTOGRAPH OF SAFEWAY SELECT COLA]
1993
Introduced Safeway SELECT line of premium quality private-label products.
Steve Burd elected CEO.
Raised $6.7 million for the National Easter Seal Society, Safeway's designated
corporate charity.
Identical-store sales increased, reversing three-year decline.
O&A expense margin decreased for first time since 1989.
Operating cash flow improved to 5.11% of sales.
Reduced working capital by $275 million.
Reduced debt by $359 million.
[Photograph of Ceo Steven A. Burd]
1994
Identical-store sales rose 4.4%.
Reduced O&A expense margin for second straight year, to 23.52% of sales.
Working capital declined another $176 million.
Operating cash flow improved to 6.06% of sales.
Capital spending increased to $352 million.
Closed six manufacturing plants, resulting in significant savings and higher
productivity in remaining plants.
Retired $292 million of senior debt.
Northern California Division donated more than $3 million worth of computer
equipment to local schools.
[Photograph of Open Cash Register Drawer]
1995
Identical-store sales up 4.6%.
O&A expense as percentage of sales declined for third consecutive year, to
22.96%.
Operating cash flow rose to 6.52% of sales.
H-18
<PAGE> 182
Capital spending increased to $503 million.
Senior unsecured debt given investment grade status by Standard & Poor's.
Began converting hundreds of private label items previously marketed under 10
other brand names to Safeway brand name.
Denver Division received Martin Luther King, Jr. Community Service Award.
[PHOTOGRAPH OF ASSORTED SAFEWAY BRAND PRODUCTS]
[PHOTOGRAPH OF VONS LOGO]
1996
Stock split two-for-one in January.
Signed definitive agreement to purchase shares of The Vons Companies, Inc. that
Safeway did not already own.
Recycled more than 300 million pounds of corrugated cardboard, in addition to
large amounts of plastic, glass, aluminum, batteries and tires.
Identical-store sales increased 5.1%.
O&A expense margin declined for fourth consecutive year, to 22.48% of sales.
Operating cash flow increased to 7.18% of sales, marking first time it exceeded
7% on an annual basis in Safeway's 70-year history.
Capital expenditures rose to $620 million.
1997
Completed Vons acquisition.
Began construction of new 762,000 sq. ft. distribution center in Maryland.
Cumulative fundraising total for Easter Seals, since becoming a corporate
sponsor in 1985, exceeded $50 million.
Contributed approximately $40 million worth of food and non-food products to
food banks in the U.S. and Canada.
Recorded positive identical-store sales for fifth year in a row.
O&A expense as percentage of sales declined 35 basis points on a pro forma basis
(to reflect acquisition of Vons), continuing a five-year trend.
Operating cash flow margin improved to 7.70% of sales.
Capital spending increased to $829 million.
[PHOTOGRAPH OF DOMINICK'S GROCERY BAG FILLED WITH PURCHASES]
[PHOTOGRAPH OF PRESS CLIPPING ON SAFEWAY'S ADDITION TO S&P 500]
1998
Stock split two-for-one in February.
H-19
<PAGE> 183
Opened new distribution center in Maryland.
Signed definitive agreement to acquire Carr-Gottstein Foods Co.
[Carrs Logo]
Acquired Dominick's Supermarkets, Inc.
Added to S&P 500 Index.
Identical-store sales increased 3.7%.
O&A expense margin declined 28 basis points to 22.56% of sales.
Operating cash flow as percentage of sales increased to 8.75%.
Capital expenditures exceeded $1 billion.
Safeway has undergone significant change since reemerging as a publicly traded
company in mid-1990. Three years after the initial public stock offering,
following a prolonged period of disappointing operating and financial results, a
new management team set out to transform the company from an industry laggard
into the preeminent food and drug retailer in North America.
[SAFEWAY STOCK SYMBOL]
CONTINUED STRONG PERFORMANCE
During 1998, Safeway continued to be among the industry leaders in the
following key measures of financial performance:*
- Identical-store sales growth
- Expense ratio reduction
- Working capital management
- Operating cash flow margin
- Earnings per share growth
The value of Safeway common stock on the New York Stock Exchange at the
close of trading in 1998 rose to $60.94 per share, a gain of 92.7% from year-end
1997. We have achieved these results by focusing on the three priorities
detailed on the following pages.
- ---------------
* Based on latest available information
CONTROLLING EXPENSES
[Photograph of Dominick's Store Exterior]
Operating and administrative expense as a percentage of sales declined for
the sixth consecutive year in 1998. This trend reflects ongoing efforts
throughout the company to streamline support functions, simplify work practices
and maintain labor cost parity. These efforts are focused on areas invisible to
our customers -- procurement, distribution, manufacturing and administration. We
continuously seek ways to operate our business at lower cost.
H-20
<PAGE> 184
[BAR GRAPH]
IMPROVEMENT IN ANNUAL OPERATING AND ADMINISTRATIVE EXPENSE MARGIN
(IN BASIS POINTS)
1994 68
1995 56
1996 48
1997* 35
1998 28
Our O&A expense-to-sales margin declined another 28 basis points in 1998,
continuing a six-year trend.
- ---------------
* Pro forma as defined on page 16.
WE BEGAN CONSOLIDATING CORPORATE ADMINISTRATIVE FUNCTIONS AT DOMINICK'S INTO
SAFEWAY'S OPERATIONS.
WE NEGOTIATED COMPETITIVE LABOR AGREEMENTS IN SEVERAL KEY MARKETS.
WE CONTINUED TO CONTROL THE FREQUENCY AND COST OF WORKERS' COMPENSATION CLAIMS
IN 1998.
ONGOING IMPROVEMENTS IN PROCUREMENT AND CATEGORY MANAGEMENT HAVE REDUCED OUR
COST OF GOODS SOLD AS A PERCENTAGE OF SALES.
INCREASING SALES
[BAR GRAPH]
ANNUAL IDENTICAL-STORE SALES GROWTH
1994 4.4%
1995 4.6%
1996 5.1%
1997 1.3%
1998 3.1%
Our identical-store sales gains have been among the industry's highest in
each of the past five years.
By reinvesting savings from our cost-reduction efforts into the business,
we continued to drive top-line growth in 1998. Identical-store sales increased
for the sixth straight year, despite the persistence of very low food price
inflation in many of our operating areas. With the recently completed
acquisition of Dominick's and pending acquisition of Carr-Gottstein, we
anticipate significant opportunities to enhance Safeway's long-term sales
growth.
[PHOTOGRAPH OF CUSTOMER LOYALTY CARDS FROM SAFEWAY, VONS AND DOMINICK'S]
WITH THE DOMINICK'S ACQUISITION, COMPLETED IN JUST SIX WEEKS, WE INCREASED OUR
STORE COUNT AND ENTERED A NEW GEOGRAPHIC MARKET.
H-21
<PAGE> 185
THE EXCHANGE OF BEST PRACTICES AMONG VONS, DOMINICK'S AND CORE SAFEWAY DIVISIONS
HAS RESULTED IN SIGNIFICANT IMPROVEMENTS IN ALL OPERATIONS.
SIX MORE DIVISIONS INTRODUCED THE SAFEWAY CLUB CARD IN 1998. ALL DIVISIONS NOW
HAVE A CARD PROGRAM TO ATTRACT AND REWARD LOYAL CUSTOMERS.
WE ADDED ANOTHER 139 NEW ITEMS TO OUR SAFEWAY SELECT LINE OF PREMIUM QUALITY
PRODUCTS, BRINGING THE TOTAL COUNT TO ALMOST 900 ITEMS.
MANAGING CAPITAL
[Photograph of Interior of Grocery Warehouse]
Continued strong operating results enabled us to increase capital
expenditures again, to $1.2 billion in 1998 from $829 million the year before.
Over the past five years, we have invested $3.5 billion to modernize our stores,
support facilities, warehouse and trucking equipment, and information systems.
Despite the additional debt incurred to finance the Dominick's acquisition, our
interest coverage ratio rose to 9.11 times in 1998 from 7.18 times in 1997.
[BAR GRAPH]
CAPITAL EXPENDITURES* (IN MILLIONS)
1994 $ 352.2
1995 503.2
1996 620.3
1997 829.4
1998 1,189.7
Capital spending has increased steadily each year since 1993, reflecting
strong operating results.
- ---------------
* Defined on page 14.
SAFEWAY, VONS AND DOMINICK'S OPENED 46 NEW STORES AND REMODELED 234 EXISTING
STORES.
WE OPENED A NEW 762,000 SQUARE FOOT DISTRIBUTION CENTER IN MARYLAND TO BETTER
SERVE OUR 123-STORE EASTERN DIVISION.
WE MAINTAINED NEGATIVE WORKING CAPITAL FOR THE FIFTH STRAIGHT YEAR BY MANAGING
INVENTORIES AND PAYABLES EFFECTIVELY.
WE REPLACED $560 MILLION OF HIGHER RATE LONG-TERM DEBT AT DOMINICK'S WITH LOWER
RATE BORROWINGS.
H-22
<PAGE> 186
COMPANY IN REVIEW
Safeway Inc. ("Safeway" or the "Company") is one of the largest food and
drug chains in North America, with 1,497 stores at year -end 1998.
The Company's U.S. retail operations are located principally in northern
California, southern California, Oregon, Washington, Colorado, Arizona, the
Chicago metropolitan area, and the Mid-Atlantic region. The Company's Canadian
retail operations are located principally in British Columbia, Alberta and
Manitoba/Saskatchewan. In support of its retail operations, the Company has an
extensive network of distribution, manufacturing and food processing facilities.
In addition, Safeway has a 49% ownership interest in Casa Ley, S.A. de C.V.
("Casa Ley") which operates 77 food and general merchandise stores in western
Mexico.
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S"). In November
1998, Safeway completed its acquisition of all of the outstanding shares of
Dominick's for $49 cash per share, or a total of approximately $1.2 billion (the
"Dominick's Acquisition"). Dominick's is the second largest supermarket operator
in the Chicago metropolitan area with 114 stores, two distribution facilities
and a dairy processing plant. The Dominick's Acquisition is accounted for as a
purchase. Safeway funded the Dominick's Acquisition, including the repayment of
approximately $560 million of debt and lease obligations, with a combination of
bank borrowings and commercial paper. Dominick's sales for calendar year 1998
were $2.4 billion.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS"). In August 1998, Safeway
and Carrs signed a definitive merger agreement in which Safeway will acquire all
of the outstanding shares of Carrs for $12.50 cash per share, or a total of
approximately $110 million. In addition, Carrs has approximately $220 million of
debt. The acquisition will be accounted for as a purchase and will be funded
initially through the issuance of commercial paper.
Carrs is Alaska's largest food and drug retailer, operating 49 stores as
well as the state's largest food warehouse and distribution operation, and
largest freight company. Carrs' sales for calendar year 1998 were $602 million.
The acquisition of Carrs is subject to a number of conditions, including
the approval of the holders of a majority of Carrs' outstanding shares, court
approval of a consent decree with the state of Alaska requiring the sale of six
Safeway stores and one Carrs store, and other customary closing conditions.
Carrs expects to schedule a shareholder meeting to vote on the transaction in
April 1999. Assuming satisfaction of all conditions, Safeway and Carrs expect to
close the transaction shortly after receiving shareholder approval and final
court approval of the consent decree.
STORES. Safeway operates stores ranging in size from approximately 5,900
square feet to over 90,000 square feet. The Company determines the size of a new
store based on a number of considerations, including the needs of the community
the store serves, the location and site plan, and the estimated return on
capital invested. Safeway's primary new store prototype is 55,000 square feet
and is designed to accommodate changing consumer needs and to achieve certain
operating efficiencies. Most stores offer a wide selection of both food and
general merchandise and feature a variety of specialty departments such as
bakery, delicatessen, floral and pharmacy. In most of Safeway's larger stores,
specialty departments are showcased in each corner and along the perimeter walls
of the store to create a pleasant shopping atmosphere.
H-23
<PAGE> 187
Safeway continues to operate a number of smaller stores which also offer an
extensive selection of food and general merchandise, and generally include one
or more specialty departments. These stores remain an important part of the
Company's store network in smaller communities and certain other locations where
larger stores may not be feasible because of space limitations and/or community
needs or restrictions.
The following table summarizes Safeway's stores by size at year-end 1998:
<TABLE>
<CAPTION>
NUMBER PERCENT
OF STORES OF TOTAL
--------- --------
<S> <C> <C>
Less than 30,000 square feet............................ 348 23%
30,000 to 50,000........................................ 770 52
More than 50,000........................................ 379 25
----- ---
Total stores.................................. 1,497 100%
===== ===
</TABLE>
STORE OWNERSHIP. At year-end 1998, Safeway owned approximately one-third of
its stores and leased its remaining stores. In recent years, the Company has
preferred ownership because it provides control and flexibility with respect to
financing terms, remodeling, expansions and closures.
MERCHANDISING. Safeway's operating strategy is to provide value to its
customers by maintaining high store standards and a wide selection of high
quality products at competitive prices. To provide one-stop shopping for today's
busy shoppers, the Company emphasizes high quality produce and meat, as well as
specialty departments including in-store bakery, delicatessen, floral and
pharmacy.
Safeway has developed a line of approximately 900 premium corporate brand
products since 1993 under the "Safeway SELECT" banner. The award-winning Safeway
SELECT line is designed to offer premium quality products that the Company
believes are equal or superior in quality to comparable best-selling nationally
advertised brands, or that are unique to the category and not available from
national brand manufacturers. The Safeway SELECT line is being introduced in
Dominick's stores during the first quarter of 1999.
The Safeway SELECT line of products includes carbonated soft drinks; unique
salsas; the Indulgence line of cookies and other sweets; the Verdi line of fresh
and frozen pastas, pasta sauces and olive oils; Artisan fresh-baked breads;
Twice-the-Fruit yogurt; NutraBalance Pet Food; Ultra laundry detergents and dish
soaps; and Softly paper products. The Safeway SELECT line also includes an
extensive array of ice cream, frozen yogurt and sorbets; Healthy Advantage items
such as low-fat ice cream and low-fat cereal bars; and Gourmet Club frozen
entrees and hors d'oeuvres.
In addition, Safeway has repackaged over 2,500 corporate brand products
primarily under the Safeway, Lucerne and Mrs. Wright's labels.
MANUFACTURING AND WHOLESALE. The principal function of manufacturing
operations is to purchase, manufacture and process private label merchandise
sold in stores operated by the Company. As measured by sales dollars,
approximately one-half of Safeway's private label merchandise is manufactured in
Company-owned plants, and the remainder is purchased from third parties.
During 1993, Safeway began a review to identify manufacturing facilities
that were not providing acceptable returns. This review resulted in the sale or
closure of 20 plants from 1993 through 1998 and the reorganization of an
administrative office during 1994. In 1998, Safeway opened a new manufacturing
facility in California to replace one that
H-24
<PAGE> 188
was closed in 1997. The ongoing review of all remaining manufacturing facilities
may result in additional plant closures.
Safeway's Canadian subsidiary has a wholesale operation that distributes
both national brands and private label products to independent grocery stores
and institutional customers.
Safeway operated the following manufacturing and processing facilities at
year-end 1998:
<TABLE>
<CAPTION>
U.S. CANADA
---- ------
<S> <C> <C>
Milk plants................................................. 8 3
Bread baking plants......................................... 6 2
Ice cream plants............................................ 5 2
Cheese and meat packaging plants............................ 1 2
Soft drink bottling plants.................................. 4 --
Fruit and vegetable processing plants....................... 2 3
Other food processing plants................................ 3 1
Pet food plant.............................................. 1 --
-- --
Total............................................. 30 13
== ==
</TABLE>
In addition, the Company operates laboratory facilities for quality
assurance and research and development in certain of its plants and at its U.S.
manufacturing headquarters in Walnut Creek, California.
DISTRIBUTION. Each of Safeway's 11 retail operating areas is served by a
regional distribution center consisting of one or more facilities. Safeway has
15 distribution/ warehousing centers (12 in the United States and three in
Canada), which collectively provide the majority of all products to Safeway
stores. Safeway's distribution centers in northern California and British
Columbia are operated by third parties. During 1998, Safeway completed
construction of a replacement distribution center in Maryland.
CAPITAL EXPENDITURE PROGRAM
A component of Safeway's long-term strategy is its capital expenditure
program. The Company's capital expenditure program funds, among other things,
new stores, remodels, manufacturing plants, distribution facilities, and
information technology advances. In the last several years, Safeway management
has significantly strengthened its program to select and approve new capital
investments, resulting in improved returns on investment.
H-25
<PAGE> 189
The table below reconciles cash paid for property additions reflected in
the Consolidated Statements of Cash Flows to Safeway's broader definition of
capital expenditures, and also details changes in the Company's store base
during such period:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash paid for property additions...................... $1,075.2 $758.2 $541.8
Less: Purchases of previously leased properties....... (35.7) (28.2) (13.2)
Plus: Present value of all lease obligations
incurred............................................ 117.4 91.3 91.7
Mortgage notes assumed in property acquisitions....... 32.8 0.9 --
Vons first-quarter expenditures....................... -- 7.2 --
-------- ------ ------
Total capital expenditures.................. $1,189.7 $829.4 $620.3
======== ====== ======
Capital expenditures as a percent of sales............ 4.9% 3.7% 3.6%
Dominick's stores acquired............................ 113 -- --
Vons stores acquired.................................. -- 316 --
Stores opened......................................... 46 37 30
Stores closed or sold................................. 30 37 37
Remodels (Note 1)..................................... 234 181 141
Total retail square footage at year-end (in
millions)........................................... 61.6 53.2 40.7
</TABLE>
- ---------------
Note 1: Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.
Improved operations and lower project costs have raised the return on
capital projects, allowing Safeway to increase capital expenditures to $1.2
billion in 1998 and open 46 stores, remodel 234 stores and complete construction
of the new distribution center in Maryland. In 1999, Safeway expects to spend
approximately $1.2 billion and open 55 to 60 new stores and complete
approximately 250 remodels.
PERFORMANCE-BASED COMPENSATION
The Company has performance-based compensation plans that cover
approximately 12,000 management and professional employees. Performance-based
compensation plans set overall bonus levels based upon both operating results
and working capital management. Individual bonuses are based on job performance.
Certain employees are covered by capital investment bonus plans which measure
the performance of capital projects based on operating performance over several
years.
MARKET RISK FROM FINANCIAL INSTRUMENTS
Safeway manages interest rate risk through the strategic use of fixed and
variable interest rate debt and, to a limited extent, interest rate derivatives.
At year-end 1998, Safeway's derivative instruments consisted of interest rate
cap agreements and an interest rate swap agreement. The cap agreements expire in
May 1999, and entitle Safeway to receive the excess of LIBOR over 7% on an $850
million notional amount. Under the swap agreement, which expires in the year
2007, Safeway pays interest of 6.2% on a $100 million notional amount and
receives a variable interest rate based on Federal Reserve rates quoted for
commercial paper. No derivatives are held for trading purposes.
H-26
<PAGE> 190
The following table provides information by year of maturity about the
Company's other financial instruments that are sensitive to interest rate
changes:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER
------ ------ ------ -------- ------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Commercial paper:
Principal............. -- -- -- $1,745.1 -- --
Weighted average
interest rate...... -- -- -- 5.99% -- --
Bank borrowings:
Principal............. $161.8 -- -- $ 89.1 -- --
Weighted average
interest rate...... 5.80% -- -- 5.57% -- --
Long-term debt:*
Principal............. $118.0 $427.5 $549.6 $ 37.8 $377.6 $1,015.9
Weighted average
interest rate...... 8.97% 5.93% 6.88% 8.95% 6.28% 7.22%
</TABLE>
- ---------------
* Primarily fixed rate debt
H-27
<PAGE> 191
FIVE-YEAR FINANCIAL SUMMARY INFORMATION
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Sales............................................ $24,484.2 $22,483.8 $17,269.0 $16,397.5 $15,626.6
========= ========= ========= ========= =========
Gross profit..................................... 7,124.5 6,414.7 4,774.2 4,492.4 4,287.3
Operating and administrative expense............. (5,522.8) (5,135.0) (3,882.5) (3,765.0) (3,675.2)
--------- --------- --------- --------- ---------
Operating profit................................. 1,601.7 1,279.7 891.7 727.4 612.1
Interest expense................................. (235.0) (241.2) (178.5) (199.8) (221.7)
Equity in earnings of unconsolidated affiliates
(Note 1)....................................... 28.5 34.9 50.0 26.9 27.3
Other income, net................................ 1.7 2.9 4.4 2.0 6.4
--------- --------- --------- --------- ---------
Income before income taxes and extraordinary
loss........................................... 1,396.9 1,076.3 767.6 556.5 424.1
Income taxes..................................... (590.2) (454.8) (307.0) (228.2) (173.9)
--------- --------- --------- --------- ---------
Income before extraordinary loss................. 806.7 621.5 460.6 328.3 250.2
Extraordinary loss, net of tax benefit of $41.1,
$1.3 and $6.7.................................. -- (64.1) -- (2.0) (10.5)
--------- --------- --------- --------- ---------
Net income....................................... $ 806.7 $ 557.4 $ 460.6 $ 326.3 $ 239.7
========= ========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary loss............... $ 1.59 $ 1.25 $ 0.97 $ 0.68 $ 0.51
Extraordinary loss............................. -- (0.13) -- -- (0.02)
--------- --------- --------- --------- ---------
Net income..................................... $ 1.59 $ 1.12 $ 0.97 $ 0.68 $ 0.49
========= ========= ========= ========= =========
FINANCIAL STATISTICS
Identical-store sales increases (Note 2)......... 3.7% 1.3% 5.1% 4.6% 4.4%
Gross profit margin.............................. 29.10% 28.53% 27.65% 27.40% 27.44%
Operating and administrative expense margin...... 22.56% 22.84% 22.48% 22.96% 23.52%
Operating profit margin.......................... 6.5% 5.7% 5.2% 4.4% 3.9%
Capital expenditures (Note 3).................... $ 1,189.7 $ 829.4 $ 620.3 $ 503.2 $ 352.2
Depreciation and amortization.................... 531.4 455.8 338.5 329.7 326.4
Total assets..................................... 11,389.6 8,493.9 5,545.2 5,194.3 5,022.1
Total debt....................................... 4,972.1 3,340.3 1,984.2 2,190.2 2,196.1
Stockholders' equity............................. 3,082.1 2,149.0 1,186.8 795.5 643.8
Weighted average shares outstanding -- Diluted
(in millions).................................. 508.8 497.7 475.7 481.2 494.2
OTHER STATISTICS
Dominick's stores acquired during the year....... 113 -- -- -- --
Vons stores acquired during the year............. -- 316 -- -- --
Stores opened during the year.................... 46 37 30 32 20
Stores closed or sold during the year............ 30 37 37 35 36
Total stores at year-end......................... 1,497 1,368 1,052 1,059 1,062
Remodels completed during the year (Note 4)...... 234 181 141 108 71
Total retail square footage at year-end (in
millions)...................................... 61.6 53.2 40.7 40.1 39.5
</TABLE>
- ---------------
Note 1. Includes equity in Vons' earnings through the first quarter of 1997.
Note 2. Reflects sales increases for stores operating the entire management
period in both the current and prior periods. 1997 and 1996 identical
store sales exclude British Columbia stores, which were closed during a
labor dispute in 1996.
Note 3. Defined in the table on page 14 under "Capital Expenditure Program."
Note 4. Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.
H-28
<PAGE> 192
FINANCIAL REVIEW
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S")
In November 1998, Safeway completed its acquisition of all of the
outstanding shares of Dominick's for $49 cash per share, or a total of
approximately $1.2 billion (the "Dominick's Acquisition"). Dominick's is the
second largest supermarket operator in the Chicago metropolitan area with 114
stores, two distribution facilities and a dairy processing plant. Safeway funded
the Dominick's Acquisition, including the repayment of approximately $560
million of debt and lease obligations, with a combination of bank borrowings and
commercial paper. Sales for fiscal 1998 were $2.4 billion.
INCOME BEFORE EXTRAORDINARY LOSS
(IN MILLIONS)
<TABLE>
<CAPTION>
INCOME BEFORE EXTRAORDINARY LOSS
--------------------------------
<S> <C>
'1996' 460.60
'1997' 621.50
'1998' 806.70
</TABLE>
MERGER WITH THE VONS COMPANIES, INC. ("VONS")
In April 1997, Safeway completed a merger with Vons pursuant to which the
Company issued 83.2 million shares of Safeway common stock for all of the shares
of Vons common stock that it did not already own (the "Vons Merger").
In connection with the Vons Merger, Safeway repurchased 64.0 million shares
of its common stock from a partnership affiliated with KKR & Co., L.L.C. at
$21.50 per share, for an aggregate purchase price of $1.376 billion. Safeway
funded the repurchase with bank borrowings.
H-29
<PAGE> 193
PORTIONS OF 1998 SALES DOLLAR
<TABLE>
<CAPTION>
OPERATING AND ADMINISTRATIVE
OPERATING PROFIT EXPENSE COST OF GOODS SOLD
- ---------------- ---------------------------- ------------------
<S> <C> <C>
6.5 22.6 70.9
</TABLE>
RESULTS OF OPERATIONS
Safeway's net income was $806.7 million ($1.59 per share) in 1998, $557.4
million ($1.12 per share) in 1997 and $460.6 million ($0.97 per share) in 1996.
In 1997, income before an extraordinary item related to debt refinancing was
$621.5 million ($1.25 per share).
Safeway's 1998 income statement includes Vons' operating results for the
full year and Dominick's operating results since approximately midway through
Safeway's fourth quarter. Safeway's 1997 income statement includes Vons'
operating results since the second quarter plus the effect of Safeway's 34.4%
equity interest in Vons in the first quarter of 1997. The 1996 income statement
reflects Safeway's 34.4% equity interest in Vons for the full year. In order to
facilitate an understanding of the Company's operations, this financial review
presents certain pro forma information based on the 1997 and 1996 combined
historical financial statements as if the Vons Merger had been effective as of
the beginning of 1997 and 1996. See Note B to the Company's 1998 consolidated
financial statements.
During the second quarter of 1997, Safeway was engaged in a 75-day labor
dispute affecting 74 stores in the Alberta, Canada operating area. The Company
estimates that the strike reduced 1997 net income by approximately $0.04 per
share. Labor disputes in the British Columbia and Denver operating areas reduced
1996 net income by an estimated $0.07 per share.
SALES. Strong store operations helped to increase identical-store sales
(stores operating the entire year in both 1998 and 1997, excluding replacement
stores) 3.7% in 1998, while comparable-store sales, which includes replacement
stores, increased 4.1%. In 1997, identical-store sales increased 1.3% while
comparable-store sales increased 2.2%. Total sales for the 52 weeks of 1998 were
$24.5 billion, compared to $22.5 billion for the 53 weeks of 1997 and $17.3
billion for the 52 weeks of 1996. Total sales increases are attributed to
comparable-store sales increases, the Vons Merger in 1997, and the Dominick's
Acquisition in 1998.
GROSS PROFIT. Safeway's continuing improvement in buying practices and
product mix helped to increase gross profit to 29.10% of sales in 1998, from
28.53% in 1997 and 27.65% in 1996. On a pro forma basis, gross profit increased
to 28.63% in 1997 from 28.20% in
H-30
<PAGE> 194
1996. Application of the LIFO method resulted in an increase in cost of goods
sold of $7.1 million in 1998, a decrease of $6.1 million in 1997, and an
increase of $4.9 million in 1996.
OPERATING AND ADMINISTRATIVE EXPENSE. Operating and administrative expense
was 22.56% of sales in 1998 compared to 22.84% in 1997 and 22.48% in 1996.
Safeway's operating and administrative expense-to-sales ratio increased in 1997
because Vons' operating and administrative expense ratio had historically been
higher than Safeway's. Increased sales and ongoing efforts to reduce or control
expenses improved this expense ratio in 1998. Goodwill amortization has
increased to $56.3 million in 1998 from $41.8 million in 1997 and $10.4 million
in 1996 primarily as a result of the Vons Merger. On a pro forma basis,
operating and administrative expense declined 35 basis points to 22.95% in 1997
from 23.30% in 1996.
INTEREST EXPENSE. Interest expense was $235.0 million in 1998, compared to
$241.2 million in 1997 and $178.5 million in 1996. Interest expense increased in
1997 because of the debt incurred during the second quarter to repurchase stock
in connection with the Vons Merger. Interest expense in 1998 included debt
incurred in connection with the Dominick's Acquisition, which was partially
offset by the paydown of certain other indebtedness.
During 1997, Safeway recorded an extraordinary loss of $64.1 million ($0.13
per share) for the redemption of $589.0 million of Safeway's public debt, $285.5
million of Vons' public debt, and $40.0 million of medium-term notes. These
redemptions were financed with $600 million of new public senior debt securities
and the balance with commercial paper.
In 1997, Safeway entered into interest rate cap agreements which expire in
1999 and entitle the Company to receive from counterparties the amounts, if any,
by which interest at LIBOR on an $850 million notional amount exceeds 7%. The
unamortized cost to purchase the cap agreements was $0.6 million at year-end
1998.
As of year-end 1998, the Company had effectively converted $100.0 million
of its floating rate debt to fixed interest rate debt through an interest rate
swap agreement which expires in 2007. Under the swap agreement, Safeway pays
interest of 6.2% on the $100.0 million notional amount and receives a variable
interest rate based on Federal Reserve rates quoted for commercial paper.
Interest rate swap and cap agreements increased interest expense by $2.8 million
in 1998, $3.3 million in 1997 and $3.0 million in 1996.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES. Safeway's investment in
affiliates consists of a 49% ownership interest in Casa Ley, S.A. de C.V. ("Casa
Ley"), which at year-end 1998 operated 77 food and general merchandise stores in
western Mexico. Through the first quarter of 1997, Safeway also held a 34.4%
interest in Vons. Safeway records its equity in earnings of unconsolidated
affiliates on a one-quarter delay basis.
Income from Safeway's equity investment in Casa Ley increased to $28.5
million in 1998, from $22.7 million in 1997 and $18.8 million in 1996. Casa
Ley's financial results have been improving since 1995, when Mexico suffered
from the adverse effects of high interest rates and inflation.
Equity in earnings of unconsolidated affiliates included Safeway's share of
Vons' earnings of $12.2 million in the first quarter of 1997 and $31.2 million
for the year in 1996.
H-31
<PAGE> 195
LIQUIDITY AND FINANCIAL RESOURCES
Net cash flow from operations was $1,252.7 million in 1998, $1,221.6
million in 1997 and $825.2 million in 1996. Net cash flow from operations
increased in 1997 largely due to increased net income and changes in working
capital.
Cash flow used by investing activities was $2,186.4 million in 1998, $607.7
million in 1997 and $482.3 million in 1996. The increases in cash used by
investing activities is primarily due to the Dominick's Acquisition in 1998, as
well as increased capital expenditures in both 1998 and 1997. Safeway opened 46
new stores and remodeled 234 stores in 1998. In 1997, Safeway opened 37 new
stores and remodeled 181 stores. The Company built a new distribution center in
Maryland during 1997 and 1998, and opened a new manufacturing plant in
California in 1998.
Cash flow from financing activities was $903.4 million in 1998 primarily
due to increased borrowing related to the Dominick's Acquisition. Cash flow used
by financing activities was $614.6 million in 1997 and $337.5 million in 1996,
reflecting Safeway's reduction of total debt in 1996, followed by increased
borrowing related to the Vons Merger in 1997.
Net cash flow from operations as presented on the Statements of Cash Flows
is an important measure of cash generated by the Company's operating activities.
Operating cash flow, as defined below, is similar to net cash flow from
operations because it excludes certain non-cash items. However, operating cash
flow also excludes interest expense and income taxes. Management believes that
operating cash flow is relevant because it assists investors in evaluating
Safeway's ability to service its debt by providing a commonly used measure of
cash available to pay interest. Operating cash flow also facilitates comparisons
of Safeway's results of operations with companies having different capital
structures. Other companies may define operating cash flow differently, and as a
result, such measures may not be comparable to Safeway's operating cash flow.
Safeway's computation of operating cash flow is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Income before income taxes and
extraordinary loss....................... $1,396.9 $1,076.3 $ 767.6
LIFO expense (income)...................... 7.1 (6.1) 4.9
Interest expense........................... 235.0 241.2 178.5
Depreciation and amortization.............. 531.4 455.8 338.5
Equity in earnings of unconsolidated
affiliates............................... (28.5) (34.9) (50.0)
-------- -------- --------
Operating cash flow........................ $2,141.9 $1,732.3 $1,239.5
======== ======== ========
As a percent of sales...................... 8.75% 7.70% 7.18%
======== ======== ========
As a multiple of interest expense (interest
coverage ratio).......................... 9.11x 7.18x 6.94x
======== ======== ========
</TABLE>
Total debt, including capital leases, increased to $4.97 billion at
year-end 1998 from $3.34 billion at year-end 1997 and $1.98 billion at year-end
1996, primarily due to the Dominick's Acquisition and Vons Merger. Annual debt
maturities over the next five years are set forth in Note C of the Company's
1998 consolidated financial statements.
Based upon the current level of operations, Safeway believes that operating
cash flow and other sources of liquidity, including borrowings under Safeway's
commercial paper program and bank credit agreement, will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments
H-32
<PAGE> 196
for the foreseeable future. There can be no assurance, however, that the
Company's business will continue to generate cash flow at or above current
levels. The bank credit agreement is used primarily as a backup facility to the
commercial paper program.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications will be necessary to avoid
system failures and the temporary inability to process transactions or engage in
other normal business activities.
In 1997, the Company established a year 2000 project group, headed by
Safeway's Chief Information Officer, to coordinate the Company's year 2000
compliance efforts. The project group is staffed primarily with representatives
of Safeway's Information Technology department and also uses outside consultants
on an as-needed basis. The Chief Information Officer reports regularly on the
status of the year 2000 project to a steering committee headed by the Chief
Executive Officer and to the Company's Board of Directors.
The year 2000 project group has identified all computer-based systems and
applications (including embedded systems) the Company uses in its operations
that might not be year 2000 compliant, and has categorized these systems and
applications into three priority levels based on how critical the system or
application is to the Company's operations. The year 2000 project group is
determining what modifications or replacements will be necessary to achieve
compliance; implementing the modifications and replacements; conducting tests
necessary to verify that the modified systems are operational; and transitioning
the compliant systems into the Company's regular operations. The systems and
applications in the highest priority level are being assessed and modified or
replaced first. Management estimates that these actions with respect to all
priority levels are approximately 80% complete at year-end 1998. The Company
estimates that all critical systems and applications will be year 2000 compliant
by June 30, 1999.
Safeway completed its acquisition of Dominick's in November 1998 and is in
the process of identifying which systems and applications of Dominick's might
not be year 2000 compliant, and integrating those systems and applications into
its year 2000 project. The Company estimates that all critical systems and
applications of Dominick's will be year 2000 compliant by September 30, 1999.
The year 2000 project group is also examining Safeway's relationships with
certain key outside vendors and others with whom the Company has significant
business relationships to determine, to the extent practical, the degree of such
outside parties' year 2000 compliance. The project group has begun testing
procedures with certain vendors identified as having potential year 2000
compliance issues. Management does not believe that the Company's relationship
with any third party is material to Safeway's operations and, therefore, does
not believe that the failure of any particular third party to be year 2000
compliant would have a material adverse effect on the Company.
The year 2000 project group is in the process of establishing and
implementing a contingency plan to provide for viable alternatives to ensure
that the Company's core business operations are able to continue in the event of
a year 2000-related systems failure.
H-33
<PAGE> 197
Management expects to have a comprehensive contingency plan established by March
31, 1999.
Through January 31, 1999, Safeway spent approximately $20.5 million to
address year 2000 compliance issues. The Company estimates that it will incur an
additional $12.5 million, for a total of $33.0 million, (including $8 million
for Dominick's) to address year 2000 compliance issues for Safeway and
Dominick's, which includes the estimated costs of all modifications, testing and
consultants' fees.
Management believes that, should Safeway or any third party with whom the
Company has a significant business relationship have a year 2000-related systems
failure, the most significant impact would likely be the inability, with respect
to a group of stores, to conduct operations due to a power failure, to deliver
inventory in a timely fashion, to receive certain products from vendors or to
process electronically customer sales at store level. The Company does not
anticipate that any such impact would be material to Safeway's liquidity or
results of operations.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements relating to,
among other things, capital expenditures, cost reduction, operating improvements
and year 2000 compliance. Such statements are subject to inherent uncertainties
and risks, including among others: business and economic conditions generally in
the Company's operating regions; pricing pressures and other competitive
factors; results of the Company's programs to reduce costs; the ability to
integrate Vons and Dominick's and continue to achieve operating improvements;
relations with union bargaining units; and the availability and terms of
financing. Consequently, actual events and results may vary significantly from
those included in or contemplated or implied by such statements.
H-34
<PAGE> 198
SAFEWAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C>
Sales........................................ $ 24,484.2 $ 22,483.8 $ 17,269.0
Cost of goods sold........................... (17,359.7) (16,069.1) (12,494.8)
---------- ---------- ----------
Gross profit............................... 7,124.5 6,414.7 4,774.2
Operating and administrative expense......... (5,522.8) (5,135.0) (3,882.5)
---------- ---------- ----------
Operating profit........................... 1,601.7 1,279.7 891.7
Interest expense............................. (235.0) (241.2) (178.5)
Equity in earnings of unconsolidated
affiliates................................. 28.5 34.9 50.0
Other income, net............................ 1.7 2.9 4.4
---------- ---------- ----------
Income before income taxes and
extraordinary loss...................... 1,396.9 1,076.3 767.6
Income taxes................................. (590.2) (454.8) (307.0)
---------- ---------- ----------
Income before extraordinary loss........... 806.7 621.5 460.6
Extraordinary loss related to early
retirement of debt, net of income tax
benefit of $41.1........................... -- (64.1) --
---------- ---------- ----------
Net income.............................. $ 806.7 $ 557.4 $ 460.6
========== ========== ==========
Basic earnings per share:
Income before extraordinary loss........... $ 1.67 $ 1.35 $ 1.06
Extraordinary loss......................... -- (0.14) --
---------- ---------- ----------
Net income.............................. $ 1.67 $ 1.21 $ 1.06
========== ========== ==========
Diluted earnings per share:
Income before extraordinary loss........... $ 1.59 $ 1.25 $ 0.97
Extraordinary loss......................... -- (0.13) --
---------- ---------- ----------
Net income.............................. $ 1.59 $ 1.12 $ 0.97
========== ========== ==========
Weighted average shares
outstanding -- basic....................... 482.8 462.3 436.0
Weighted average shares
outstanding -- diluted..................... 508.8 497.7 475.7
</TABLE>
See accompanying notes to consolidated financial statements.
H-35
<PAGE> 199
SAFEWAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
YEAR-END YEAR-END
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 45.7 $ 77.2
Receivables............................................... 200.1 180.8
Merchandise inventories, net of LIFO reserve of $80.2 and
$73.1................................................... 1,856.0 1,613.2
Prepaid expenses and other current assets................. 218.1 158.5
--------- ---------
Total current assets............................... 2,319.9 2,029.7
--------- ---------
Property:
Land...................................................... 794.1 722.2
Buildings................................................. 2,069.9 1,719.9
Leasehold improvements.................................... 1,498.3 1,247.3
Fixtures and equipment.................................... 3,282.6 2,663.1
Property under capital leases............................. 379.2 329.2
--------- ---------
8,024.1 6,681.7
Less accumulated depreciation and amortization............ (2,841.5) (2,566.4)
--------- ---------
Total property, net................................ 5,182.6 4,115.3
Goodwill, net of accumulated amortization of $211.0 and
$157.0.................................................... 3,348.0 1,824.7
Prepaid pension costs....................................... 369.6 341.4
Investment in unconsolidated affiliate...................... 115.2 97.7
Other assets................................................ 54.3 85.1
--------- ---------
Total assets....................................... $11,389.6 $ 8,493.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures................ $ 279.8 $ 277.4
Current obligations under capital leases.................. 41.7 22.0
Accounts payable.......................................... 1,595.9 1,391.8
Accrued salaries and wages................................ 348.9 310.5
Other accrued liabilities................................. 627.3 536.9
--------- ---------
Total current liabilities.......................... 2,893.6 2,538.6
--------- ---------
Long-term debt:
Notes and debentures...................................... 4,242.6 2,817.8
Obligations under capital leases.......................... 408.0 223.1
--------- ---------
Total long-term debt............................... 4,650.6 3,040.9
Deferred income taxes....................................... 216.9 297.0
Accrued claims and other liabilities........................ 546.4 468.4
--------- ---------
Total liabilities.................................. 8,307.5 6,344.9
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share; 1,500 shares
authorized; 550.9 and 537.4 shares outstanding.......... 5.5 5.3
Additional paid-in capital................................ 2,599.9 2,467.4
Accumulated other comprehensive (loss) income............. (19.7) 0.6
Retained earnings......................................... 1,925.0 1,315.0
--------- ---------
4,510.7 3,788.3
Less: Treasury stock at cost; 60.6 and 61.2 shares........ (1,302.6) (1,316.6)
Unexercised warrants purchased........................ (126.0) (322.7)
--------- ---------
Total stockholders' equity......................... 3,082.1 2,149.0
--------- ---------
Total liabilities and stockholders' equity......... $11,389.6 $ 8,493.9
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
H-36
<PAGE> 200
SAFEWAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1998 1997 1996
--------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net income................................................ $ 806.7 $ 557.4 $ 460.6
Reconciliation to net cash flow from operations:
Extraordinary loss related to early retirement of debt,
before income tax benefit............................. -- 105.2 --
Depreciation and amortization........................... 531.4 455.8 338.5
Amortization of deferred finance costs.................. 1.6 1.7 1.8
Deferred income taxes................................... 59.4 55.9 113.9
LIFO expense (income)................................... 7.1 (6.1) 4.9
Equity in earnings of unconsolidated affiliates......... (28.5) (34.9) (50.0)
Net pension (income) expense............................ (18.3) (4.1) 4.2
Contributions to Canadian pension plans................. (6.8) (10.0) (10.6)
Decrease in accrued claims and other liabilities........ (17.5) (13.9) (17.6)
Other................................................... 13.3 (12.4) (12.6)
Changes in working capital items:
Receivables........................................... (5.5) 25.8 (8.5)
Inventories at FIFO cost.............................. (48.0) 37.5 (99.3)
Prepaid expenses and other current assets............. (36.9) 2.7 (35.1)
Payables and accruals................................. (5.3) 61.0 135.0
--------- --------- -------
Net cash flow from operations.................... 1,252.7 1,221.6 825.2
--------- --------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions.......................... (1,075.2) (758.2) (541.8)
Proceeds from sale of property............................ 47.6 75.6 60.8
Net cash used to acquire Dominick's....................... (1,144.9) -- --
Net cash acquired in merger with Vons..................... -- 55.3 --
Other..................................................... (13.9) 19.6 (1.3)
--------- --------- -------
Net cash flow used by investing activities....... (2,186.4) (607.7) (482.3)
--------- --------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings........................ 251.7 414.5 227.2
Payments on short-term borrowings......................... (299.9) (287.5) (280.4)
Additions to long-term borrowings......................... 2,722.3 4,254.3 387.1
Payments on long-term borrowings.......................... (1,789.9) (3,553.5) (552.0)
Purchase of treasury stock................................ -- (1,376.0) --
Purchase of unexercised warrants.......................... -- -- (126.5)
Net proceeds from exercise of warrants and stock
options................................................. 34.5 43.9 12.6
Premiums paid on early retirement of debt................. -- (97.7) --
Other..................................................... (15.3) (12.6) (5.5)
--------- --------- -------
Net cash flow from (used by) financing
activities..................................... 903.4 (614.6) (337.5)
--------- --------- -------
Effect of changes in exchange rates on cash............... (1.2) (1.8) (0.5)
--------- --------- -------
Increase (decrease) in cash and equivalents............... (31.5) (2.5) 4.9
CASH AND EQUIVALENTS
Beginning of year......................................... 77.2 79.7 74.8
--------- --------- -------
End of year............................................... $ 45.7 $ 77.2 $ 79.7
========= ========= =======
OTHER CASH FLOW INFORMATION
Cash payments during the year for:
Interest.............................................. $ 241.0 $ 263.6 $ 181.8
Income taxes, net of refunds.......................... 468.7 214.6 156.7
NONCASH INVESTING AND FINANCING ACTIVITIES
Stock issued for acquisition of Vons...................... -- 1,693.0 --
Tax benefit from stock options exercised.................. 85.2 42.4 51.9
Capital lease obligations entered into.................... 34.2 37.3 15.5
Mortgage notes assumed in property additions.............. 32.8 0.9 --
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 201
SAFEWAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK UNEXERCISED
--------------- PAID-IN ------------------ WARRANTS RETAINED
SHARES AMOUNT CAPITAL SHARES COST PURCHASED EARNINGS
------ ------ ---------- ------ --------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, year-end 1995.................. 427.4 $4.2 $ 682.8 $(196.2) $ 284.4
Net income.............................. -- -- -- -- 460.6
Translation adjustments................. -- -- -- -- --
Options and warrants exercised.......... 15.4 0.2 64.3 -- --
Stock bonuses........................... -- -- 1.0 -- --
Unexercised warrants purchased.......... -- -- -- (126.5) --
----- ---- -------- ------- --------
Balance, year-end 1996.................. 442.8 4.4 748.1 (322.7) 745.0
Net income.............................. -- -- -- -- 557.4
Translation adjustments................. -- -- -- -- --
Equity in Vons' premerger earnings due
to timing of recording earnings....... -- -- -- -- 12.6
Shares issued for acquisition of Vons... 83.2 0.8 1,692.2 -- --
Treasury stock purchased................ -- -- -- (64.0) $(1,376.0) -- --
Options and warrants exercised.......... 11.4 0.1 26.8 2.8 59.4 -- --
Stock bonuses........................... -- -- 0.3 -- -- -- --
----- ---- -------- ----- --------- ------- --------
Balance, year-end 1997.................. 537.4 5.3 2,467.4 (61.2) (1,316.6) (322.7) 1,315.0
Net income.............................. -- -- -- -- -- -- 806.7
Translation adjustments................. -- -- -- -- -- -- --
Dominick's options converted............ -- -- 27.0 -- -- -- --
Options and warrants exercised.......... 13.5 0.2 105.5 0.6 14.0 -- --
Warrants canceled....................... -- -- -- -- -- 196.7 (196.7)
----- ---- -------- ----- --------- ------- --------
Balance, year-end 1998.................. 550.9 $5.5 $2,599.9 (60.6) $(1,302.6) $(126.0) $1,925.0
===== ==== ======== ===== ========= ======= ========
<CAPTION>
ACCUMULATED
OTHER TOTAL TOTAL
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
INCOME (LOSS) EQUITY INCOME
------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, year-end 1995.................. $ 20.3 $ 795.5
Net income.............................. -- 460.6 $460.6
Translation adjustments................. (8.3) (8.3) (8.3)
Options and warrants exercised.......... -- 64.5 --
Stock bonuses........................... -- 1.0 --
Unexercised warrants purchased.......... -- (126.5) --
------ --------- ------
Balance, year-end 1996.................. 12.0 1,186.8 $452.3
======
Net income.............................. 557.4 $557.4
Translation adjustments................. (11.4) (11.4) (11.4)
Equity in Vons' premerger earnings due
to timing of recording earnings....... -- 12.6 --
Shares issued for acquisition of Vons... -- 1,693.0 --
Treasury stock purchased................ -- (1,376.0) --
Options and warrants exercised.......... -- 86.3 --
Stock bonuses........................... -- 0.3 --
------ --------- ------
Balance, year-end 1997.................. 0.6 2,149.0 $546.0
======
Net income.............................. -- 806.7 $806.7
Translation adjustments................. (20.3) (20.3) (20.3)
Dominick's options converted............ -- 27.0 --
Options and warrants exercised.......... -- 119.7 --
Warrants canceled....................... -- -- --
------ --------- ------
Balance, year-end 1998.................. $(19.7) $ 3,082.1 $786.4
====== ========= ======
</TABLE>
See accompanying notes to consolidated financial statements.
H-38
<PAGE> 202
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. Safeway Inc. ("Safeway" or the "Company") is one of the
largest food and drug chains in North America, with 1,497 stores as of year-end
1998. Safeway's U.S. retail operations are located principally in northern
California, southern California, Oregon, Washington, Colorado, Arizona, the
Chicago metropolitan area and the Mid-Atlantic region. The Company's Canadian
retail operations are located principally in British Columbia, Alberta and
Manitoba/Saskatchewan. In support of its retail operations, the Company has an
extensive network of distribution, manufacturing and food processing facilities.
As discussed in Note B, in November 1998 the Company acquired Dominick's
Supermarkets, Inc. ("Dominick's") by purchasing all of the outstanding shares of
Dominick's for $49 cash per share, or a total of approximately $1.2 billion (the
"Dominick's Acquisition"). The acquisition was accounted for as a purchase and
Dominick's operating results have been consolidated with Safeway's since
approximately midway through the fourth quarter of 1998.
Also discussed in Note B, in August 1998 Safeway and Carr-Gottstein Foods
Co. ("Carrs") signed a definitive merger agreement in which Safeway will acquire
all of the outstanding shares of Carrs for $12.50 cash per share, or a total of
approximately $110 million (the "Carrs Acquisition").
In April 1997, Safeway completed a merger with The Vons Companies, Inc.
("Vons") pursuant to which the Company issued 83.2 million shares of Safeway
common stock for all of the shares of Vons common stock that it did not already
own (the "Vons Merger"). Beginning in the second quarter of 1997, Safeway's
consolidated financial statements include Vons' financial results.
In addition to these operations, the Company has a 49% ownership interest
in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 77 food and general
merchandise stores in western Mexico.
BASIS OF CONSOLIDATION. The consolidated financial statements include
Safeway Inc., a Delaware corporation, and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. The Company's investment in Casa Ley is reported using the equity
method. Prior to the Vons Merger in the second quarter of 1997, the Company's
investment in Vons was reported using the equity method.
FISCAL YEAR. The Company's fiscal year ends on the Saturday nearest
December 31. The last three fiscal years consist of the 52-week period ended
January 2, 1999, the 53-week period ended January 3, 1998 and 52-week period
ended December 28, 1996.
USE OF ESTIMATES. 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,
liabilities, revenues and expenses, as well as the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES. Assets and liabilities of the Company's
Canadian subsidiaries and Casa Ley are translated into U.S. dollars at year-end
rates of exchange,
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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and income and expenses are translated at average rates during the year.
Adjustments resulting from translating financial statements into U.S. dollars
are reported, net of applicable income taxes, as a separate component of
comprehensive income in the Statements of Stockholders' Equity and Comprehensive
Income.
MERCHANDISE INVENTORIES. Merchandise inventory of $1,110 million at
year-end 1998 and $1,118 million at year-end 1997 is valued at the lower of cost
on a last-in, first-out ("LIFO") basis or market value. Such LIFO inventory had
a replacement or current cost of $1,190 million at year-end 1998 and $1,191
million at year-end 1997. Liquidations of LIFO layers during the three years
reported did not have a significant effect on the results of operations. All
remaining inventory is valued at the lower of cost on a first-in, first-out
("FIFO") basis or market value. The FIFO cost of inventory approximates
replacement or current cost.
PROPERTY AND DEPRECIATION. Property is stated at cost. Depreciation expense
on buildings and equipment is computed on the straight-line method using the
following lives:
<TABLE>
<S> <C>
Stores and other buildings.......................... 10 to 30 years
Fixtures and equipment.............................. 3 to 15 years
</TABLE>
Property under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the remaining terms of the lease or the
estimated useful lives of the assets.
SELF-INSURANCE. The Company is primarily self-insured for workers'
compensation, automobile and general liability costs. The self-insurance
liability is determined actuarially, based on claims filed and an estimate of
claims incurred but not yet reported. The present value of such claims was
accrued using a discount rate of 5.5% in 1998 and 1997. The current portion of
the self-insurance liability of $107.3 million at year-end 1998 and $96.3
million at year-end 1997 is included in other accrued liabilities in the
consolidated balance sheets. The long-term portion of $265.5 million at year-end
1998 and $230.7 million at year-end 1997 is included in accrued claims and other
liabilities. Claims payments were $98.2 million in 1998, $100.0 million in 1997
and $66.7 million in 1996. The total undiscounted liability was $413.1 million
at year-end 1998 and $365.5 million at year-end 1997.
INCOME TAXES. The Company provides a deferred tax expense or benefit equal
to the change in the deferred tax liability during the year in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred income taxes represent tax credit carryforwards and
future net tax effects resulting from temporary differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
STATEMENT OF CASH FLOWS. Short-term investments with original maturities of
less than three months are considered to be cash equivalents. Borrowings with
original maturities of less than three months are presented net of related
repayments.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. As discussed in Note E, the
Company has entered into interest rate swap and cap agreements to limit the
Company's exposure to changes in market interest rates. Interest rate swap
agreements involve the exchange with
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<PAGE> 204
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a counterparty of fixed and floating-rate interest payments periodically over
the life of the agreements without exchange of the underlying notional principal
amounts. The differential to be paid or received is recognized over the life of
the agreements as an adjustment to interest expense. Interest rate cap
agreements lock in a maximum interest rate on a notional principal amount by
paying a fee to a counterparty in exchange for the counterparty's promise to pay
to Safeway the difference between a fixed rate and a floating rate of interest.
The fee paid to the counterparty is deferred and amortized as an adjustment to
interest expense over the life of the agreement.
The Company's counterparties are major financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Generally accepted accounting
principles require the disclosure of the fair value of certain financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate fair value. Safeway estimated the fair values presented
below using appropriate valuation methodologies and market information available
as of year-end. Considerable judgment is required to develop estimates of fair
value, and the estimates presented are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions or estimation methodologies could have a material
effect on the estimated fair values. Additionally, these fair values were
estimated at year-end, and current estimates of fair value may differ
significantly from the amounts presented. The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
Cash and equivalents, accounts receivable, accounts payable and short-term
debt. The carrying amount of these items approximates fair value.
Long-term debt. Market values quoted on the New York Stock Exchange are
used to estimate the fair value of publicly traded debt. To estimate the fair
value of debt issues that are not quoted on an exchange, the Company uses those
interest rates that are currently available to it for issuance of debt with
similar terms and remaining maturities. At year-end 1998, the estimated fair
value of debt was $4.6 billion compared to a carrying value of $4.5 billion. At
year-end 1997, the estimated fair value of debt was $3.2 billion compared to a
carrying value of $3.1 billion.
Off-balance sheet instruments. The fair value of interest rate swap and cap
agreements is the amount at which they could be settled based on estimates
obtained from dealers. At year-end 1998 and 1997, net unrealized losses on such
agreements were $7.0 million and $0.4 million.
IMPAIRMENT OF LONG-LIVED ASSETS. When Safeway decides to close a store or
other facility, the Company accrues estimated losses, if any, which may include
lease payments or other costs of holding the facility, net of estimated future
income (primarily sublease income) in accordance with the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Safeway had an accrued liability of $84.6 million at
year-end 1998 and $72.0 million at year-end 1997 for the anticipated future
closure of stores and other facilities, which is included in Accrued Claims and
Other Liabilities in the Company's consolidated balance sheets.
GOODWILL. Goodwill was $3.3 billion at year-end 1998 and $1.8 billion at
year-end 1997, and is being amortized on a straight-line basis over its
estimated useful life. If it
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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
became probable that the projected future undiscounted cash flows of acquired
assets were less than the carrying value of the goodwill, Safeway would
recognize an impairment loss in accordance with the provisions of SFAS No. 121.
Goodwill amortization was $56.3 million in 1998, $41.8 million in 1997 and $10.4
million in 1996. Goodwill and related amortization has increased due to the Vons
Merger and Dominick's Acquisition as discussed in Note B.
STOCK-BASED COMPENSATION. Safeway accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" are set forth in Note F.
NEW ACCOUNTING STANDARDS. In 1998, Safeway adopted the American Institute
of Certified Public Accountants' ("AICPA") Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 defines the types of computer software project costs
that may be capitalized. All other costs must be expensed in the period
incurred. In order for costs to be capitalized, the computer software project
must be intended to create a new system or add identifiable functionality to an
existing system. Adoption of this statement did not have a material impact on
the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which defines
derivatives, requires that derivatives be carried at fair value, and provides
for hedge accounting when certain conditions are met. This statement is
effective for Safeway beginning in the year 2000. Although Safeway has not fully
assessed the implications of this new statement, the Company believes adoption
of this statement will not have a material impact on its consolidated financial
statements.
In April 1998, the AICPA finalized SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires that costs incurred for start-up
activities, such as store openings, be expensed as incurred. This SOP, which is
effective in the first quarter of 1999, is not expected to have a material
impact on Safeway's consolidated financial statements.
NOTE B: ACQUISITIONS
In November 1998, Safeway completed its acquisition of all of the
outstanding shares of Dominick's for $49 cash per share, or a total of
approximately $1.2 billion. The Dominick's acquisition was accounted for as a
purchase and resulted in additional goodwill of $1.6 billion which is being
amortized over 40 years. Safeway funded the Dominick's Acquisition, including
the repayment of approximately $560 million of debt and lease obligations, with
a combination of bank borrowings and commercial paper.
In April 1997, Safeway completed the Vons Merger pursuant to which the
Company issued 83.2 million shares of Safeway common stock valued at $1.7
billion for all of the shares of Vons common stock that it did not already own.
The Vons Merger was accounted for as a purchase and resulted in additional
goodwill of $1.5 billion which is being amortized over 40 years. In connection
with the Vons Merger, Safeway repurchased 64.0 million shares of its common
stock from a partnership affiliated with KKR & Co.,
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<PAGE> 206
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L.L.C. ("KKR") at $21.50 per share, for an aggregate purchase price of $1.376
billion. Safeway funded the repurchase with bank borrowings.
The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of operations of Safeway, Vons and
Dominick's, as if the Vons Merger and the Dominick's Acquisition had occurred as
of the beginning of each year presented. This pro forma financial information is
presented for informational purposes only and may not be indicative of what the
actual consolidated results of operations would have been if the acquisitions
had been effective as of the beginning of the years presented. Pro forma
adjustments were applied to the respective historical financial statements to
account for the Vons Merger and the Dominick's Acquisition as purchases. Under
purchase accounting, the purchase price is allocated to acquired assets and
liabilities based on their estimated fair values at the date of acquisition, and
any excess is allocated to goodwill.
For Dominick's, such allocations are subject to adjustment when additional
analysis concerning asset and liability balances is finalized. The preliminary
allocation of the purchase price to the assets and liabilities acquired was
based in part upon an independent valuation which, in turn, was based upon
certain estimates and cash flow information provided by management. Management
does not expect the final allocations to differ materially from the amounts
presented herein.
<TABLE>
<CAPTION>
PRO FORMA
----------------------
52 WEEKS 53 WEEKS
1998 1997
--------- ---------
(IN MILLIONS, EXCEPT
PER-SHARE AMOUNTS)
<S> <C> <C>
Sales....................................................... $26,487.6 $26,315.9
Income before extraordinary loss............................ 742.1 510.6
Net income.................................................. 742.1 423.1
Diluted earnings per share:
Income before extraordinary loss.......................... $ 1.46 $ 1.01
Net income................................................ 1.46 0.84
</TABLE>
In August 1998, Safeway and Carrs signed a definitive merger agreement in
which Safeway will acquire all of the outstanding shares of Carrs for $12.50
cash per share, or a total of approximately $110 million. In addition, Carrs has
approximately $220 million of debt. The acquisition will be accounted for as a
purchase and will be funded initially through the issuance of commercial paper.
The acquisition of Carrs is subject to a number of conditions, including
the approval of the holders of a majority of Carrs' outstanding shares, court
approval of a consent decree with the state of Alaska requiring the sale of six
Safeway stores and one Carrs store, and other customary closing conditions.
Carrs expects to schedule a shareholder meeting to vote on the transaction in
April 1999. Assuming satisfaction of all conditions, Safeway and Carrs expect to
close the transaction shortly after receiving shareholder approval and final
court approval of the consent decree.
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<PAGE> 207
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C: FINANCING
Notes and debentures were composed of the following at year-end (in
millions):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Commercial paper...................................... $1,745.0 $1,473.5
Bank credit agreement, unsecured...................... 89.1 238.2
9.30% Senior Secured Debentures due 2007.............. 24.3 24.3
6.85% Senior Notes due 2004, unsecured................ 200.0 200.0
7.00% Senior Notes due 2007, unsecured................ 250.0 250.0
7.45% Senior Debentures due 2027, unsecured........... 150.0 150.0
5.75% Notes due 2000, unsecured....................... 400.0 --
5.875% Notes due 2001, unsecured...................... 400.0 --
6.05% Notes due 2003, unsecured....................... 350.0 --
6.50% Notes due 2008, unsecured....................... 250.0 --
9.35% Senior Subordinated Notes due 1999, unsecured... 66.7 66.7
10% Senior Subordinated Notes due 2001, unsecured..... 79.9 79.9
9.65% Senior Subordinated Debentures due 2004,
unsecured........................................... 81.2 81.2
9.875% Senior Subordinated Debentures due 2007,
unsecured........................................... 24.2 24.2
10% Senior Notes due 2002, unsecured.................. 6.1 6.1
Mortgage notes payable, secured....................... 115.9 150.8
Other notes payable, unsecured........................ 102.7 114.8
Medium-term notes, unsecured.......................... 25.5 25.5
Short-term bank borrowings, unsecured................. 161.8 210.0
-------- --------
4,522.4 3,095.2
Less current maturities............................... (279.8) (277.4)
-------- --------
Long-term portion..................................... $4,242.6 $2,817.8
======== ========
</TABLE>
COMMERCIAL PAPER. The amount of commercial paper borrowings is limited to
the unused borrowing capacity under the bank credit agreement. Commercial paper
is classified as long-term because the Company intends to and has the ability to
refinance these borrowings on a long-term basis through either continued
commercial paper borrowings or utilization of the bank credit agreement, which
matures in 2002. The weighted average interest rate on commercial paper
borrowings was 5.75% during 1998 and 5.99% at year-end 1998.
BANK CREDIT AGREEMENT. Safeway's total borrowing capacity under the bank
credit agreement is $2.9 billion. Of the $2.9 billion credit line, $2.0 billion
matures in 2002 and has two one-year extension options, and $0.9 million is
renewable annually through 2004. The restrictive covenants of the bank credit
agreement limit Safeway with respect to, among other things, creating liens upon
its assets and disposing of material amounts of assets other than in the
ordinary course of business. Safeway is also required to meet certain financial
tests under the bank credit agreement. At year-end 1998, the Company had total
unused borrowing capacity under the bank credit agreement of $ 2.7 billion ($1.0
billion excluding that portion of the bank credit agreement reserved to back up
commercial paper borrowings).
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<PAGE> 208
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
U.S. borrowings under the bank credit agreement carry interest at one of
the following rates selected by the Company: (i) the prime rate; (ii) a rate
based on rates at which Eurodollar deposits are offered to first-class banks by
the lenders in the bank credit agreement plus a pricing margin based on the
Company's debt rating or interest coverage ratio (the "Pricing Margin"); or
(iii) rates quoted at the discretion of the lenders. Canadian borrowings
denominated in U.S. dollars carry interest at one of the following rates
selected by the Company: (a) the Canadian base rate; or (b) the Canadian
Eurodollar rate plus the Pricing Margin. Canadian borrowings denominated in
Canadian dollars carry interest at one of the following rates selected by the
Company: (i) the Canadian prime rate or (ii) the rate for Canadian bankers
acceptances plus the Pricing Margin.
The weighted average interest rate on borrowings under the bank credit
agreement was 6.69% during 1998 and 5.57% at year-end 1998.
SENIOR SECURED INDEBTEDNESS. The 9.30% Senior Secured Debentures due 2007
are secured by a deed of trust which created a lien on the land, buildings and
equipment owned by Safeway at its distribution center in Tracy, California.
SENIOR UNSECURED INDEBTEDNESS. In November 1998, Safeway issued senior
unsecured debt securities consisting of 5.75% Notes due 2000, 5.875% Notes due
2001, 6.05% Notes due 2003, and 6.50% Notes due 2008. In 1997 Safeway issued
senior unsecured debt securities consisting of 6.85% Senior Notes due 2004,
7.00% Senior Notes due 2007, and 7.45% Senior Debentures due 2027.
SENIOR SUBORDINATED INDEBTEDNESS. The 9.35% Senior Subordinated Notes due
1999, 10% Senior Subordinated Notes due 2001, 9.65% Senior Subordinated
Debentures due 2004, and 9.875% Senior Subordinated Debentures due 2007 are
subordinated in right of payment to, among other things, the Company's
borrowings under the bank credit agreement, the 9.30% Senior Secured Debentures,
the Senior Unsecured Indebtedness, and mortgage notes payable.
MORTGAGE NOTES PAYABLE. Mortgage notes payable at year-end 1998 have
remaining terms ranging from one to 17 years, have a weighted average interest
rate of 9.36% and are secured by properties with a net book value of
approximately $225 million.
OTHER NOTES PAYABLE. Other notes payable at year-end 1998 have remaining
terms ranging from one to 13 years and a weighted average interest rate of
7.12%.
REDEMPTIONS. During 1997, the Company redeemed $588.5 million of the Senior
Subordinated Indebtedness, $285.5 million of Vons' public debt, and $40.0
million of medium-term notes using proceeds from the Senior Unsecured
Indebtedness and commercial paper program. In connection with these redemptions,
Safeway recorded an extraordinary loss of $64.1 million ($0.13 per share). The
extraordinary loss represents the payment of redemption premiums and the
write-off of deferred finance costs, net of the related tax benefits.
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<PAGE> 209
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ANNUAL DEBT MATURITIES. As of year-end 1998, annual debt maturities were as
follows (in millions):
<TABLE>
<S> <C>
1999..................................................... $ 279.8
2000..................................................... 427.5
2001..................................................... 549.6
2002..................................................... 1,872.0
2003..................................................... 377.6
Thereafter............................................... 1,015.9
--------
$4,522.4
========
</TABLE>
LETTERS OF CREDIT. The Company had letters of credit of $143.9 million
outstanding at year-end 1998 of which $63.2 million were issued under the bank
credit agreement. The letters of credit are maintained primarily to support
performance, payment, deposit or surety obligations of the Company. The Company
pays commitment fees ranging from 0.25% to 1.00% on the outstanding portion of
the letters of credit.
NOTE D: LEASE OBLIGATIONS
Approximately two-thirds of the premises that the Company occupies are
leased. The Company had approximately 1,400 leases at year-end 1998, including
approximately 220 which are capitalized for financial reporting purposes. Most
leases have renewal options, some with terms and conditions similar to the
original lease, others with reduced rental rates during the option periods.
Certain of these leases contain options to purchase the property at amounts that
approximate fair market value. As of year-end 1998, future minimum rental
payments applicable to non-cancelable capital and operating leases with
remaining terms in excess of one year were as follows (in millions):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999................................................... $ 87.9 $ 236.8
2000................................................... 84.5 231.5
2001................................................... 87.0 207.3
2002................................................... 70.1 210.7
2003................................................... 67.4 200.2
Thereafter............................................. 404.2 1,821.9
------- --------
Total minimum lease payments................. 801.1 $2,908.4
========
Less amounts representing interest..................... (351.4)
-------
Present value of net minimum lease payments............ 449.7
Less current obligations............................... (41.7)
-------
Long-term obligations.................................. $ 408.0
=======
</TABLE>
Future minimum lease payments under non-cancelable capital and operating
lease agreements have not been reduced by minimum sublease rental income of
$210.5 million.
Amortization expense for property under capital leases was $22.3 million in
1998, $21.1 million in 1997 and $17.9 million in 1996. Accumulated amortization
of property under capital leases was $136.1 million at year-end 1998 and $153.4
million at year-end 1997.
H-46
<PAGE> 210
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following schedule shows the composition of total rental expense for
all operating leases (in millions). In general, contingent rentals are based on
individual store sales.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Property leases:
Minimum rentals............................... $208.7 $206.0 $138.2
Contingent rentals............................ 19.2 12.3 9.9
Less rentals from subleases................... (12.0) (13.4) (11.1)
------ ------ ------
215.9 204.9 137.0
Equipment leases................................ 22.4 19.3 21.0
------ ------ ------
$238.3 $224.2 $158.0
====== ====== ======
</TABLE>
NOTE E: INTEREST EXPENSE
Interest expense consisted of the following (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Commercial paper................................ $ 83.7 $ 43.8
Bank credit agreement........................... 10.8 36.9 $ 16.4
9.30% Senior Secured Debentures................. 2.3 5.3 6.6
6.85% Senior Notes.............................. 13.7 4.1 --
7.00% Senior Notes.............................. 17.5 5.2 --
7.45% Senior Debentures......................... 11.2 3.4 --
5.75% Notes..................................... 3.5 -- --
5.875% Notes.................................... 3.6 -- --
6.05% Notes..................................... 3.2 -- --
6.50% Notes..................................... 2.5 -- --
9.35% Senior Subordinated Notes................. 6.2 12.3 15.3
10% Senior Subordinated Notes................... 8.0 19.3 24.1
9.65% Senior Subordinated Debentures............ 7.8 17.8 22.0
9.875% Senior Subordinated Debentures........... 2.4 8.2 10.9
10% Senior Notes................................ 0.6 4.3 5.9
Vons Debentures................................. -- 10.2 --
Mortgage notes payable.......................... 12.1 22.0 33.0
Other notes payable............................. 9.5 9.9 11.9
Medium-term notes............................... 2.1 4.4 6.0
Short-term bank borrowings...................... 10.6 8.8 5.1
Obligations under capital leases................ 27.8 26.0 20.8
Amortization of deferred finance costs.......... 1.6 1.7 1.8
Interest rate swap and cap agreements........... 2.8 3.3 3.0
Capitalized interest............................ (8.5) (5.7) (4.3)
------ ------ ------
$235.0 $241.2 $178.5
====== ====== ======
</TABLE>
In 1997 the Company entered into interest rate cap agreements which entitle
Safeway to receive the excess, if any, of LIBOR over 7% on an $850 million
notional amount. The cap agreements expire in May 1999. The unamortized cost to
purchase the cap agreements was $0.6 million at year-end 1998.
H-47
<PAGE> 211
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also in 1997, the Company entered into an interest rate swap agreement with
a notional amount of $100.0 million. Under the swap agreement, Safeway pays
interest of 6.2% on the $100.0 million notional amount and receives a variable
interest rate based on Federal Reserve rates quoted for commercial paper. The
agreement expires in the year 2007. At year-end 1998 and 1997, the net
unrealized loss on the interest rate swap agreement was $7.0 million and $0.4
million.
The Company is not subject to credit risk because the notional amounts do
not represent cash flows. The Company is subject to risk from nonperformance of
the counterparties to the swap and cap agreements in the amount of any interest
differential to be received. Because the Company monitors the credit ratings of
its counterparties, which are limited to major financial institutions, Safeway
does not anticipate nonperformance by the counterparties.
Because the Company intends to hold these agreements as hedges for the term
of the agreements, the market risk associated with changes in interest rates
should not be significant.
NOTE F: CAPITAL STOCK
SHARES AUTHORIZED AND ISSUED. Authorized preferred stock consists of 25
million shares of which none was outstanding during 1998, 1997 or 1996.
Authorized common stock consists of 1.5 billion shares at $0.01 par value.
Common stock outstanding was 490.3 million shares (net of 60.6 million shares of
treasury stock) at year-end 1998 and 476.2 million shares (net of 61.2 million
shares of treasury stock) at year-end 1997.
STOCK OPTION PLANS. Under Safeway's stock option plans, the Company may
grant incentive and non-qualified options to purchase common stock at an
exercise price equal to or greater than the fair market value at the grant date,
as determined by the Compensation and Stock Option Committee of the Board of
Directors. Options generally vest over seven years. Vested options are
exercisable in part or in full at any time prior to the expiration date of 10 to
15 years from the date of the grant.
H-48
<PAGE> 212
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity in the Company's stock option plans for the three-year period
ended January 2, 1999 was as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding, year-end 1995............................... 44,330,644 $ 3.52
1996 Activity:
Granted............................................. 3,991,984 16.65
Canceled............................................ (724,454) 5.07
Exercised........................................... (8,825,018) 2.04
----------
Outstanding, year-end 1996............................... 38,773,156 5.07
1997 Activity:
Granted............................................. 3,981,766 26.25
Converted Vons options.............................. 7,578,098 7.34
Canceled............................................ (962,522) 10.01
Exercised........................................... (8,373,270) 5.06
----------
Outstanding, year-end 1997............................... 40,997,228 7.53
1998 Activity:
Granted............................................. 4,987,038 40.28
Converted Dominick's options........................ 922,701 19.70
Canceled............................................ (848,482) 14.61
Exercised........................................... (6,680,083) 3.90
----------
Outstanding, year-end 1998............................... 39,378,402 12.15
==========
Exercisable, year-end 1996............................... 23,034,640 4.25
==========
Exercisable, year-end 1997............................... 25,887,094 4.75
==========
Exercisable, year-end 1998............................... 24,447,905 5.79
==========
</TABLE>
Weighted average fair value of options granted during the year:
<TABLE>
<S> <C>
1996 $ 7.64
1997 12.43
1998 17.06
</TABLE>
The following table summarizes stock option information at year-end 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------- -----------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OF OPTIONS REMAINING CONTRACTUAL LIFE EXERCISE PRICE OF OPTIONS EXERCISE PRICE
- ------------------ ---------- -------------------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.50 to $ 0.50 1,047,000 0.35 year $ 0.50 1,047,000 $ 0.50
1.46 to 9.44 25,297,992 7.06 4.71 20,730,918 4.37
9.67 to 17.63 3,495,840 8.31 13.63 1,756,064 14.78
18.94 to 29.88 4,468,929 8.50 25.59 807,537 24.87
31.44 to 39.00 2,261,808 9.19 35.13 25,496 32.82
40.06 to 48.06 2,806,833 9.56 41.80 80,890 42.56
---------- ----------
0.50 to 48.06 39,378,402 7.46 12.15 24,447,905 5.79
========== ==========
</TABLE>
Options to purchase 18.4 million shares were available for grant at
year-end 1998.
ADDITIONAL STOCK OPTION PLAN INFORMATION. The Company accounts for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles
H-49
<PAGE> 213
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock option awards granted
at fair market value.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share as if the Company had
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: seven to nine
years expected life to vesting; stock volatility of 31% in both 1998 and 1997,
and 30% in 1996; risk-free interest rates of 5.26% in 1998 and 6.29% in both
1997 and 1996; and no dividends during the expected term.
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. However, the impact of outstanding
non-vested stock options granted prior to 1995 has been excluded from the pro
forma calculation; accordingly, the pro forma results presented below are not
indicative of future period pro forma results. Had compensation cost for
Safeway's stock option plans been determined based on the fair value at the
grant date for awards in 1998, 1997 and 1996, consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Net income:
As reported........................................... $806.7 $557.4 $460.6
Pro forma............................................. 794.8 553.5 459.0
Basic earnings per share:
As reported........................................... $ 1.67 $ 1.21 $ 1.06
Pro forma............................................. 1.65 1.20 1.05
Diluted earnings per share:
As reported........................................... $ 1.59 $ 1.12 $ 0.97
Pro forma............................................. 1.56 1.11 0.96
</TABLE>
H-50
<PAGE> 214
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G: TAXES ON INCOME
The components of income tax expense are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $398.8 $303.6 $162.9
State................................................. 80.0 57.5 30.7
Foreign............................................... 52.0 37.8 (0.5)
------ ------ ------
530.8 398.9 193.1
------ ------ ------
Deferred:
Federal............................................... 44.4 40.4 49.3
State................................................. 12.2 8.4 12.6
Foreign............................................... 2.8 7.1 52.0
------ ------ ------
59.4 55.9 113.9
------ ------ ------
$590.2 $454.8 $307.0
====== ====== ======
</TABLE>
Extraordinary losses are presented net of related tax benefits. Therefore,
1997 income tax expense excludes the $41.1 million tax benefit on an
extraordinary loss related to the early retirement of debt. Tax benefits from
the exercise of employee stock options of $85.2 million in 1998, $42.4 million
in 1997 and $51.9 million in 1996 were credited directly to paid-in capital and,
therefore, are excluded from income tax expense.
The reconciliation of the provision for income taxes at the U.S. federal
statutory income tax rate to the Company's income taxes is as follows (dollars
in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory rate.......................................... 35% 35% 35%
Income tax expense using federal statutory rate......... $488.9 $376.7 $268.7
State taxes on income net of federal benefit............ 59.9 42.8 28.1
Taxes provided on equity in earnings of unconsolidated
affiliates at rates below the statutory rate.......... (10.0) (9.4) (10.5)
Taxes on foreign earnings not permanently reinvested.... 7.9 8.9 7.3
Nondeductible expenses and amortization................. 17.6 13.6 3.2
Difference between statutory rate and foreign effective
rate.................................................. 11.1 10.6 11.1
Other accruals.......................................... 14.8 11.6 (0.9)
------ ------ ------
$590.2 $454.8 $307.0
====== ====== ======
</TABLE>
H-51
<PAGE> 215
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's net deferred tax liability at
year-end were as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Workers' compensation and other claims............. $ 158.5 $ 138.8 $ 91.7
Accruals not currently deductible.................. 106.6 80.3 48.7
Accrued claims and other liabilities............... 48.0 48.8 47.4
Employee benefits.................................. 34.7 18.4 9.7
U.S. operating loss carry forward.................. 12.1 -- --
Canadian operating loss carryforward............... -- -- 2.7
Other assets....................................... 51.5 14.6 6.0
------- ------- -------
411.4 300.9 206.2
------- ------- -------
Deferred tax liabilities:
Property........................................... (315.7) (280.8) (110.5)
Prepaid pension costs.............................. (166.4) (161.3) (149.9)
LIFO inventory reserves............................ (125.7) (106.0) (66.8)
Investments in unconsolidated affiliates........... (16.7) (15.3) (48.1)
Cumulative translation adjustments................. (3.8) (16.2) (23.0)
Other liabilities.................................. -- (18.3) (31.7)
------- ------- -------
(628.3) (597.9) (430.0)
------- ------- -------
Net deferred tax liability................. $(216.9) $(297.0) $(223.8)
======= ======= =======
</TABLE>
Deferred tax assets include net operating losses assumed in the Dominick's
acquisition which will expire between 2008 and 2010. Such losses are expected to
be fully utilized.
NOTE H: EMPLOYEE BENEFIT PLANS AND COLLECTIVE BARGAINING AGREEMENTS
RETIREMENT PLANS. The Company maintains defined benefit, non-contributory
retirement plans for substantially all of its employees not participating in
multi-employer pension plans.
In connection with the Vons Merger, the Company assumed the obligations of
Vons' retirement plan. The actuarial assumptions for the existing Vons'
retirement plan are comparable to the existing plans of the Company. Vons'
retirement plan has been combined with Safeway's for financial statement
presentation.
H-52
<PAGE> 216
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide a reconciliation of the changes in the
retirement plans' benefit obligation and fair value of assets over the two-year
period ended January 2, 1999 and a statement of the funded status as of year-end
1998 and 1997 (in millions):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Change in benefit obligation:
Beginning balance................................. $ 1,056.8 $ 867.1
Service cost...................................... 52.5 42.5
Interest cost..................................... 69.7 60.1
Plan amendments................................... 18.2 25.1
Actuarial loss.................................... 65.1 45.4
Acquisition of Vons............................... -- 83.9
Benefit payments.................................. (79.8) (70.3)
Change in assumptions............................. (0.5) 12.3
Currency translation adjustments.................. (16.3) (9.3)
--------- ---------
Ending balance...................................... $ 1,165.7 $ 1,056.8
========= =========
Change in fair value of plan assets:
Beginning balance................................. $ 1,662.6 $ 1,392.0
Actual return on plan assets...................... 193.2 263.8
Acquisition of Vons............................... -- 76.5
Employer contributions............................ 6.8 10.0
Benefit payments.................................. (79.8) (70.3)
Currency translation adjustments.................. (16.7) (9.4)
--------- ---------
Ending balance...................................... $ 1,766.1 $ 1,662.6
========= =========
Funded status:
Fair value of plan assets......................... $ 1,766.1 $ 1,662.6
Projected benefit obligation...................... (1,165.7) (1,056.8)
--------- ---------
Funded status..................................... 600.4 605.8
Adjustment for difference in book and tax basis of
assets......................................... (165.1) (165.1)
Unamortized prior service cost.................... 95.5 93.7
Unrecognized gain................................. (161.2) (193.0)
--------- ---------
Prepaid pension cost................................ $ 369.6 $ 341.4
========= =========
</TABLE>
The following table provides the components of 1998 and 1997 net pension
income for the retirement plans (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Estimated return on assets...................... $141.5 $118.3 $148.2
Service cost.................................... (52.5) (42.5) (41.3)
Interest cost................................... (69.7) (60.1) (51.7)
Amortization of prior service cost.............. (14.3) (11.6) (56.0)
Amortization of unrecognized gains.............. 13.3 -- --
------ ------ ------
Net pension income.................... $ 18.3 $ 4.1 $ (0.8)
====== ====== ======
</TABLE>
Prior service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Actuarial gains and losses are
amortized over the
H-53
<PAGE> 217
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
average remaining service life of active participants when the accumulation of
such gains and losses exceeds 10% of the greater of the projected benefit
obligation or the fair value of plan assets.
The actuarial assumptions used to determine year-end plan status were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate used to determine the projected benefit
obligation:
United States Plans....................................... 6.5% 7.0% 7.5%
Canadian Plans............................................ 6.3 6.3 7.0
Combined weighted average rate............................ 6.5 6.8 7.4
Expected return on plan assets:
United States Plans....................................... 9.0% 9.0% 9.0%
Canadian Plans............................................ 8.0 8.0 8.0
Rate of compensation increase:
United States Plans....................................... 5.0% 5.0% 5.5%
Canadian Plans............................................ 4.5 4.5 5.5
</TABLE>
RETIREMENT RESTORATION PLAN. The Retirement Restoration Plan provides death
benefits and supplemental income payments for senior executives after
retirement. The Company recognized expense of $5.0 million in 1998, $4.3 million
in 1997 and $4.4 million in 1996. The aggregate projected benefit obligation of
the Retirement Restoration Plan was approximately $53.8 million at year-end 1998
and $48.4 million at year-end 1997.
MULTI-EMPLOYER PENSION PLANS. Safeway participates in various
multi-employer pension plans, covering virtually all Company employees not
covered under the Company's non-contributory pension plans, pursuant to
agreements between the Company and employee bargaining units which are members
of such plans. These plans are generally defined benefit plans; however, in many
cases, specific benefit levels are not negotiated with or known by the
employer-contributors. Contributions of $119 million in 1998, $130 million in
1997 and $112 million in 1996 were made and charged to expense.
Under U.S. legislation regarding such pension plans, a company is required
to continue funding its proportionate share of a plan's unfunded vested benefits
in the event of withdrawal (as defined by the legislation) from a plan or plan
termination. Safeway participates in a number of these pension plans, and the
potential obligation as a participant in these plans may be significant. The
information required to determine the total amount of this contingent
obligation, as well as the total amount of accumulated benefits and net assets
of such plans, is not readily available. During 1988 and 1987, the Company sold
certain operations. In most cases the party acquiring the operation agreed to
continue making contributions to the plans. Safeway is relieved of the
obligations related to these sold operations to the extent the acquiring parties
continue to make contributions. Whether such sales could result in withdrawal
under ERISA and, if so, whether such withdrawals could result in liability to
the Company, is not determinable at this time.
COLLECTIVE BARGAINING AGREEMENTS. At year-end 1998, Safeway had
approximately 170,000 full and part-time employees. Approximately 90% of
Safeway's employees in the United States and Canada are covered by collective
bargaining agreements negotiated with local unions affiliated with one of 12
different international unions. There are approximately 400 such agreements,
typically having three-year terms, with some agreements
H-54
<PAGE> 218
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
having terms up to five years. Accordingly, Safeway negotiates a significant
number of these agreements every year.
NOTE I: INVESTMENT IN UNCONSOLIDATED AFFILIATE
At year-end 1998 Safeway's investment in unconsolidated affiliate consists
of a 49% ownership interest in Casa Ley, which operates 77 food and general
merchandise stores in western Mexico.
Income from Safeway's equity investment in Casa Ley, recorded on a
one-quarter delay basis, was $28.5 million in 1998, $22.7 million in 1997 and
$18.8 million in 1996.
Through April 8, 1997, Safeway also owned 15.1 million common shares, or
34.4% of the total shares outstanding, of Vons. Vons is now a wholly-owned
subsidiary of Safeway, and as of the beginning of the second quarter of 1997,
Safeway's consolidated financial statements include Vons' financial position and
results of operations.
Safeway's share of Vons' earnings was $12.2 million for the first quarter
of 1997 and $31.2 million for the year in 1996.
NOTE J: RELATED-PARTY TRANSACTIONS
KKR provides management, consulting and financial services to the Company
for an annual fee. Such services include, but are not necessarily limited to,
advice and assistance concerning any and all aspects of the operation, planning
and financing of the Company. Annual payments for management fees, special
services and reimbursement of expenses were approximately $1.4 million in 1998,
1997 and 1996.
The Company holds an 80% interest in Property Development Associates
("PDA"), a partnership formed in 1987 with a company controlled by an affiliate
of KKR, to purchase, manage and dispose of certain Safeway facilities which are
no longer used in the retail grocery business. The financial statements of PDA
are consolidated with those of the Company and a minority interest of $23.9
million and $24.0 million at year-end 1998 and 1997 is included in accrued
claims and other liabilities in the accompanying consolidated balance sheets.
During 1997, the Company contributed to PDA six properties no longer used in its
retail grocery business which had an aggregate net book value of $4.9 million.
The minority partner contributed cash in an amount sufficient to maintain its
20% ownership. No gains or losses were recognized on these transactions. In
1998, no properties were contributed to PDA. Safeway paid PDA $1.9 million in
1998, $1.5 million in 1997 and $1.6 million in 1996 for reimbursement of
expenses related to management and real estate services provided by PDA.
NOTE K: COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS. In July 1988, there was a major fire at the Company's dry
grocery warehouse in Richmond, California. Through January 2, 1999, in excess of
126,000 claims for personal injury and property damage arising from the fire
have been settled for an aggregate amount of approximately $123.9 million. The
Company's loss as a result of the fire damage to its property and settlement of
the above claims was substantially covered by insurance.
H-55
<PAGE> 219
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of January 2, 1999, there were still pending approximately 3,100 claims
against the Company for personal injury (including punitive damages), and
approximately 290 separate claims for property damage, arising from the smoke,
ash and embers generated by the fire. A substantial percentage of these claims
have been asserted in lawsuits against the Company filed in the Superior Court
for Alameda County, California. There can be no assurance that the pending
claims will be settled or otherwise disposed of for amounts and on terms
comparable to those settled to date.
In early 1996, a purported class action was filed in the Superior Court for
Alameda County, California on behalf of persons allegedly injured as a result of
the smoke, ash and embers generated by the fire. The complaint, which was
amended after the Court sustained the Company's demurrer with leave to amend,
generally alleged that the Company fraudulently (i) obtained settlements of
certain claims arising out of the fire and (ii) made statements that induced
claimants not to file actions within the time period under the statute of
limitations. The amended complaint sought compensatory and punitive damages. In
May 1997, the Court dismissed the case, and in May 1998 the California Court of
Appeal affirmed the dismissal. In August 1998, plaintiffs' petition for review
by the California Supreme Court was denied.
On July 10, 1998, Safeway was served with a new case filed in the Superior
Court for Alameda County, California by the same attorney who handled the
purported class action described in the preceding paragraph. Safeway filed a
demurrer, and plaintiffs filed an amended complaint. Safeway filed a demurrer to
the amended complaint. The first complaint asserted allegations that are
generally similar to those in the case described above. The amended complaint
contains factual allegations that materially contradict those contained in the
first complaint and includes a claim for breach of contract. Plaintiffs seek
damages according to proof, plus interest and punitive damages. The case
purports to be filed on behalf of approximately 21,500 individual plaintiffs. On
March 5, 1999, the Court sustained Safeway's demurrer to plaintiffs' fraud claim
and overruled Safeway's demurrer to plaintiffs' contract claim. The Company
believes that the claims in the new case are without merit and intends to defend
this lawsuit vigorously.
The Company has received notice from its insurance carrier denying coverage
for the claims asserted in the two purported class action suits described above.
Safeway strongly disagrees with the insurance carrier's denial of coverage.
Safeway continues to believe that coverage under its insurance policy will be
sufficient and available for resolution of all remaining personal injury and
property damage claims arising out of the fire.
On September 13, 1996, a class action lawsuit entitled McCampbell et al. v.
Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego
County, California against Vons and two other grocery store chains operating in
southern California. In the complaint it is alleged, among other things, that
Vons and the other defendants conspired to fix the retail price of eggs in
southern California. The plaintiffs claim that the defendants violated
provisions of the California Cartwright Act and engaged in unfair competition.
Plaintiffs seek damages they allege the class has sustained; the amount of
damages sought is not specified. Plaintiffs have produced a damages study which
purports to support damages in excess of $90 million attributable to Vons. If
any damages were to be awarded, they may be trebled under the applicable
statute. In addition, plaintiffs seek an injunction against future acts that
would be in restraint of trade or that would constitute
H-56
<PAGE> 220
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unfair competition. An answer has been filed to the complaint that denies
plaintiffs' allegations and sets forth several defenses. On October 3, 1997, the
Court issued an order certifying a class of retail purchasers of white chicken
eggs by the dozen from defendants' stores within the Counties of Los Angeles,
Riverside, San Bernardino, San Diego, Imperial and Orange during the period from
September 13, 1992 to the present. On September 23, 1998 the Court denied
defendants' motions for summary judgment. It is expected that trial will
commence in the third quarter of 1999. The Company believes that Vons has
meritorious defenses to plaintiffs' claims and plans to defend this lawsuit
vigorously.
Safeway acquired Dominick's in November 1998. At that time, there was
pending against Dominick's a class action lawsuit that had been filed in the
U.S. District Court for the Northern District of Illinois in March 1995,
alleging gender discrimination and seeking compensatory and punitive damages in
an unspecified amount. The lawsuit also alleges national origin discrimination,
but the court denied plaintiffs' class certification motion as to those claims.
The Company believes Dominick's has meritorious defenses and plans to defend
this lawsuit vigorously.
There are also pending against Company various claims and lawsuits arising
in the normal course of business, some of which seek damages and other relief,
which, if granted, would require very large expenditures.
It is management's opinion that although the amount of liability with
respect to all of the above matters cannot be ascertained at this time, any
resulting liability, including any punitive damages, will not have a material
adverse effect on the Company's financial statements taken as a whole.
COMMITMENTS. The Company has commitments under contracts for the purchase
of property and equipment and for the construction of buildings. Portions of
such contracts not completed at year-end are not reflected in the consolidated
financial statements. These unrecorded commitments were $63.8 million at
year-end 1998.
H-57
<PAGE> 221
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L: SEGMENTS
Safeway's retail grocery business, which represents more than 98% of
consolidated sales, is its only reportable segment. The following table presents
information about the Company by geographic area (in millions):
<TABLE>
<CAPTION>
U.S. CANADA TOTAL
--------- -------- ---------
<S> <C> <C> <C>
1998
Sales.......................................... $21,241.7 $3,242.5 $24,484.2
Operating Profit............................... 1,467.3 134.4 1,601.7
Income Before Income Taxes..................... 1,272.3 124.6 1,396.9
Total Assets........................... 10,541.9 847.7 11,389.6
1997
Sales.......................................... $19,075.9 $3,407.9 $22,483.8
Operating profit............................... 1,169.6 110.1 1,279.7
Income before income taxes and extraordinary
loss........................................ 978.4 97.9 1,076.3
Total assets........................... 7,613.7 880.2 8,493.9
1996
Sales.......................................... $13,797.5 $3,471.5 $17,269.0
Operating profit............................... 752.8 138.9 891.7
Income before income taxes..................... 652.2 115.4 767.6
Total assets........................... 4,625.4 919.8 5,545.2
</TABLE>
H-58
<PAGE> 222
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
DILUTED BASIC DILUTED BASIC DILUTED BASIC
------- ------ ------- ------ ------- ------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Income before
extraordinary loss..... $806.7 $806.7 $621.5 $621.5 $460.6 $460.6
Extraordinary loss....... -- -- (64.1) (64.1) -- --
------ ------ ------ ------ ------ ------
Net income............... $806.7 $806.7 $557.4 $557.4 $460.6 $460.6
====== ====== ====== ====== ====== ======
Weighted average common
shares outstanding..... 482.8 482.8 462.3 462.3 436.0 436.0
====== ====== ======
Common share
equivalents............ 26.0 35.4 39.7
------ ------ ------
Weighted average shares
outstanding............ 508.8 497.7 475.7
====== ====== ======
Earnings per common share
and common share
equivalent:
Income before
extraordinary
loss................ $ 1.59 $ 1.67 $ 1.25 $ 1.35 $ 0.97 $ 1.06
Extraordinary loss..... -- -- (0.13) (0.14) -- --
------ ------ ------ ------ ------ ------
Net income............. $ 1.59 $ 1.67 $ 1.12 $ 1.21 $ 0.97 $ 1.06
====== ====== ====== ====== ====== ======
Calculation of common
share equivalents:
Options and warrants to
purchase common
shares.............. 48.0 58.6 62.6
Common shares assumed
purchased with
potential
proceeds............ (22.0) (23.2) (22.9)
------ ------ ------
Common share
equivalents......... 26.0 35.4 39.7
====== ====== ======
Calculation of common
shares assumed
purchased with
potential proceeds:
Potential proceeds from
exercise of options
and warrants to
purchase common
shares.............. $913.9 $597.4 $394.3
Common stock price used
under the treasury
stock method........ $41.60 $25.75 $17.22
Common shares assumed
purchased with
potential
proceeds............ 22.0 23.2 22.9
</TABLE>
H-59
<PAGE> 223
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N: QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflect all
adjustments which, in the opinion of management, are of a normal and recurring
nature necessary to present fairly the results of operations for the periods
presented.
<TABLE>
<CAPTION>
LAST 16 THIRD 12 SECOND 12 FIRST 12
52 WEEKS WEEKS WEEKS WEEKS WEEKS
--------- -------- -------- --------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Sales....................... $24,484.2 $7,922.6 $5,589.0 $5,583.3 $5,389.3
Gross Profit................ 7,124.5 2,288.1 1,650.1 1,622.2 1,564.1
Operating Profit............ 1,601.7 511.8 377.8 380.9 331.2
Income Before Income
Taxes..................... 1,396.9 441.6 335.5 334.4 285.4
Net Income.................. 806.7 255.0 193.7 193.2 164.8
Earnings Per Share:
Basic....................... $ 1.67 $ 0.52 $ 0.40 $ 0.40 $ 0.34
Diluted..................... 1.59 0.50 0.38 0.38 0.33
Price Range, New York Stock
Exchange.................. 61 3/8 61 3/8 46 3/4 40 7/16 37 1/4
to 30 1/2 to 37 5/8 to 37 1/4 to 34 to 30 1/2
</TABLE>
<TABLE>
<CAPTION>
LAST 17 THIRD 12 SECOND 12 FIRST 12
53 WEEKS WEEKS WEEKS WEEKS WEEKS
--------- -------- -------- --------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Sales....................... $22,483.8 $7,785.4 $5,371.4 $5,249.2 $4,077.8
Gross profit................ 6,414.7 2,211.3 1,552.6 1,505.3 1,145.5
Operating profit............ 1,279.7 439.6 317.3 298.0 224.8
Income before income taxes
and extraordinary loss.... 1,076.3 372.2 259.8 240.2 204.1
Extraordinary loss related
to early retirement of
debt, net of income tax
benefit................... (64.1) -- (59.9) (4.2) --
Net income.................. 557.4 214.9 90.1 129.9 122.5
Earnings per share:
Basic
Income before
extraordinary loss..... $ 1.35 $ 0.46 $ 0.32 $ 0.29 $ 0.28
Extraordinary loss........ (0.14) -- (0.13) (0.01) --
--------- -------- -------- -------- --------
Net income............. $ 1.21 $ 0.46 $ 0.19 $ 0.28 $ 0.28
========= ======== ======== ======== ========
Diluted
Income before
extraordinary loss..... $ 1.25 $ 0.43 $ 0.30 $ 0.27 $ 0.26
Extraordinary loss........ (0.13) -- (0.12) (0.01) --
--------- -------- -------- -------- --------
Net income............. $ 1.12 $ 0.43 $ 0.18 $ 0.26 $ 0.26
========= ======== ======== ======== ========
Price range, New York Stock
Exchange.................. $ 31 23/32 $ 31 23/32 $ 27 3/4 $ 24 13/16 $ 26
to 20 9/16 to 25 11/32 to 23 1/16 to 21 1/8 to 20 9/16
</TABLE>
H-60
<PAGE> 224
MANAGEMENT'S REPORT
FINANCIAL STATEMENTS. Safeway Inc. is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
that are based on judgments and estimates made by management. Safeway also
prepared the other information included in the annual report and is responsible
for its accuracy and consistency with the financial statements.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders, the
Board of Directors, and committees of the Board. Safeway believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The report of Deloitte & Touche LLP is presented below.
INTERNAL CONTROL SYSTEM. Safeway maintains a system of internal control
over financial reporting, which is designed to provide reasonable assurance to
management and the Board of Directors regarding the preparation of reliable
published financial statements. The system includes a documented organizational
structure and division of responsibility, established policies and procedures
including a code of conduct to foster a strong ethical climate, which are
communicated throughout Safeway, and the careful selection, training and
development of employees. Internal auditors monitor the operation of the
internal control system and report findings and recommendations to management
and the Board, and corrective actions are taken to address control deficiencies
and other opportunities for improving the system as they are identified. The
Board, operating through its Audit Committee, which is composed entirely of
outside directors, provides oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of circumvention or overriding of
controls. Accordingly, even an effective internal control system can provide
only reasonable assurance with respect to financial statement preparation.
Furthermore, the effectiveness of an internal control system can change with
circumstances. As of January 2, 1999, Safeway believes its system of internal
controls over financial reporting was effective for providing reliable financial
statements.
<TABLE>
<S> <C>
/s/ STEVEN A. BURD /s/ DAVID G. WEED
- --------------------------------------- ---------------------------------------
Steven A. Burd David G. Weed
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
H-61
<PAGE> 225
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Safeway Inc.:
We have audited the accompanying consolidated balance sheets of Safeway
Inc. and subsidiaries as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and of cash flows for each of the three fiscal years in the period ended January
2, 1999. 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 opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Safeway Inc. and subsidiaries
as of January 2, 1999 and January 3, 1998, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
January 2, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 5, 1999
H-62
<PAGE> 226
ANNEX I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 1-41
------------------------
SAFEWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3019135
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5918 STONERIDGE MALL RD. 94588-3229
PLEASANTON, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 467-3000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ ] NO [X].
As of April 30, 1999, there were issued and outstanding 496.6 million
shares of the registrant's common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I-1
<PAGE> 227
SAFEWAY INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 27, 1999
and January 2, 1999......................................... I-3
Condensed Consolidated Statements of Income for the 12 weeks
ended March 27, 1999 and March 28, 1998..................... I-4
Condensed Consolidated Statements of Cash Flows for the 12
weeks ended March 27, 1999 and March 28, 1998............... I-5
Notes to the Condensed Consolidated Financial Statements.... I-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... I-9
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ I-13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... I-14
Item 6. Exhibits and Reports on Form 8-K............................ I-14
</TABLE>
I-2
<PAGE> 228
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 27, JANUARY 2,
1999 1999
--------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 44.9 $ 45.7
Receivables............................................... 191.1 200.1
Merchandise inventories................................... 1,860.6 1,856.0
Prepaid expenses and other current assets................. 208.2 218.1
--------- ---------
Total current assets.............................. 2,304.8 2,319.9
--------- ---------
Property.................................................... 8,118.7 8,024.1
Less accumulated depreciation and amortization............ (2,917.7) (2,841.5)
--------- ---------
Property, net............................................. 5,201.0 5,182.6
Goodwill, net of accumulated amortization of $231.3 and
$211.0.................................................... 3,301.2 3,348.0
Prepaid pension costs....................................... 374.0 369.6
Investment in unconsolidated affiliate...................... 123.2 115.2
Other assets................................................ 27.4 54.3
--------- ---------
Total assets...................................... $11,331.6 $11,389.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures................ $ 130.3 $ 279.8
Current obligations under capital leases.................. 42.3 41.7
Accounts payable.......................................... 1,416.9 1,595.9
Accrued salaries and wages................................ 284.0 348.9
Other accrued liabilities................................. 683.3 627.3
--------- ---------
Total current liabilities......................... 2,556.8 2,893.6
--------- ---------
Long-term debt:
Notes and debentures...................................... 4,349.6 4,242.6
Obligations under capital leases.......................... 394.3 408.0
--------- ---------
Total long-term debt.............................. 4,743.9 4,650.6
Deferred income taxes....................................... 236.1 216.9
Accrued claims and other liabilities........................ 461.2 546.4
--------- ---------
Total liabilities................................. 7,998.0 8,307.5
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share; 1,500 shares
authorized; 495.7 and 490.3 shares issued, after
deducting 60.5 and 60.6 treasury shares................ 5.6 5.5
Additional paid-in capital................................ 1,340.4 1,297.3
Retained earnings......................................... 2,004.8 1,799.0
Accumulated other comprehensive loss...................... (17.2) (19.7)
--------- ---------
Total stockholders' equity........................ 3,333.6 3,082.1
========= =========
Total liabilities and stockholders' equity........ $11,331.6 $11,389.6
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-3
<PAGE> 229
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
----------------------
MARCH 27, MARCH 28,
1999 1998
--------- ---------
<S> <C> <C>
Sales....................................................... $ 6,113.2 $ 5,389.3
Cost of goods sold.......................................... (4,291.6) (3,825.2)
--------- ---------
Gross profit.............................................. 1,821.6 1,564.1
Operating and administrative expense........................ (1,396.4) (1,232.9)
--------- ---------
Operating profit.......................................... 425.2 331.2
Interest expense............................................ (73.3) (52.9)
Equity in earnings of unconsolidated affiliate.............. 8.0 5.8
Other income, net........................................... 1.2 1.3
--------- ---------
Income before income taxes................................ 361.1 285.4
Income taxes................................................ (155.3) (120.6)
--------- ---------
Net income.................................................. $ 205.8 $ 164.8
========= =========
Basic earnings per share.................................... $ 0.42 $ 0.34
========= =========
Diluted earnings per share.................................. $ 0.40 $ 0.33
========= =========
Weighted average shares outstanding -- basic................ 492.6 478.1
========= =========
Weighted average shares outstanding -- diluted.............. 512.8 506.7
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-4
<PAGE> 230
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
----------------------
MARCH 27, MARCH 28,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income.................................................. $ 205.8 $ 164.8
Reconciliation to net cash flow from operations:
Depreciation and amortization............................. 144.0 116.9
LIFO expense.............................................. 2.3 --
Equity in undistributed earnings of unconsolidated
affiliate.............................................. (8.0) (5.8)
Other..................................................... (24.2) (25.5)
Change in working capital items:
Receivables and prepaid expenses....................... 18.3 (23.4)
Inventories at FIFO cost............................... (6.3) (32.8)
Payables and accruals.................................. (162.3) (204.9)
------- -------
Net cash flow from (used by) operations........... 169.6 (10.7)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions............................ (130.1) (101.8)
Proceeds from sale of property.............................. 8.2 1.2
Other....................................................... (4.9) (4.6)
------- -------
Net cash flow used by investing activities........ (126.8) (105.2)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings.......................... 9.5 50.0
Payments on short-term borrowings........................... (86.5) (111.0)
Additions to long-term borrowings........................... 236.5 208.1
Payments on long-term borrowings............................ (212.7) (79.8)
Net proceeds from exercise of stock options and warrants.... 11.6 7.2
Other....................................................... (2.0) (1.1)
------- -------
Net cash flow from (used by) financing
activities...................................... (43.6) 73.4
------- -------
Decrease in cash and equivalents............................ (0.8) (42.5)
CASH AND EQUIVALENTS
Beginning of period....................................... 45.7 77.2
------- -------
End of period............................................. $ 44.9 $ 34.7
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-5
<PAGE> 231
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Safeway
Inc. and subsidiaries ("Safeway" or the "Company") for the 12 weeks ended March
27, 1999 and March 28, 1998 are unaudited and, in the opinion of management,
contain all adjustments that are of a normal and recurring nature necessary to
present fairly the financial position and results of operations for such
periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 1998 Annual Report to Stockholders. The results of
operations for the 12 weeks ended March 27, 1999 are not necessarily indicative
of the results expected for the full year.
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S")
In November 1998, Safeway acquired Dominick's by purchasing all of the
outstanding shares of Dominick's for $49 cash per share, or a total of
approximately $1.2 billion (the "Dominick's Acquisition"). The Dominick's
Acquisition was accounted for as a purchase, and Dominick's operating results
have been consolidated with Safeway's since approximately midway through the
fourth quarter of 1998. See Note D.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
In April 1999, Safeway acquired Carrs by purchasing all of the outstanding
shares of Carrs for $12.50 cash per share, or a total of approximately $110
million (the "Carrs Acquisition"). Carrs is Alaska's largest food and drug
retailer. Carrs also runs Alaska's largest food warehouse and distribution
operation. On the acquisition date, Carrs operated 49 stores. The Carrs
Acquisition will be accounted for as a purchase. Safeway funded the Carrs
Acquisition, including the subsequent repayment of $238.7 million of Carr's
debt, with the issuance of commercial paper.
INVENTORY
Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
Safeway recorded LIFO expense $2.3 million during the first 12 weeks of 1999. No
LIFO expense was recorded during the first 12 weeks of 1998. Actual LIFO Indices
are calculated during the fourth quarter of the year based upon a statistical
sampling of inventories.
COMPREHENSIVE INCOME
Comprehensive income includes net income and foreign currency translation
adjustments. Total comprehensive income approximates net income.
NOTE B -- NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
derivatives be
I-6
<PAGE> 232
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
carried at fair value, and provides for hedge accounting when certain conditions
are met. This statement is effective for Safeway beginning in the first quarter
of 2000. Although the Company has not fully assessed the implications of this
new statement, the Company does not believe adoption of this statement will have
a material impact on its financial statements.
During the first quarter of 1999, the Company adopted SOP 98-5, "Reporting
on the Costs of Start-Up Activities," which requires that costs incurred for
start-up activities, such as store openings, be expensed as incurred. This SOP
did not have a material impact on Safeway's financial statements.
NOTE C -- FINANCING
Notes and debentures were composed of the following at March 27, 1999 and
January 2, 1999 (in millions):
<TABLE>
<CAPTION>
MARCH 27, 1999 JANUARY 2, 1999
------------------- -------------------
LONG-TERM CURRENT LONG-TERM CURRENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial paper................................. $1,763.0 $1,745.0
Bank credit agreement, unsecured................. 185.1 89.1
9.30% Senior Secured Debentures due 2007......... 24.3 24.3
6.85% Senior Notes due 2004, unsecured........... 200.0 200.0
7.00% Senior Notes due 2007, unsecured........... 250.0 250.0
7.45% Senior Debentures due 2027, unsecured...... 150.0 150.0
5.75% Notes due 2000, unsecured.................. 400.0 400.0
5.875% Notes due 2001, unsecured................. 400.0 400.0
6.05% Notes due 2003, unsecured.................. 350.0 350.0
6.50% Notes due 2008, unsecured.................. 250.0 250.0
9.35% Senior Subordinated Notes due 1999,
unsecured...................................... -- -- $ 66.7
10% Senior Subordinated Notes due 2001,
unsecured...................................... 79.9 79.9 --
9.65% Senior Subordinated Debentures due 2004,
unsecured...................................... 81.2 81.2 --
9.875% Senior Subordinated Debentures due 2007,
unsecured...................................... 24.2 24.2 --
10% Senior Notes due 2002, unsecured............. 6.1 6.1 --
Mortgage notes payable, secured.................. 64.0 $ 40.4 69.6 46.3
Other notes payable, unsecured................... 96.3 5.1 97.7 5.0
Medium-term notes, unsecured..................... 25.5 -- 25.5 --
Short-term bank borrowings, unsecured............ -- 84.8 -- 161.8
-------- ------ -------- ------
$4,349.6 $130.3 $4,242.6 $279.8
======== ====== ======== ======
</TABLE>
NOTE D -- PRO FORMA SUMMARY FINANCIAL INFORMATION
The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of the operations of Safeway and
Dominick's, as if the Dominick's Acquisition had occurred as of the beginning of
the 12-week period ended March 28, 1998. This pro forma financial information is
presented for informational
I-7
<PAGE> 233
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
purposes only and may not be indicative of what the actual consolidated results
of operations would have been if the acquisition had been effective as of the
period being presented.
Under purchase accounting, the purchase price is allocated to acquired
assets and liabilities based on their estimated fair values at the date of
acquisition, and any excess is allocated to goodwill. For Dominick's, such
allocations are subject to adjustment when additional analysis concerning asset
and liability balances is finalized. The preliminary allocation of the purchase
price to the assets and liabilities acquired was based in part upon an
independent valuation which, in turn, was based upon certain estimates and cash
flow information provided by management. Management does not expect the final
allocations to differ materially from the amounts presented herein.
<TABLE>
<CAPTION>
12 WEEKS ENDED
----------------------------------------
(ACTUAL) (PRO FORMA)
MARCH 27, 1999 MARCH 28, 1998
----------------- -----------------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C>
Sales....................................... $6,113.2 $5,920.7
Net income.................................. $ 205.8 $ 150.9
Diluted earnings per share.................. $ 0.40 $ 0.30
</TABLE>
NOTE E -- CONTINGENCIES
LEGAL MATTERS
Note K to the Company's consolidated financial statements, under the
caption "Legal Matters" on pages 35 and 36 of the 1998 Annual Report to
Stockholders, provides information on significant claims and litigation in which
the Company is involved. There have been no material changes in the information
relating to those matters.
In April 1999, a lawsuit entitled Sanders, et al. v. Lucky Stores, Inc. et
al. was filed in the California Superior Court, San Francisco County, against
the Company and five other retail grocery store operations. The complaint
alleges, among other things, that the Company conspired with the other
defendants to fix the retail price of milk in six San Francisco Bay Area
counties in violation of the California Cartwright Act and the California Unfair
Competition Act. The plaintiffs purport to bring the lawsuit as a class action
on behalf of all persons who reside, and who purchased milk from the defendants,
in the Bay Area counties from April 1995 to the present. The complaint seeks
unspecified damages, an injunction enjoining the defendants from fixing the
price of milk and restitution of profits earned through the allegedly unlawful
practices. If damages were to be awarded, they may be trebled under the
applicable statute. The Company believes that it has meritorious defenses to
plaintiffs' claims and plans to defend this lawsuit vigorously.
I-8
<PAGE> 234
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Safeway's net income was $205.8 million ($0.40 per share) for the first
quarter ended March 27, 1999, compared to $164.8 million ($0.33 per share) for
the first quarter of 1998.
In November 1998, Safeway acquired Dominick's Supermarkets, Inc. (the
"Dominick's Acquisition"), which is the second largest supermarket operator in
the Chicago metropolitan area. In order to facilitate an understanding of the
Company's operations, the following discussions of gross profit and operating
and administrative expenses include certain pro forma information based on the
1998 combined historical financial statements as if the Dominick's Acquisition
had been effective as of the beginning of 1998.
Due primarily to the Dominick's Acquisition, total first-quarter sales
increased 13.4% to $6.1 billion in 1999 from $5.4 billion in 1998.
Identical-store sales (which exclude replacement stores) increased 2.2%, while
comparable-store sales increased 2.8%.
Safeway's continuing improvement in buying practices and product mix,
together with reduced advertising costs, helped increase gross profit to 29.80%
of sales in the first quarter of 1999, from 29.02% in 1998 on a historical basis
and 28.98% on a pro forma basis. The Company recorded LIFO expense of $2.3
million in the first quarter of 1999. No LIFO expense was recorded in the first
quarter of 1998. Increased sales and ongoing efforts to reduce or control
expenses helped to improve Safeway's operating and administrative expense to
22.84% of sales in the first quarter of 1999, from 22.88% in 1998 on a
historical basis and 23.16% on a pro forma basis.
Interest expense increased to $73.3 million in the first quarter of 1999
from $52.9 million last year, due to borrowings incurred in connection with the
Dominick's Acquisition. Despite higher interest expense, Safeway's interest
coverage (defined in the table on page 11) was 7.81 times, due to strong
operating results. Operating cash flow (defined in the table on page 11) as a
percentage of sales was 9.37% for the first quarter of 1999 and 8.99% for the
last four quarters.
Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was
$8.0 million for the first quarter of 1999, compared to $5.8 million in 1998.
Casa Ley operates 80 food and general merchandise stores in western Mexico.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
On April 16, 1999, Safeway acquired all of the outstanding shares of Carrs
for $12.50 cash per share, or a total of approximately $110 million (the "Carrs
Acquisition"). Carrs is Alaska's largest food and drug retailer. Carrs also runs
Alaska's largest food warehouse and distribution operation. On the acquisition
date, Carrs operated 49 stores. A consent decree entered into with the state of
Alaska requires the sale of six Safeway stores and one Carrs store following the
Carrs Acquisition. Safeway funded the Carrs Acquisition, including the
subsequent repayment of $238.7 million of Carrs' debt, with the issuance of
commercial paper.
I-9
<PAGE> 235
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operations was $169.6 million in the first quarter of 1999
compared to cash flow used by operations of $10.7 million in the first quarter
of 1998. This change is primarily due to improved results of operations and
changes in working capital. Working capital (excluding cash and debt) at March
27, 1999 was a deficit of $112.2 million compared to a deficit of $16.8 million
at March 28, 1998.
Cash flow used for investing activities for the first quarter of the year
was $126.8 million in 1999 compared to $105.2 million in 1998, primarily due to
increased capital expenditures in 1999.
Cash flow used for financing activities was $43.6 million in the first
quarter of 1999, primarily due to the repayment of debt. In the first quarter of
1998, financing activities provided cash flow of $73.4 million which was used
primarily to fund capital expenditures.
I-10
<PAGE> 236
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash flow from operations as presented in the Condensed Consolidated
Statements of Cash Flows is an important measure of cash generated by the
Company's operating activities. Operating cash flow, as defined below, is
similar to net cash flow from operations because it excludes certain noncash
items. However, operating cash flow also excludes interest expense and income
taxes. Management believes that operating cash flow is relevant because it
assists investors in evaluating Safeway's ability to service its debt by
providing a commonly used measure of cash available to pay interest, and it
facilitates comparisons of Safeway's results of operations with those of
companies having different capital structures. Other companies may define
operating cash flow differently, and as a result, such measures may not be
comparable to Safeway's operating cash flow. Safeway's computation of operating
cash flow is as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED
----------------------
MARCH 27, MARCH 28,
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Income before income taxes.................................. $361.1 $285.4
Interest expense............................................ 73.3 52.9
Depreciation and amortization............................... 144.0 116.9
LIFO expense................................................ 2.3 --
Equity in earnings of unconsolidated affiliate.............. (8.0) (5.8)
------ ------
Operating cash flow......................................... $572.7 $449.4
====== ======
As a percent of sales....................................... 9.73% 8.34%
As a multiple of interest expense........................... 7.81x 8.50x
</TABLE>
Based upon the current level of operations, Safeway believes that operating
cash flow and other sources of liquidity, including borrowings under Safeway's
commercial paper program and the bank credit agreement, will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the foreseeable future. There can
be no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels. The bank credit agreement is used
primarily as a backup facility to the commercial paper program. During the
second quarter of 1999, the acquisition of Carrs, including the subsequent
repayment of $238.7 million of Carr's debt, was funded with the issuance of
commercial paper.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications is necessary to avoid system
failures and the temporary inability to process transactions or engage in other
normal business activities.
In 1997 the Company established a year 2000 project group, headed by the
Company's Chief Information Officer, to coordinate the Company's year 2000
compliance
I-11
<PAGE> 237
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
efforts. The project group is staffed primarily with representatives of the
Company's Information Technology department and also uses outside consultants on
an as-needed basis. The Chief Information Officer reports regularly on the
status of the year 2000 project to a steering committee headed by the Chief
Executive Officer and to the Company's board of directors.
The year 2000 project group has identified all computer-based systems and
applications (including embedded systems) the Company uses in its operations
that might not be year 2000 compliant, and has categorized these systems and
applications into three priority levels based on how critical the system or
application is to the Company's operations. The year 2000 project group is
determining what modifications or replacements will be necessary to achieve
compliance; implementing the modifications and replacements; conducting tests
necessary to verify that the modified systems are operational; and transitioning
the compliant systems into the regular operations of the Company. The systems
and applications in the highest priority level are being assessed and modified
or replaced first. Management estimates that these actions with respect to all
priority levels are approximately 90% complete as of March 31, 1999. The Company
estimates that all critical Safeway systems and applications will be year 2000
compliant by June 30, 1999.
Safeway completed its acquisition of Dominick's in November 1998, and is in
the process of replacing or modifying systems that are not year 2000 compliant.
Safeway estimates that all critical systems and applications of Dominick's will
be year 2000 compliant by September 30, 1999.
Safeway also completed its acquisition of Carrs on April 16, 1999. The
majority of Carrs systems which are not year 2000 compliant will be replaced
with the core Safeway systems. Other Carrs systems will be modified as
necessary. Safeway estimates that all critical systems and applications of Carrs
will be year 2000 compliant by September 30, 1999.
The year 2000 project group is also examining the Company's relationships
with certain key outside vendors and others with whom the Company has
significant business relationships to determine, to the extent practical, the
degree of such outside parties' year 2000 compliance. The project group is
testing procedures with certain vendors identified as having potential year 2000
compliance issues. Management does not believe that the Company's relationship
with any third party is material to the Company's operations and, therefore,
does not believe that the failure of any particular third party to be year 2000
compliant would have a material adverse effect on the Company.
The year 2000 project group has established a preliminary contingency plan
to provide for viable alternatives to ensure that the Company's core business
operations are able to continue in the event of a year 2000-related systems
failure. The plan provides for several alternative responses to various possible
failure scenarios in each of the Company's primary functional areas. The plan is
being and will continue to be evaluated and refined by management for each
functional area. Limited testing of the plan will take place during the third
quarter of 1999, and the Company expects that the plan will be finalized in all
material respects by September 30, 1999.
I-12
<PAGE> 238
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Through the first quarter of 1999 the Company has spent approximately $21.4
million to address year 2000 compliance issues. The Company estimates that it
will incur an additional $8.6 million, for a total of approximately $30.0
million (including $5.0 million for Dominick's and Carrs) to address year 2000
compliance issues, which includes the estimated costs of all modifications,
testing and consultants' fees.
Management believes that, should the Company or any third party with whom
the Company has a significant business relationship have a year 2000-related
systems failure, the most significant impact would likely be the inability, with
respect to a group of stores, to conduct operations due to a power failure, to
deliver inventory in a timely fashion, to receive certain products from vendors
or to process electronically customer sales at the store level. The Company does
not anticipate that any such impact would be material to the Company's liquidity
or results of operations.
CAPITAL EXPENDITURE PROGRAM
During the first quarter of 1999, Safeway invested $176.8 million in
capital expenditures (as defined on page 14 of the Company's 1998 Annual Report
to Stockholders) and opened 13 new stores. The Company expects to spend
approximately $1.2 billion in 1999, while opening 55 to 60 new stores and
completing approximately 250 remodels.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Exchange Act of 1934. Such statements relate to, among other things,
capital expenditures, cost reduction, cash flow, operating improvements and year
2000 disclosures, and are indicated by words or phrases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects", "management
believes," "the Company believes," "the Company intends" and similar words or
phrases. The following are among the principal factors that could cause actual
results to differ materially from the forward-looking statements: general
business and economic conditions in the Company's operating regions, including
the rate of inflation, population, employment and job growth in the Company's
markets; pricing pressures and other competitive factors, which could include
pricing strategies, store openings and remodels; results of the Company's
efforts to reduce costs; the ability to integrate and achieve operating
improvements at companies Safeway acquires; increases in labor costs and
deterioration in relations with the union bargaining units representing the
Company's employees; issues arising from addressing year 2000 information
technology issues; opportunities or acquisitions that the Company pursues; and
the availability and terms of financing. Consequently, actual events and results
may vary significantly from those included in or contemplated or implied by such
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change to the information appearing under the
caption "Market Risk from Financial Instruments" on page 14 of the Company's
1998 Annual Report to Stockholders.
I-13
<PAGE> 239
SAFEWAY INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note K to the Company's consolidated financial statements, under the
caption "Legal Matters" on pages 35 and 36 of the 1998 Annual Report to
Stockholders, provides information on significant claims and litigation in which
the Company is involved. There have been no material changes in the information
relating to those matters.
In April 1999, a lawsuit entitled Sanders, et al. v. Lucky Stores, Inc. et
al. was filed in the California Superior Court, San Francisco County, against
the Company and five other retail grocery store operations. The complaint
alleges, among other things, that the Company conspired with the other
defendants to fix the retail price of milk in six San Francisco Bay Area
counties in violation of the California Cartwright Act and the California Unfair
Competition Act. The plaintiffs purport to bring the lawsuit as a class action
on behalf of all persons who reside, and who purchased milk from the defendants,
in the Bay Area counties from April 1995 to the present. The complaint seeks
unspecified damages, an injunction enjoining the defendants from fixing the
price of milk and restitution of profits earned through the allegedly unlawful
practices. If damages were to be awarded, they may be trebled under the
applicable statute. The Company believes that it has meritorious defenses to
plaintiffs' claims and plans to defend this lawsuit vigorously.
ITEM 6(a). EXHIBITS
<TABLE>
<S> <C>
Exhibit 2.1 Agreement and Plan of Merger dated as of August 6, 1998,
among Carr-Gottstein Foods Co., Safeway Inc. and ACG Merger
Sub., Inc.; and Stockholder Support Agreement dated August
6, 1998 entered into by Green Equity Investors, L.P. for the
benefit of Safeway Inc. (incorporated by reference to
Exhibit 2.1 to Registrant's Form 10-Q for the quarterly
period ended September 12, 1998).
Exhibit 2.2 Agreement and Plan of Merger dated as of October 13, 1998,
by and among Safeway Inc., Windy City Acquisition Corp. and
Dominick's Supermarkets, Inc. (incorporated by reference to
Exhibit (c)(1) to Registrant's Schedule 14D-1 dated October
19, 1998), and Stockholders' Agreement dated as of October
12, 1998 between Safeway Inc., Windy City Acquisition Corp.,
and each of the stockholders of Dominick's Supermarkets,
Inc. named on the signature pages thereto (incorporated by
reference to Exhibit (c)(2) to Registrant's Schedule 14D-1
dated October 19, 1998).
Exhibit 3.1 Restated Certificate of Incorporation of the Company and
Certificate of Amendment of Restated Certificate of
Incorporation by the Company (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 15, 1996) and
Certificate of Amendment of Restated Certificate of
Incorporation of Safeway Inc. (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 20, 1998).
Exhibit 3.2 Form of By-laws of the Company as amended (incorporated by
reference to Exhibit 3.2 to Registration Statement No.
33-33388), and Amendment to the Company's By-laws effective
March 8, 1993 (incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-K for the year ended January 2, 1993).
</TABLE>
I-14
<PAGE> 240
<TABLE>
<S> <C>
Exhibit 11.1 Computation of Earnings Per Share.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
</TABLE>
ITEM 6(b). REPORTS ON FORM 8-K
On February 23, 1999, the Company filed a Current Report on Form 8-K
stating under "Item 5. Other Events" that Safeway and Carrs announced that the
companies had settled a purported class action lawsuit pending in the state
court in Anchorage, Alaska, which sought to prevent the proposed acquisition of
Carrs by Safeway.
On February 11, 1999, the Company filed a Current Report on Form 8-K
stating under "Item 5. Other Events" that Safeway and Carrs announced the filing
of a consent decree with the Attorney General of the State of Alaska regarding
the proposed acquisition of Carrs by Safeway.
I-15
<PAGE> 241
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 1999 /s/ STEVEN A. BURD
----------------------------------
Steven A. Burd
Chairman, President
and Chief Executive Officer
Date: May 10, 1999 /s/ DAVID G. WEED
----------------------------------
David G. Weed
Executive Vice President
and Chief Financial Officer
I-16
<PAGE> 242
ANNEX J
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 19, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 1-41
SAFEWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3019135
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5918 STONERIDGE MALL RD.
PLEASANTON, CALIFORNIA 94588-3229
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 467-3000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 3, 1999, there were issued and outstanding 497.6 million
shares of the registrant's common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J-1
<PAGE> 243
SAFEWAY INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements........................................ J-3
Condensed Consolidated Balance Sheets as of June 19, 1999
and January 2, 1999......................................... J-3
Condensed Consolidated Statements of Income for the 12 weeks
and 24 weeks ended June 19, 1999 and June 20, 1998.......... J-4
Condensed Consolidated Statements of Cash Flows for the 24
weeks ended June 19, 1999 and June 20, 1998................. J-5
Notes to the Condensed Consolidated Financial Statements.... J-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... J-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... J-15
Item 4. Submission of Matters to a Vote of Security Holders......... J-16
Item 6. Exhibits and Reports on Form 8-K............................ J-16
</TABLE>
J-2
<PAGE> 244
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 19, JANUARY 2,
1999 1999
--------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 40.3 $ 45.7
Receivables............................................... 201.2 200.1
Merchandise inventories................................... 1,884.8 1,856.0
Prepaid expenses and other current assets................. 203.7 218.1
--------- ---------
Total current assets...................................... 2,330.0 2,319.9
--------- ---------
Property.................................................... 8,432.9 8,024.1
Less accumulated depreciation and amortization............ (3,019.5) (2,841.5)
--------- ---------
Property, net............................................. 5,413.4 5,182.6
Goodwill, net of accumulated amortization of $253.3 and
$211.0.................................................... 3,519.2 3,348.0
Prepaid pension costs....................................... 378.4 369.6
Investment in unconsolidated affiliate...................... 128.4 115.2
Other assets................................................ 44.3 54.3
--------- ---------
Total assets................................................ $11,813.7 $11,389.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures................ $ 153.2 $ 279.8
Current obligations under capital leases.................. 42.3 41.7
Accounts payable.......................................... 1,423.5 1,595.9
Accrued salaries and wages................................ 337.1 348.9
Other accrued liabilities................................. 667.5 627.3
--------- ---------
Total current liabilities................................. 2,623.6 2,893.6
--------- ---------
Long-term debt:
Notes and debentures...................................... 4,505.0 4,242.6
Obligations under capital leases.......................... 387.8 408.0
--------- ---------
Total long-term debt...................................... 4,892.8 4,650.6
Deferred income taxes....................................... 195.7 216.9
Accrued claims and other liabilities........................ 497.3 546.4
--------- ---------
Total liabilities........................................... 8,209.4 8,307.5
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share; 1,500 shares
authorized; 497.1 and 490.3 shares issued, after
deducting 60.4 and 60.6 treasury shares................ 5.6 5.5
Additional paid-in capital................................ 1,365.9 1,297.3
Retained earnings......................................... 2,241.2 1,799.0
Accumulated other comprehensive loss...................... (8.4) (19.7)
--------- ---------
Total stockholders' equity................................ 3,604.3 3,082.1
--------- ---------
Total liabilities and stockholders' equity.................. $11,813.7 $11,389.6
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
J-3
<PAGE> 245
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
---------------------- ----------------------
JUNE 19, JUNE 20, JUNE 19, JUNE 20,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales............................... $ 6,337.0 $ 5,583.3 $12,450.2 $10,972.6
Cost of goods sold.................. (4,442.0) (3,961.1) (8,733.6) (7,786.3)
--------- --------- --------- ---------
Gross profit................... 1,895.0 1,622.2 3,716.6 3,186.3
Operating and administrative
expense........................... (1,425.4) (1,241.3) (2,821.8) (2,474.2)
--------- --------- --------- ---------
Operating profit............... 469.6 380.9 894.8 712.1
Interest expense.................... (74.2) (51.5) (147.5) (104.4)
Equity in earnings of unconsolidated
affiliate......................... 5.2 4.6 13.2 10.4
Other income, net................... 0.8 0.4 2.0 1.7
--------- --------- --------- ---------
Income before income taxes..... 401.4 334.4 762.5 619.8
Income taxes........................ (165.0) (141.2) (320.3) (261.8)
--------- --------- --------- ---------
Net income.......................... $ 236.4 $ 193.2 $ 442.2 $ 358.0
========= ========= ========= =========
Basic earnings per share............ $ 0.48 $ 0.40 $ 0.89 $ 0.75
========= ========= ========= =========
Diluted earnings per share.......... $ 0.46 $ 0.38 $ 0.86 $ 0.71
========= ========= ========= =========
Weighted average shares
outstanding -- basic.............. 496.5 480.2 494.6 479.2
========= ========= ========= =========
Weighted average shares
outstanding -- diluted............ 513.0 508.2 512.9 507.4
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
J-4
<PAGE> 246
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS ENDED
--------------------
JUNE 19, JUNE 20,
1999 1998
-------- --------
<S> <C> <C>
Cash Flow from Operations
Net income.................................................. $ 442.2 $ 358.0
Reconciliation to net cash flow from operations:
Depreciation and amortization............................. 292.3 234.9
LIFO expense.............................................. 4.6 2.3
Equity in undistributed earnings of unconsolidated
affiliate.............................................. (13.2) (10.4)
Other..................................................... 21.8 (13.4)
Change in working capital items:
Receivables and prepaid expenses....................... (6.1) (21.7)
Inventories at FIFO cost............................... 29.6 1.8
Payables and accruals.................................. (244.8) (144.5)
------- -------
Net cash flow from operations..................... 526.4 407.0
------- -------
Cash Flow from Investing Activities
Cash paid for property additions............................ (374.7) (300.7)
Proceeds from sale of property.............................. 32.3 8.1
Net cash paid for acquisition of Carr-Gottstein Foods
Co. ...................................................... (91.3) --
Other....................................................... (6.7) (6.6)
------- -------
Net cash flow used by investing activities........ (440.4) (299.2)
------- -------
Cash Flow from Financing Activities
Additions to short-term borrowings.......................... 58.9 90.0
Payments on short-term borrowings........................... (111.0) (120.0)
Additions to long-term borrowings........................... 697.0 295.0
Payments on long-term borrowings............................ (749.5) (407.9)
Net proceeds from exercise of stock options and warrants.... 16.1 16.4
Other....................................................... (2.9) (2.7)
------- -------
Net cash flow used by financing activities........ (91.4) (129.2)
------- -------
Decrease in cash and equivalents............................ (5.4) (21.4)
Cash and Equivalents
Beginning of period....................................... 45.7 77.2
------- -------
End of period............................................. $ 40.3 $ 55.8
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
J-5
<PAGE> 247
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Safeway
Inc. and subsidiaries ("Safeway" or the "Company") for the 12 weeks and 24 weeks
ended June 19, 1999 and June 20, 1998 are unaudited and, in the opinion of
management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 1998 Annual Report to Stockholders. The results of
operations for the 12 weeks and 24 weeks ended June 19, 1999 are not necessarily
indicative of the results expected for the full year.
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S")
In November 1998, Safeway acquired Dominick's by purchasing all of the
outstanding shares of Dominick's for $49 cash per share, or a total of
approximately $1.2 billion (the "Dominick's Acquisition"). The Dominick's
Acquisition was accounted for as a purchase, and Dominicks' operating results
have been consolidated with Safeway's since approximately midway through the
fourth quarter of 1998. See Note D.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
In April 1999, Safeway acquired Carrs by purchasing all of the outstanding
shares of Carrs for $12.50 cash per share, or a total of approximately $110
million (the "Carrs Acquisition"). Carrs is Alaska's largest food and drug
retailer and runs Alaska's largest food warehouse and distribution operation. On
the acquisition date, Carrs operated 49 stores. The Carrs Acquisition was
accounted for as a purchase and resulted in goodwill of $206 million which is
being amortized over 40 years. Safeway funded the Carrs Acquisition, and the
subsequent repayment of $238.7 million of Carrs' debt, with the issuance of
commercial paper. Safeway's income statement includes eight weeks of Carrs'
results for the second quarter of 1999. See Note D.
PROPOSED ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
On July 23, 1999, Safeway and Randall's jointly announced that they signed
a definitive merger agreement pursuant to which Safeway will acquire Randall's
for total consideration of approximately $1.8 billion. Safeway will pay
approximately $1.425 billion for the equity of Randall's using approximately
$855 million in cash and approximately 10.9 million shares of Safeway common
stock and will assume or repay approximately $375 million of Randall's debt.
Randall's operates 116 stores in Texas with fiscal 1999 net sales of $2.6
billion.
The transaction will be accounted for as a purchase, and the cash portion
is expected to be funded initially with a combination of bank debt, commercial
paper and public debt.
The acquisition is subject to a number of conditions, including the
approval of a majority of Randall's outstanding shares, certain regulatory
approvals and other customary closing conditions.
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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
An affiliate of Kohlberg Kravis Roberts & Co. ("KKR"), which owns
approximately 62% of Randall's outstanding shares and members of the Onstead
family, who own approximately 21% of Randall's outstanding shares, have agreed
to vote their shares in favor of the merger. Another affiliate of KKR is one of
Safeway's shareholders and four of its members sit on Safeway's board of
directors. The acquisition was approved by a special committee of Safeway's
board of directors comprised of three directors who are not affiliated with KKR.
INVENTORY
Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
Safeway recorded LIFO expense $4.6 million during the first 24 weeks of 1999 and
$2.3 million in the first 24 weeks of 1998. Actual LIFO Indices are calculated
during the fourth quarter of the year based upon a statistical sampling of
inventories.
COMPREHENSIVE INCOME
Comprehensive income includes net income and foreign currency translation
adjustments. Total comprehensive income approximates net income.
NOTE B -- NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. This statement is effective for Safeway beginning in
the first quarter of 2001. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption of
this statement will have a material impact on its financial statements.
During the first quarter of 1999, the Company adopted SOP 98-5, "Reporting
on the Costs of Start-Up Activities," which requires that costs incurred for
start-up activities, such as store openings, be expensed as incurred. This SOP
did not have a material impact on Safeway's financial statements.
J-7
<PAGE> 249
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C -- FINANCING
Notes and debentures were composed of the following at June 19, 1999 and
January 2, 1999 (in millions):
<TABLE>
<CAPTION>
JUNE 19, 1999 JANUARY 2, 1999
-------------------- --------------------
LONG-TERM CURRENT LONG-TERM CURRENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial paper........................... $1,549.0 $1,745.0
Bank credit agreement, unsecured........... 560.4 89.1
9.30% Senior Secured Debentures due 2007... 24.3 24.3
6.85% Senior Notes due 2004, unsecured..... 200.0 200.0
7.00% Senior Notes due 2007, unsecured..... 250.0 250.0
7.45% Senior Debentures due 2027,
unsecured................................ 150.0 150.0
5.75% Notes due 2000, unsecured............ 400.0 400.0
5.875% Notes due 2001, unsecured........... 400.0 400.0
6.05% Notes due 2003, unsecured............ 350.0 350.0
6.50% Notes due 2008, unsecured............ 250.0 250.0
9.35% Senior Subordinated Notes due 1999,
unsecured................................ -- -- $ 66.7
10% Senior Subordinated Notes due 2001,
unsecured................................ 79.9 79.9 --
9.65% Senior Subordinated Debentures due
2004,
unsecured................................ 81.2 81.2 --
9.875% Senior Subordinated Debentures due
2007, unsecured.......................... 24.2 24.2 --
10% Senior Notes due 2002, unsecured....... 6.1 6.1 --
Mortgage notes payable, secured............ 60.4 $ 34.5 69.6 46.3
Other notes payable, unsecured............. 94.0 9.1 97.7 5.0
Medium-term notes, unsecured............... 25.5 -- 25.5 --
Short-term bank borrowings, unsecured...... -- 109.6 -- 161.8
-------- ------ -------- ------
$4,505.0 $153.2 $4,242.6 $279.8
======== ====== ======== ======
</TABLE>
NOTE D -- PRO FORMA SUMMARY FINANCIAL INFORMATION
The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of the operations of Safeway,
Dominick's and Carrs, as if these acquisitions had occurred as of the beginning
of the 24-week periods ended June 20, 1998 and June 19, 1999. This pro forma
financial information is presented for informational purposes only and may not
be indicative of what the actual consolidated results of operations would have
been if the acquisitions had been effective as of the period being presented.
Under purchase accounting, the purchase price is allocated to acquired
assets and liabilities based on their estimated fair values at the date of
acquisition, and any excess is allocated to goodwill. For Dominick's and Carrs,
such allocations are subject to adjustment when additional analysis concerning
asset and liability balances is finalized. The preliminary allocation of the
purchase price to the assets and liabilities acquired was based
J-8
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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
in part upon an independent valuation which, in turn, was based upon certain
estimates and cash flow information provided by management. Management does not
expect the final allocations to differ materially from the amounts presented
herein.
<TABLE>
<CAPTION>
24 WEEKS ENDED
----------------------------------
(PRO FORMA) (PRO FORMA)
JUNE 19, 1999 JUNE 20, 1998
------------- -------------
(IN MILLIONS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C>
Sales........................................ $12,593.3 $12,308.7
Net income................................... $ 438.4 $ 327.1
Diluted earnings per share................... $ 0.85 $ 0.64
</TABLE>
NOTE E -- CONTINGENCIES
LEGAL MATTERS
Note K to the Company's consolidated financial statements, under the
caption "Legal Matters" on pages 35 and 36 of the 1998 Annual Report to
Stockholders, provides information on significant litigation in which the
Company is involved. The material changes to that information are described
below.
On May 20, 1999, the Superior Court for Alameda County, California
sustained the Company's motion for judgment on the pleadings on plaintiffs'
contract claim in the case served on Safeway on July 10, 1998 relating to the
1998 Richmond warehouse fire. On March 5, 1999, the same Court sustained the
Company's demurrer to plaintiffs' fraud claim. The May 20, 1999 ruling included
entry of final judgment for the Company. Plaintiffs have filed a motion seeking
relief from that judgment and permission to file a fraud claim that is similar
to their prior claim. Plaintiffs have also filed a notice of appeal.
The trial of the class action lawsuit, McCampbell et. al. v. Ralphs Grocery
Company et. al. in the Super Court for San Diego County, alleging that Vons and
two other grocery store chains conspired to fix the price of eggs in Southern
California, began on July 12, 1999. The trial is expected to continue through
early September. During the trial, plaintiffs amended their damages study to
reduce the alleged damages (before trebling) attributable to Vons to between
$37.2 million to $49.7 million, depending upon the ending date for calculating
damages and whether Vons' discounts are taken into account.
On May 14, 1999, the Company filed an answer to the April 1999 class action
lawsuit entitled Sanders, et al. v. Lucky Stores, et al. in the California
Superior Court, San Francisco County. The lawsuit alleges, among other things,
that the Company conspired with the other defendants to fix the retail price of
milk in six San Francisco Bay Area counties. In the answer, the Company denied
the material allegations of the complaint and asserted several affirmative
defenses.
On July 23, 1999, the Company settled claims made by the U.S. Attorney,
Northern District of California that in March, 1996 Safeway employees caused
milk to enter storm drains at some of its Northern California stores, in
violation of the Clean Water Act. In the settlement, the Company agreed, among
other things, to pay $200,000 in civil fines, enhance training and compliance
programs and educate the industry on storm drain awareness.
J-9
<PAGE> 251
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Safeway Inc. net income was $236.4 million ($0.46 per share) for the second
quarter ended June 19, 1999, compared to $193.2 million ($0.38 per share) for
the second quarter of 1998, an increase of 22%.
Safeway acquired Dominick's in November 1998. Consequently, Safeway's
income statement for the first 24 weeks of 1999 includes Dominick's operating
results while the income statement for the first 24 weeks of 1998 does not.
Also, in April 1999 Safeway acquired all of the outstanding shares of
Carr-Gottstein Foods Co. ("Carrs") for approximately $110 million cash plus the
subsequent repayment of approximately $238.7 million of Carrs' debt.
Consequently, Safeway's income statement includes eight weeks of Carrs' results
for the second quarter of 1999 while the second quarter of 1998 does not.
In order to facilitate an understanding of Safeway's operations, the pro
forma amounts presented below were computed as if Safeway had owned Dominick's
for the first 24 weeks of 1998 and Carrs for the last eight weeks of the second
quarter of 1998.
Second quarter sales increased 13.5% to $6.3 billion in 1999 from $5.6
billion in 1998, primarily because of the Dominick's acquisition.
Comparable-store sales increased 1.5%, while identical-store sales (which
exclude replacement stores) increased 0.7%.
Safeway's continuing improvements in buying practices and product mix
helped increase gross profit to 29.90% of sales in the second quarter of 1999
from 29.05% in the second quarter of 1998 on a historical basis and 29.01% on a
pro forma basis. In addition, promotional spending related to the introduction
of the Safeway Club Card in a number of operating areas reduced gross profit in
1998. LIFO expense was $2.3 million in both the second quarter of 1999 and the
second quarter of 1998.
Operating and administrative expense increased to 22.49% of sales in the
second quarter of 1999 compared to 22.23% in 1998 because Dominick's and Carrs'
operating and administrative expense ratio had historically been higher than
Safeway's and because of increased goodwill amortization as a result of the
Dominick's and Carrs acquisitions. On a pro forma basis, operating and
administrative expense declined 17 basis points from 22.66% in 1998, reflecting
increased sales and ongoing efforts to reduce or control expenses.
Interest expense increased to $74.2 million in the second quarter of 1999
from $51.5 million for the second quarter of 1998 primarily due to debt incurred
to finance the Dominick's and Carrs acquisitions. However, strong operating
results pushed the interest coverage ratio (defined on page 12) for the last
four quarters to 8.57 times compared to 8.04 in the second quarter of 1998.
Operating cash flow (defined on page 12) as a percentage of sales also reached
all-time highs of 9.80% for the quarter and 9.19% for the last four quarters.
Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was
$5.2 million for the quarter compared to $4.6 million in 1998.
For the first 24 weeks of 1999, sales were $12.5 billion compared to sales
of $11.0 billion in 1998. The gross profit margin improved to 29.85% from 29.04%
in 1998 on a historical basis and 29.00% on a pro forma basis. Operating and
administrative expense
J-10
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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
increased to 22.66% of sales in 1999 from 22.55% in 1998 because of the
Dominick's and Carrs acquisitions. On a pro forma basis operating and
administrative expense improved from 22.89% in the first 24 weeks of 1998.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO.
On April 16, 1999, Safeway acquired all of the outstanding shares of Carrs
for $12.50 cash per share, or a total of approximately $110 million (the "Carrs
Acquisition"). Carrs is Alaska's largest food and drug retailer and runs
Alaska's largest food warehouse and distribution operation. On the acquisition
date, Carrs operated 49 stores. A consent decree entered into with the state of
Alaska requires the disposition of six Safeway stores and one Carrs store
following the Carrs Acquisition. Safeway funded the Carrs Acquisition, and the
subsequent repayment of $238.7 million of Carrs' debt, with the issuance of
commercial paper.
PROPOSED ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
On July 23, 1999, Safeway and Randall's jointly announced that they signed
a definitive merger agreement pursuant to which Safeway will acquire Randall's
for total consideration of approximately $1.8 billion. Safeway will pay
approximately $1.425 billion for the equity of Randall's using approximately
$855 million in cash and approximately 10.9 million shares of Safeway common
stock and will assume or repay approximately $375 million of Randall's debt.
Randall's operates 116 stores in Texas with fiscal 1999 net sales of $2.6
billion.
The transaction will be accounted for as a purchase, and the cash portion
is expected to be funded initially with a combination of bank debt, commercial
paper and public debt.
The acquisition is subject to a number of conditions, including the
approval of a majority of Randall's outstanding shares, certain regulatory
approvals and other customary closing conditions.
An affiliate of Kohlberg Kravis Roberts & Co. ("KKR"), which owns
approximately 62% of Randall's outstanding shares and members of the Onstead
family, who own approximately 21% of Randall's outstanding shares, have agreed
to vote their shares in favor of the merger. Another affiliate of KKR is one of
Safeway's shareholders and four of its members sit on Safeway's board of
directors. The acquisition was approved by a special committee of Safeway's
board of directors comprised of three directors who are not affiliated with KKR.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operations was $526.4 million in the first 24 weeks of 1999
compared to cash flow from operations of $407.0 million in the first 24 weeks of
1998. This change is primarily due to improved operations offset by changes in
working capital. Working capital (excluding cash and debt) at June 19, 1999 was
a deficit of $138.4 million compared to a deficit of $117.2 million at June 20,
1998.
Cash flow used for investing activities for the first 24 weeks of the year
was $440.4 million in 1999 compared to $299.2 million in 1998, primarily due to
the acquisition of Carrs and increased capital expenditures in 1999.
J-11
<PAGE> 253
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cash flow used for financing activities was $91.4 million in the first 24
weeks of 1999 and $129.2 in 1998, primarily due to the repayment of debt.
Net cash flow from operations as presented in the Condensed Consolidated
Statements of Cash Flows is an important measure of cash generated by the
Company's operating activities. Operating cash flow, as defined below, is
similar to net cash flow from operations because it excludes certain noncash
items. However, operating cash flow also excludes interest expense and income
taxes. Management believes that operating cash flow is relevant because it
assists investors in evaluating Safeway's ability to service its debt by
providing a commonly used measure of cash available to pay interest, and it
facilitates comparisons of Safeway's results of operations with those of
companies having different capital structures. Other companies may define
operating cash flow differently, and as a result, such measures may not be
comparable to Safeway's operating cash flow. Safeway's computation of operating
cash flow is as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------- --------------------
JUNE 19, JUNE 20, JUNE 19, JUNE 20,
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Income before income taxes.................. $401.4 $334.4 $ 762.5 $619.8
Interest expense............................ 74.2 51.5 147.5 104.4
Depreciation and amortization............... 148.4 118.0 292.3 234.9
LIFO expense................................ 2.3 2.3 4.6 2.3
Equity in earnings of unconsolidated
affiliate................................. (5.2) (4.6) (13.2) (10.4)
------ ------ -------- ------
Operating cash flow......................... $621.1 $501.6 $1,193.7 $951.0
====== ====== ======== ======
As a percent of sales....................... 9.80% 8.98% 9.59% 8.67%
As a multiple of interest expense........... 8.37x 9.74x 8.09x 9.11x
</TABLE>
Based upon the current level of operations, Safeway believes that operating
cash flow and other sources of liquidity, including borrowings under Safeway's
commercial paper program and the bank credit agreement, will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the foreseeable future. There can
be no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels. The bank credit agreement is used
primarily as a backup facility to the commercial paper program. During the
second quarter of 1999, the acquisition of Carrs, including the subsequent
repayment of $238.7 million of Carrs' debt, was funded with the issuance of
commercial paper.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications is necessary to avoid system
failures and the temporary inability to process transactions or engage in other
normal business activities.
J-12
<PAGE> 254
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In 1997 the Company established a year 2000 project group, headed by the
Company's Chief Information Officer, to coordinate the Company's year 2000
compliance efforts. The project group is staffed primarily with representatives
of the Company's Information Technology department and also uses outside
consultants on an as-needed basis. The Chief Information Officer reports
regularly on the status of the year 2000 project to a steering committee headed
by the Chief Executive Officer and to the Company's board of directors.
The year 2000 project group has identified all computer-based systems and
applications (including embedded systems) the Company uses in its operations
that might not be year 2000 compliant, and has categorized these systems and
applications into three priority levels based on how critical the system or
application is to the Company's operations. The year 2000 project group has
determined the modifications or replacements necessary to achieve compliance, is
implementing the modifications and replacements, conducting tests necessary to
verify that the modified systems are operational and transitioning the compliant
systems into the regular operations of the Company. Management believes that all
critical Safeway systems and applications are now year 2000 compliant. The year
2000 project group will continue to evaluate and test any additional year
2000-related upgrades or changes which may be provided by software vendors
relating to software packages supporting Company systems and applications.
Safeway completed its acquisition of Dominick's in November 1998, and is in
the process of replacing or modifying systems that are not year 2000 compliant.
Safeway estimates that all critical systems and applications of Dominick's will
be year 2000 compliant by September 30, 1999.
Safeway also completed its acquisition of Carrs on April 16, 1999. The
majority of Carrs systems which are not year 2000 compliant will be replaced
with the core Safeway systems. Other Carrs systems will be modified as
necessary. Safeway estimates that all critical systems and applications of Carrs
will be year 2000 compliant by September 30, 1999.
The year 2000 project group is also examining the Company's relationships
with certain key outside vendors and others with whom the Company has
significant business relationships to determine, to the extent practical, the
degree of such outside parties' year 2000 compliance. The project group is
testing procedures with certain vendors identified as having potential year 2000
compliance issues. Management does not believe that the Company's relationship
with any third party is material to the Company's operations and, therefore,
does not believe that the failure of any particular third party to be year 2000
compliant would have a material adverse effect on the Company.
The year 2000 project group has established a contingency plan to provide
for viable alternatives to ensure that the Company's core business operations
are able to continue in the event of a year 2000-related systems failure. The
plan provides for several alternative responses to various possible failure
scenarios in each of the Company's primary functional areas. The plan is being
and will continue to be evaluated and refined by management for each functional
area. A central task force is being formed to manage all year 2000 contingency
preparation and activities for the Company. Each division of the Company will
form its own committee to manage and control contingency preparation and
activities for
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<PAGE> 255
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
that division. Communication of the contingency plan and training to support it
are scheduled for August through October 1999. Testing and contingency drills to
validate the contingency plan and its effectiveness are expected to be complete
by November 30, 1999.
Through the second quarter of 1999 the Company has spent approximately
$23.7 million to address year 2000 compliance issues. The Company estimates that
it will incur an additional $6.3 million, for a total of approximately $30.0
million (including $5.0 million for Dominick's and Carrs) to address year 2000
compliance issues, which includes the estimated costs of all modifications,
testing and consultants' fees.
Management believes that, should the Company or any third party with whom
the Company has a significant business relationship have a year 2000-related
systems failure, the most significant impact would likely be the inability, with
respect to a group of stores, to conduct operations due to a power failure, to
deliver inventory in a timely fashion, to receive certain products from vendors
or to process electronically customer sales at the store level. The Company does
not anticipate that any such impact would be material to the Company's liquidity
or results of operations.
CAPITAL EXPENDITURE PROGRAM
During the first 24 weeks of 1999, Safeway invested $425.1 million in
capital expenditures (as defined on page 14 of the Company's 1998 Annual Report
to Stockholders) and opened 20 new stores. The Company expects to spend
approximately $1.4 billion in 1999 while opening 70 to 75 new stores and
completing approximately 250 remodels.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Exchange Act of 1934. Such statements relate to, among other things,
capital expenditures, cost reduction, cash flow, operating improvements and year
2000 disclosures, and are indicated by words or phrases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects", "management
believes," "the Company believes," "the Company intends" and similar words or
phrases. The following are among the principal factors that could cause actual
results to differ materially from the forward-looking statements: general
business and economic conditions in the Company's operating regions, including
the rate of inflation, population, employment and job growth in the Company's
markets; pricing pressures and other competitive factors, which could include
pricing strategies, store openings and remodels; results of the Company's
efforts to reduce costs; the ability to integrate and achieve operating
improvements at companies Safeway acquires; increases in labor costs and
deterioration in relations with the union bargaining units representing the
Company's employees; issues arising from addressing year 2000 information
technology issues; opportunities or acquisitions that the Company pursues; and
the availability and terms of financing. Consequently, actual events and results
may vary significantly from those included in or contemplated or implied by such
statements.
J-14
<PAGE> 256
SAFEWAY INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note K to the Company's consolidated financial statements, under the
caption "Legal Matters" on pages 35 and 36 of the 1998 Annual Report to
Stockholders, provides information on significant litigation in which the
Company is involved. The material changes to that information are described
below.
On May 20, 1999, the Superior Court for Alameda County, California
sustained the Company's motion for judgment on the pleadings on plaintiffs'
contract claim in the case served on Safeway on July 10, 1998 relating to the
1998 Richmond warehouse fire. On March 5, 1999, the same Court sustained the
Company's demurrer to plaintiffs' fraud claim. The May 20, 1999 ruling included
entry of final judgment for the Company. Plaintiffs have filed a motion seeking
relief from that judgment and permission to file a fraud claim that is similar
to their prior claim. Plaintiffs have also filed a notice of appeal.
The trial of the class action lawsuit, McCampbell et. al. v. Ralphs Grocery
Company et. al. in the Super Court for San Diego County, alleging that Vons and
two other grocery store chains conspired to fix the price of eggs in Southern
California, began on July 12, 1999. The trial is expected to continue through
early September. During the trial, plaintiffs amended their damages study to
reduce the alleged damages (before trebling) attributable to Vons to between
$37.2 million to $49.7 million, depending upon the ending date for calculating
damages and whether Vons' discounts are taken into account.
On May 14, 1999, the Company filed an answer to the April 1999 class action
lawsuit entitled Sanders, et al. v. Lucky Stores, et al. in the California
Superior Court, San Francisco County. The lawsuit alleges, among other things,
that the Company conspired with the other defendants to fix the retail price of
milk in six San Francisco Bay Area counties. In the answer, the Company denied
the material allegations of the complaint and asserted several affirmative
defenses.
On July 23, 1999, the Company settled claims made by the U.S. Attorney,
Northern District of California that in March, 1996 Safeway employees caused
milk to enter storm drains at some of its Northern California stores, in
violation of the Clean Water Act. In the settlement, the Company agreed, among
other things, to pay $200,000 in civil fines, enhance training and compliance
programs and educate the industry on storm drain awareness.
J-15
<PAGE> 257
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 11, 1999 at which the
stockholders voted on proposals as follows:
<TABLE>
<CAPTION>
VOTES AGAINST VOTES BROKER
VOTES FOR OR WITHHELD ABSTAINED NON-VOTES
----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Election of Directors:
Peter A. Magowan..................... 398,783,876 7,299,411 N/A N/A
George R. Roberts.................... 399,035,402 7,047,885 N/A N/A
Rebecca A. Stirn..................... 399,162,581 6,920,706 N/A N/A
Adopt the Company's 1998 Amended and
Restated Equity Participation Plan... 305,009,535 99,055,658 2,018,094 -0-
Reapproval of Performance Bonus Plan
for Executive Officers of Safeway.... 386,374,903 18,173,534 1,534,850 -0-
Adopt stockholder proposal tying
executive compensation to dividends
paid................................. 7,165,207 341,225,979 7,179,753 -0-
Adopt stockholder proposal requesting
the Board of Directors to take the
necessary steps to provide for
cumulative voting.................... 134,745,708 217,651,513 3,173,718 -0-
Ratification of appointment of Deloitte
& Touche LLP as independent auditors
for fiscal year 1999................. 403,857,061 1,151,149 1,075,077 -0-
</TABLE>
ITEM 6(a). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
Exhibit 2.1 Agreement and Plan of Merger dated as of August 6, 1998,
among Carr-Gottstein Foods Co., Safeway Inc. and ACG Merger
Sub., Inc.; and Stockholder Support Agreement dated August
6, 1998 entered into by Green Equity Investors, L.P. for the
benefit of Safeway Inc. (incorporated by reference to
Exhibit 2.1 to Registrant's Form 10-Q for the quarterly
period ended September 12, 1998).
Exhibit 2.2 Agreement and Plan of Merger dated as of October 13, 1998,
by and among Safeway Inc., Windy City Acquisition Corp. and
Dominick's Supermarkets, Inc. (incorporated by reference to
Exhibit (c)(1) to Registrant's Schedule 14D-1 dated October
19, 1998), and Stockholders' Agreement dated as of October
12, 1998 between Safeway Inc., Windy City Acquisition Corp.,
and each of the stockholders of Dominick's Supermarkets,
Inc. named on the signature pages thereto (incorporated by
reference to Exhibit (c)(2) to Registrant's Schedule 14D-1
dated October 19, 1998).
</TABLE>
J-16
<PAGE> 258
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
Exhibit 3.1 Restated Certificate of Incorporation of the Company and
Certificate of Amendment of Restated Certificate of
Incorporation by the Company (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 15, 1996) and
Certificate of Amendment of Restated Certificate of
Incorporation of Safeway Inc. (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 20, 1998).
Exhibit 3.2 Form of By-laws of the Company as amended (incorporated by
reference to Exhibit 3.2 to Registration Statement No.
33-33388); Amendment to the Company's By-laws effective
March 8, 1993 (incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-K for the year ended January 2, 1993);
Amendment to Company's By-laws effective March 10, 1998;
Amendment to Company's By-laws effective May 11, 1999.
Exhibit 10(iii).1* The 1999 Amended and restated Equity Participation Plan of
Safeway, Inc.
Exhibit 11.1 Computation of Earnings Per Share.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
</TABLE>
- ---------------
* Management contract, or compensatory plan or arrangement.
ITEM 6(b). REPORTS ON FORM 8-K
On April 23, 1999, the Company filed a current report on Form 8-K under
"Item 5. Other Events" that on April 13 an Alaska court approved the February
Consent Decree governing Safeway's acquisition of Carr-Gottstein and that on
April 16, 1999 Safeway completed the acquisition of Carr-Gottstein.
J-17
<PAGE> 259
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 3, 1999 /s/ STEVEN A. BURD
----------------------------------
Steven A. Burd
Chairman, President and Chief
Executive Officer
Date: August 3, 1999 /s/ DAVID G. WEED
----------------------------------
David G. Weed
Executive Vice President and Chief
Financial Officer
J-18
<PAGE> 260
ANNEX K
[SAFEWAY LOGO]
SAFEWAY INC.
5918 STONERIDGE MALL ROAD
PLEASANTON, CA 94588-3229
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Safeway
Inc., a Delaware corporation (the "Company"), will be held at the corporate
offices of our subsidiary, The Vons Companies, Inc., 618 Michillinda Avenue,
Arcadia, California on Tuesday, May 11, 1999 at 10:30 a.m. for the following
purposes:
1. To elect three directors of the Company to serve for a term of three
years and until their successors are elected and have qualified;
2. To consider and vote upon adoption of the 1999 Amended and Restated
Equity Participation Plan of Safeway Inc.;
3. To consider and vote upon reapproval of the Operating Performance Bonus
Plan for Executive Officers of Safeway Inc.;
4. To consider and vote upon a stockholder proposal requesting the Board of
Directors to take the necessary steps to adopt a policy to tie at least
half of executive management's compensation to the amount of common
stock dividends paid each year, which proposal is opposed by the Board
of Directors;
5. To consider and vote upon a stockholder proposal requesting the Board of
Directors to take the necessary steps to provide for cumulative voting,
which proposal is opposed by the Board of Directors;
6. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for fiscal year 1999; and
7. To transact such other business as may properly come before the meeting
and any adjournments thereof.
Only stockholders of record at the close of business on March 16, 1999 will
be entitled to notice of and to vote at the Annual Meeting and at any and all
adjournments thereof. A complete list of stockholders entitled to vote at the
Annual Meeting shall be open to the examination of any stockholder, for any
purpose germane to the Annual Meeting, during ordinary business hours for at
least 10 days prior to the Annual Meeting, at the corporate offices of The Vons
Companies, Inc., 618 Michillinda Avenue, Arcadia, California.
K-1
<PAGE> 261
Whether or not you plan to attend the meeting in person, in order to ensure
your representation, please complete, sign, date and promptly return the
enclosed proxy card. A return envelope, which requires no postage if mailed in
the United States, has been provided for your use. If you attend the Annual
Meeting and inform the Secretary of the Company in writing that you wish to vote
your shares in person, your proxy will not be used.
By Order of the Board of
Directors,
MICHAEL C. ROSS
Secretary
Pleasanton, California
Dated: March 24, 1999
K-2
<PAGE> 262
SAFEWAY INC.
5918 STONERIDGE MALL ROAD
PLEASANTON, CA 94588-3229
------------------------
PROXY STATEMENT
This Proxy Statement is furnished to the stockholders on behalf of the
Board of Directors of Safeway Inc., a Delaware corporation ("Safeway" or the
"Company"), in connection with the solicitation by the Board of Directors of
proxies for use at the Annual Meeting of Stockholders of the Company, to be held
at the corporate offices of our subsidiary, The Vons Companies, Inc., 618
Michillinda Avenue, Arcadia, California on Tuesday, May 11, 1999, at 10:30 a.m.
and at any and all adjournments thereof. It is anticipated that the mailing to
stockholders of this Proxy Statement and the enclosed proxy will commence on
March 30, 1999.
Only stockholders of record at the close of business on March 16, 1999 will
be entitled to vote at the meeting. At the close of business on March 16, 1999
there were 495,632,548 outstanding shares of Common Stock. A majority of the
outstanding shares of Common Stock will constitute a quorum for the transaction
of business. Each share of Common Stock not in the treasury is entitled to one
vote. There is no provision in the Company's Restated Certificate of
Incorporation for cumulative voting.
If shares are not voted in person, they cannot be voted on your behalf
unless a signed proxy is given. Even if you expect to attend the Annual Meeting
in person, in order to ensure your representation, please complete, sign and
date the enclosed proxy and mail it promptly in the enclosed envelope. A
stockholder giving a proxy pursuant to the present solicitation may revoke it at
any time before it is exercised by giving a subsequent proxy or by delivering to
the Secretary of the Company a written notice of revocation prior to the voting
of the proxy at the Annual Meeting. If you attend the Annual Meeting and inform
the Secretary of the Company in writing that you wish to vote your shares in
person, your proxy will not be used. If you receive two or more proxy cards,
please complete, sign, date and return each to complete your representation. All
shares represented by each properly executed and unrevoked proxy, in the
accompanying form, will be voted unless the proxy is mutilated or otherwise
received in such form or at such time as to render it unusable.
Votes cast at the Annual Meeting will be tabulated by the persons appointed
by the Company to act as inspectors of election for the Annual Meeting. Shares
represented by proxies that reflect abstentions or "broker non-votes" (i.e.,
shares held by a broker or nominee which are represented at the meeting, but
with respect to which such broker or nominee is not empowered to vote on a
particular proposal) will be counted as shares that are present and entitled to
vote for purposes of determining the presence of a quorum. Directors will be
elected by a plurality of the shares voting, which means that abstentions and
broker non-votes will not affect the election of the candidates receiving the
plurality of votes. In accordance with the Company's Bylaws, for purposes of
determining the outcome of any other proposal as to which proxies reflect
abstentions or broker non-votes, shares represented by such proxies will be
treated as not present and not entitled to vote with respect to that proposal.
The cost of this solicitation will be borne by the Company. Solicitation
will be made by mail, by telegraph and telephone, and personally by a few
officers and regular employees of the Company who will not receive additional
compensation for solicitation.
K-3
<PAGE> 263
Brokers, nominees and fiduciaries will be reimbursed for out-of-pocket expenses
incurred in obtaining proxies or authorizations from the beneficial owners of
the Common Stock. In addition, the Company has retained MacKenzie Partners, Inc.
to assist in the solicitation for a fee of approximately $6,500 plus expenses.
The purpose of the meeting and the matters to be acted upon are set forth
in the foregoing attached Notice of Annual Meeting of Stockholders. As of the
date of this Proxy Statement, management knows of no other business which will
be presented for consideration at the meeting. However, if any such other
business shall properly come before the meeting, votes will be cast pursuant to
said proxies in respect of any such other business in accordance with the best
judgment of the persons acting under said proxies.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Board of Directors is divided into three classes. Each year the stockholders
are asked to elect the members of a class for a term of three years or less,
depending on the class to which the Board has assigned a director not previously
elected by the stockholders. If a quorum is present in person or by proxy, the
affirmative vote of a plurality of the voting power of the shares represented at
the meeting and entitled to vote will be sufficient to elect directors.
It is intended that the shares represented by proxies, in the accompanying
form, will be voted for the election of the three nominees named below unless
authority to so vote is withheld. All of the nominees have consented to being
named herein and to serve if elected. If any of them should become unavailable
prior to the Annual Meeting, the proxy will be voted for a substitute nominee or
nominees designated by the Board of Directors, or the number of directors may be
reduced accordingly.
The Board of Directors recommends the three nominees named below for
election as directors. The three directors will be elected to office for a
three-year term ending at the Annual Meeting in 2002 and until their successors
are elected and have qualified.
The following information, which has been provided by the directors, sets
forth for each of the nominees for election to the Board of Directors and for
each director whose term continues, such person's age and principal occupation
or employment during the past five years, the name of the corporation or other
organization, if any, in which such occupation or employment is or was carried
on and the period during which such person has served as a Safeway director.
1999 NOMINEES
PETER A. MAGOWAN, age 56, has been a member of the Board of Directors since
November 26, 1986. He served as Chairman of the Board of Directors from November
26, 1986 to May 12, 1998. He also served as Chief Executive Officer of the
Company from November 26, 1986 to April 30, 1993 and President of the Company
from March 27, 1988 to October 26, 1992. From December 1979 to November 26,
1986, Mr. Magowan served as Chairman of the Board and Chief Executive Officer of
the Company's predecessor, Safeway Stores, Incorporated, a Maryland corporation.
Mr. Magowan is also a director of Caterpillar, Inc. and DaimlerChrysler AG. Mr.
Magowan is Managing General Partner and President of the San Francisco Giants.
K-4
<PAGE> 264
GEORGE R. ROBERTS, age 55, has been a member of the Board of Directors
since July 23, 1986. Mr. Roberts is a Founding Partner of Kohlberg Kravis
Roberts & Co. ("KKR") and KKR Associates, L.P. ("KKR Associates"). Effective
January 1, 1996, he became a managing member of the limited liability company
which serves as the general partner of KKR. Mr. Roberts is also a director of
Accuride Corporation, Amphenol Corporation, Borden, Inc., Bruno's, Inc., The
Boyd's Collection, Ltd., Evenflo Company Inc., IDEX Corporation, KinderCare
Learning Centers, Inc., KSL Recreation Group, Inc., Owens-Illinois, Inc.,
PRIMEDIA, Inc., Randall's Food Markets, Inc., Regal Cinemas, Inc., RELTEC
Corporation and Spalding Holdings Corporation.
REBECCA A. STIRN, age 46, has been nominated to become a director to serve
in the class of directors whose term will expire in 2002. She has been Vice
President, Sales and Marketing, North America, of Collagen Aesthetics, Inc.
(formerly Collagen Corporation)("Collagen") since January 1998 and was Vice
President, Global Marketing Strategy, of Collagen from January 1996 to January
1998. She was a consultant from March 1995 to January 1996.
CONTINUING DIRECTORS
STEVEN A. BURD, age 49, has been a member of the Board of Directors since
September 7, 1993 and has served as Chairman of the Board of Directors since May
12, 1998. He has been Chief Executive Officer of the Company since April 30,
1993 and President of the Company since October 26, 1992.
JAMES H. GREENE, JR., age 48, has been a member of the Board of Directors
since December 17, 1987. Mr. Greene is a General Partner of KKR Associates and
was a General Partner of KKR from January 1, 1993 until January 1, 1996 when he
became a member of the limited liability company which serves as the general
partner of KKR. Mr. Greene is also a director of Accuride Corporation, Bruno's,
Inc., Owens-Illinois, Inc., Randall's Food Markets, Inc. and RELTEC Corporation.
PAUL HAZEN, age 57, has been a member of the Board of Directors since July
18, 1990. Mr. Hazen has been Chairman of Wells Fargo & Co. since January 1995.
He was Chief Executive Officer of Wells Fargo & Co. and of Wells Fargo Bank,
N.A., from January 1995 to November 1998. He was President of Wells Fargo & Co.
and of Wells Fargo Bank, N.A., from 1984 to 1994. Mr. Hazen is also a director
of AirTouch Communications, Inc.
HENRY R. KRAVIS, age 55, has been a member of the Board of Directors since
November 26, 1986. Mr. Kravis is a Founding Partner of KKR and KKR Associates.
Effective January 1, 1996, he became a managing member of the limited liability
company which serves as the general partner of KKR. Mr. Kravis is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The Boyd's
Collection, Ltd., Bruno's, Inc., Evenflo Company, Inc., The Gillette Company,
IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreation Group, Inc.,
Newsquest Capital, plc, Owens-Illinois, Inc., PRIMEDIA, Inc., Randall's Food
Markets, Inc., RELTEC Corporation, Sotheby's Holdings, Inc. and Spalding
Holdings Corporation.
ROBERT I. MACDONNELL, age 61, has been a member of the Board of Directors
since November 26, 1986. Mr. MacDonnell is a General Partner of KKR Associates
and was a General Partner of KKR until January 1, 1996 when he became a member
of the limited liability company which serves as the general partner of KKR. Mr.
MacDonnell is also a director of Owens-Illinois, Inc.
K-5
<PAGE> 265
WILLIAM Y. TAUSCHER, age 49, has been a member of the Board of Directors
since May 12, 1998. Mr. Tauscher was most recently Chairman of the Board of
Vanstar Corporation ("Vanstar") from 1987, and Chief Executive Officer of
Vanstar from 1988, until its acquisition by Inacom Corp. in February 1999. He
was President of Vanstar from September 1988 to July 1995. Mr. Tauscher is a
director of Inacom Corp.
Mr. Roberts and Mr. Kravis are first cousins. Mr. MacDonnell and Mr.
Roberts are brothers-in-law.
Messrs. Greene, Hazen and Kravis are in the class of directors whose term
will expire in 2000.
Messrs. Burd, MacDonnell and Tauscher are in the class of directors whose
term will expire in 2001.
K-6
<PAGE> 266
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth certain information regarding the beneficial
ownership of Safeway's outstanding Common Stock as of March 16, 1999 by (i) each
of Safeway's directors and nominees who is a stockholder, (ii) the Company's
Chief Executive Officer, (iii) each of the Company's five other most highly
compensated executive officers who were serving as executive officers at the end
of fiscal 1998, (iv) all executive officers and directors of Safeway as a group
and (v) each person believed by Safeway to own beneficially more than 5% of its
outstanding shares of Common Stock. Except as indicated by the notes to the
following table, the holders listed below have sole voting power and investment
power over the shares beneficially held by them. The address of KKR Associates,
SSI Equity Associates, L.P. ("SSI Equity Associates") and SSI Partners, L.P.
("SSI Partners") is 9 West 57th Street, New York, New York 10019.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS(1)
------------------------ ---------------- -------------
<S> <C> <C>
KKR Associates, L.P.(2).......... 44,034,755 8.8
James H. Greene, Jr.(3)........ 144,402 *
Henry R. Kravis(4)............. --
Robert I. MacDonnell(5)........ 85,504 *
George R. Roberts(6)........... --
SSI Equity Associates, L.P.(7)... 6,429,533 1.3
Paul Hazen(8).................... 204,168 *
Peter A. Magowan(8).............. 3,102,352 *
William Y. Tauscher(8)........... 6,700 *
Steven A. Burd(9)................ 4,438,952 *
Kenneth W. Oder(9)(10)........... 2,152,144 *
David G. Weed(9)................. 267,912 *
Michael C. Ross(9)............... 823,985 *
Larree M. Renda 9)............... 341,019 *
Gary D. Smith(9)................. 163,373 *
All executive officers and
directors as a group (17
persons, excluding Messrs.
Greene, Kravis, MacDonnell and
Roberts)(8)(9)................. 12,885,785 2.6
FMR Corp.(11).................... 48,633,005 9.8
</TABLE>
- -------------------------
* Less than 1%
(1) For purposes of this table, a person or a group of persons is deemed to
have "beneficial ownership" as of a given date of any shares which such
person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any shares which
such person or persons has the right to acquire within 60 days after such
date are deemed to be outstanding, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Messrs. Greene, Kravis, MacDonnell, Roberts, Edward A. Gilhuly, Perry
Golkin, Michael W. Michelson, Paul E. Raether, Clifton S. Robbins, Scott
Stuart and Michael T. Tokarz, as general partners of KKR Associates, may be
deemed to share beneficial ownership of any shares beneficially owned by
KKR Associates, but
K-7
<PAGE> 267
disclaim any such beneficial ownership. Messrs. Greene, Kravis, MacDonnell
and Roberts are members of Safeway's Board of Directors.
(3) Represents 70,000 shares owned jointly by Mr. Greene and his wife and
74,402 shares issuable upon exercise of stock options. Does not include
20,000 shares owned by Mrs. Greene, as to which Mr. Greene disclaims any
beneficial ownership. Does not include 12,000 shares held in trust by Mrs.
Greene for the benefit of their children, as to which Mr. Greene disclaims
any beneficial ownership.
(4) Does not include 800,000 shares held by Mr. Kravis as a trustee of an
irrevocable trust created by Mr. Roberts for the benefit of his children
(the "Roberts Trust"). As co-trustee, Mr. Kravis shares the authority to
vote and dispose of the shares, but has no economic interest in the shares.
(5) Represents shares issuable upon exercise of stock options. Does not include
120,000 shares held in an irrevocable trust created by Mr. MacDonnell for
the benefit of his children (the "MacDonnell Trust") with respect to which
Mr. MacDonnell disclaims any beneficial ownership.
(6) Does not include 120,000 shares held by Mr. Roberts as a trustee of the
MacDonnell Trust. As co-trustee, Mr. Roberts shares the authority to vote
and to dispose of the shares, but has no economic interest in the shares.
Does not include 800,000 shares held in the Roberts Trust with respect to
which Mr. Roberts disclaims any beneficial ownership.
(7) SSI Equity Associates is a Delaware limited partnership, the sole general
partner of which is SSI Partners, L.P., a Delaware limited partnership. SSI
Partners, in its capacity as general partner, may be deemed to own any
shares beneficially owned by SSI Equity Associates. Messrs. Kravis,
MacDonnell, Raether and Roberts, as general partners of SSI Partners, may
be deemed to share beneficial ownership of any shares beneficially owned by
SSI Partners, but disclaim any such beneficial ownership. Messrs. Kravis,
MacDonnell and Roberts are members of Safeway's Board of Directors. Safeway
is the sole limited partner of SSI Equity Associates. All of the warrants
held by SSI Equity Associates are attributable to Safeway's limited
partnership interests in SSI Equity Associates. Safeway intends to hold
such warrants until they expire in November 2001 and not to exercise such
warrants.
(8) Includes shares issuable upon exercise of stock options as follows: Mr.
Hazen, 162,500; Mr. Magowan, 350,000; Mr. Tauscher, 2,233.
(9) Includes shares issuable upon exercise of stock options as follows: Mr.
Burd, 3,982,262; Mr. Oder, 2,040,000; Mr. Weed, 250,000; Mr. Ross, 770,000;
Ms. Renda, 304,500; Mr. Smith, 126,800; and all executive officers and
directors as a group, 9,258,149. Does not include shares issuable upon
exercise of stock options which are not vested and will not become vested
within 60 days after March 16, 1999.
(10) Does not include 7,790 shares held by Mr. Oder as trustee of irrevocable
trusts created by Mr. Burd for the benefit of his children. As trustee, Mr.
Oder has the authority to vote and dispose of the shares, but has no
economic interest in the shares.
(11) All information regarding FMR Corp. and its affiliates is based on
information disclosed in the Schedule 13G, as amended, filed by FMR Corp.,
Edward C. Johnson 3d and Abigail Johnson on February 12, 1999 (the "FMR
Schedule 13G"). According to the FMR Schedule 13G, (i) Fidelity Management
& Research Company, a wholly owned subsidiary of FMR Corp., is the
beneficial owner of 44,091,904 of such shares as a result of acting as
investment adviser to various
K-8
<PAGE> 268
investment companies, (ii) Fidelity Management Trust Company, a wholly
owned subsidiary of FMR Corp., is the beneficial owner of 3,893,900 of such
shares as a result of its serving as investment manager of institutional
account(s), (iii) Fidelity International Limited is the beneficial owner of
674,201 of such shares as a result of its providing investment advisory and
management services to a number of non-U.S. investment companies and
certain institutional investors, (iv) FMR Corp., Edward C. Johnson 3d and
Abigail Johnson each has sole dispositive power over all of such shares and
(v) FMR Corp. has sole voting power over 3,194,801 of such shares. The
address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
BOARD MEETINGS, COMMITTEES AND COMPENSATION
The Company's Board of Directors held four regular meetings and four
special meetings in fiscal 1998. Each director, except Mr. Kravis, attended 75%
or more of the total number of Board meetings and meetings of Board committees
on which the director served during the time he served on the Board or
committee. The Board of Directors has established the following standing
committees: Audit Committee, Compensation and Stock Option Committee and Section
162(m) Committee. There is no standing Nominating Committee.
Audit Committee: Paul Hazen, Chairman; William Y. Tauscher. As directed by
the Board, the functions of the committee include recommending independent
auditors to be employed by the Company; conferring with the independent auditors
regarding their audit of the Company; reviewing the fees of such auditors and
other terms of their engagement; considering the adequacy of internal financial
controls and the results of fiscal policies and financial management of the
Company; meeting with the Company's internal auditors; reviewing with the
independent and internal auditors the results of their examinations; and
recommending changes in financial policies or procedures as suggested by the
auditors. During fiscal 1998 the Audit Committee held three meetings.
Compensation and Stock Option Committee: William Y. Tauscher, Chairman;
James H. Greene, Jr., Paul Hazen and Robert I. MacDonnell. The functions of the
committee are to review new or modified programs in the areas of executive
salary and incentive compensation, deferred compensation and stock plans; to
review direct and indirect compensation matters; and to review management's
compensation actions for executive officers and other key personnel. During
fiscal 1998 the Compensation and Stock Option Committee held two meetings.
Section 162(m) Committee: William Y. Tauscher, Chairman; Paul Hazen. The
functions of the committee are to approve grants of stock options to executive
officers; establish performance goals with respect to performance-based
compensation for executive officers; certify whether performance goals have been
met before performance-based compensation is made to executive officers; and
perform any other action required to be performed by a committee of "outside
directors" (pursuant to Section 162(m) of the Internal Revenue Code of 1986), or
by a committee of "non-employee directors" (pursuant to Rule 16b-3 under the
Securities Exchange Act of 1934). During fiscal 1998 the Section 162(m)
Committee did not hold any meetings.
Director Compensation: Directors who are not employees of the Company or
its subsidiaries were paid an annual fee of $40,000 in 1998. See "Compensation
Committee Interlocks and Insider Participation" for a description of fees paid
to KKR by the Company for management, consulting and financial services.
K-9
<PAGE> 269
The Outside Director Equity Purchase Plan (the "Director Plan") generally
provides for the grant to "Outside Directors" (as defined in the Director Plan)
of options to purchase shares of Common Stock of the Company and requires
Outside Directors to purchase shares of Common Stock as a condition to
membership on the Board. Pursuant to the Director Plan, each Outside Director is
granted, on the later to occur of (a) December 14, 1990 (the date of adoption of
the Director Plan by the Board), or (b) such Outside Director's appointment to
the Board, an option to purchase the number of shares of Common Stock equal to
$150,000 (increased by 10% on every other anniversary of the date the Director
Plan was adopted by the Board) divided by the Purchase Price (defined as $2.40
for Outside Directors eligible to be granted options as of the date of adoption
of the Director Plan by the Board, and 80% of the fair market value of a share
of Common Stock on the date of grant for all other initial grants). The
foregoing option grants are conditioned on the purchase by such Outside Director
of shares of Common Stock as set forth in the Director Plan. Mr. Hazen has
purchased 41,668 shares of Common Stock and, in connection with such purchase,
Mr. Hazen delivered to Safeway a full recourse note in the amount of $99,900
which was to mature in 2001 and bore interest at 8.87% per annum. Mr. Hazen
repaid this note in full in April 1998. Mr. Tauscher has purchased 4,467 shares
of Common Stock and, in connection with such purchase, Mr. Tauscher delivered to
Safeway a full recourse note in the amount of $133,070 which matures in 2008 and
bears interest at 5.75% per annum. In addition, pursuant to the Director Plan,
each Outside Director is granted, on the later to occur of (i) May 9, 1995 (the
date of adoption of the First Amendment to the Director Plan by the Board) or
(ii) the date such Outside Director completes three continuous years of service
as a member of the Board, an option to purchase an additional 100,000 shares of
Common Stock at an exercise price equal to the fair market value of a share of
Common Stock on the date of grant. The Director Plan will be replaced with the
1999 Amended and Restated Equity Participation Plan of Safeway Inc. (the "1999
Equity Plan") effective upon the adoption by the Company's stockholders of the
1999 Equity Plan. For a description of the provisions regarding director
compensation under the 1999 Equity Plan, see Proposal 2.
Under the Deferred Compensation Plan for Safeway Directors, a non-employee
director may elect to defer, until a specified calendar year or until retirement
from the Board, all or any portion of the director's cash compensation. The
director may elect to have such compensation credited to a cash credit account
(which accrues interest at the prime rate) or a stock credit account (based on
an equivalent number of shares of Common Stock that could have been purchased
with the deferred compensation). All distributions of a director's cash or stock
credit account are made in cash.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Mr. Magowan resigned from his position as Chief Executive Officer of the
Company effective April 30, 1993 and from his position as Chairman of the Board
of the Company on May 12, 1998. He continues to serve as a director of the
Company and commenced receiving an annual directors fee effective January 1,
1998. The Company employed Mr. Magowan at an annual salary of $737,500 until
December 31, 1994, after which he received a monthly salary of $42,500 ($510,000
annually) until his retirement from the Company on April 30, 1997. Mr. Magowan
will continue to receive insurance benefits and, upon his retirement, became
entitled to receive retirement benefits in accordance with the terms of the
Company's qualified retirement plan of $70,089 per year, and an additional
$566,843 per year from the Company.
K-10
<PAGE> 270
See COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION for
additional relationships and transactions.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership (Forms 3, 4
and 5) of Common Stock with the Securities and Exchange Commission (the "SEC")
and the New York Stock Exchange. Officers, directors and
greater-than-ten-percent holders are required to furnish the Company with copies
of all such forms which they file.
To the Company's knowledge, based solely on the Company's review of copies
of such reports or written representations from certain reporting persons that
no Forms 5 were required to be filed by those persons, the Company believes that
for fiscal 1998 all filing requirements applicable to its officers, directors,
greater-than-ten-percent beneficial owners and other persons subject to Section
16 of the Exchange Act were complied with, except that (a) for fiscal 1996,
Peter Magowan filed one report late covering one transaction, and (b) for fiscal
1998, Mr. Magowan filed one report late covering one transaction, Lawrence
Jackson filed two reports late, in each case covering one transaction, and Paul
Raether filed one report late covering one transaction.
K-11
<PAGE> 271
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation paid by the
Company for services rendered during fiscal years 1998, 1997 and 1996 for the
Chief Executive Officer and the five most highly compensated executive officers
of the Company who were serving as executive officers at the end of fiscal 1998.
SUMMARY COMPENSATION TABLE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
---------------- SECURITIES
SALARY BONUS UNDERLYING
NAME AND PRINCIPAL POSITION YEAR ($)(A) ($)(B) OPTIONS(#)
--------------------------- ---- ------ ------ ------------
<S> <C> <C> <C> <C>
Steven A. Burd................................ 1998 750 1,125 1,200,000
President and CEO 1997 687 631 --
1996 650 715 --
Kenneth W. Oder............................... 1998 500 600 --
Executive Vice President 1997 452 324 600,000
1996 425 425 --
Michael C. Ross............................... 1998 344 275 --
Senior Vice President, 1997 320 191 --
Secretary & General Counsel 1996 300 240 --
David G. Weed................................. 1998 271 298 100,000
Executive Vice President and CFO 1997 304 260 --
1996 212 286 --
Larree M. Renda............................... 1998 284 312 --
Senior Vice President -- 1997 216 113 100,000
Corporate Retail Operations 1996 175 105 --
Gary D. Smith................................. 1998 284 312 --
Senior Vice President 1997 216 113 100,000
and Director of Marketing 1996 174 104 --
</TABLE>
- -------------------------
(a) 1997 salary amounts include an additional week because fiscal 1997 was a
53-week year.
(b) Represents the dollar value of cash and stock bonuses earned by the named
individual during the fiscal year indicated.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Greene, Hazen and MacDonnell served as members of the Compensation
and Stock Option Committee (the "Compensation Committee") of the Company's Board
of Directors during fiscal 1998. Mr. Hazen served as a member of the Section
162(m) Committee during fiscal 1998. Sam Ginn served as Chairman of the
Compensation Committee and the Section 162(m) Committee until his resignation
from the Board on May 12, 1998, whereupon Mr. Tauscher was appointed Chairman of
the Compensation Committee and the Section 162(m) Committee. Mr. Greene was a
Vice President and Assistant Secretary of the Company from August 1986 to
November 1986. No other member of the Compensation Committee or the Section
162(m) Committee is a current or former officer or employee of the Company or
any of its subsidiaries.
Safeway holds an 80% interest in Property Development Associates, a
California general partnership formed in 1987 ("PDA"). The general partners of
PDA are Pacific
K-12
<PAGE> 272
Resources Associates, L.P., a Delaware limited partnership ("PRA"), which is a
company controlled by an affiliate of KKR, and Safeway. PDA was organized to
purchase, manage and dispose of certain Safeway facilities which are no longer
used in Safeway's retail grocery business. During 1998, PDA transferred one
property to the Company to be used as part of an on-site store replacement,
which property had a net book value of $750,000. PDA made a corresponding
distribution in cash to PRA in order to permit PRA to maintain its proportionate
ownership interest in PDA. No gains or losses were recognized on this
transaction in the Company's financial statements. During 1998, Safeway paid PDA
$1.9 million for reimbursement of expenses related to management and real estate
services provided by PDA in connection with certain of Safeway's properties no
longer used in the retail grocery business. At year-end 1998, PDA held 193
properties which were recorded at an aggregate net book value of $113 million.
The accounts of PDA are consolidated with those of the Company, and a minority
interest of $23.9 million is included in accrued claims and other liabilities in
the Company's consolidated balance sheet at year-end 1998.
During fiscal 1998, the Company paid approximately $288,000 in rent to
Carmel Valley Partners with respect to a lease for one of the Company's retail
grocery stores. Carmel Valley Partners is a general partnership 80% of which is
owned by a subsidiary of Pacific Realty Associates, L.P., which is a partnership
controlled by an affiliate of KKR. In addition, during fiscal 1998, the Company
paid approximately $1,283,000 in rent and maintenance fees to PDA with respect
to leases for 14 of the Company's retail grocery stores. The Company believes
that the rates charged with respect to the foregoing leases were the same as or
less than the rates that could be obtained from unrelated third parties.
In 1998, KKR provided management, consulting and financial services to
Safeway for an annual management fee. Such services included, but were not
necessarily limited to, advice and assistance concerning any and all aspects of
the operation, planning and financing of Safeway, as needed from time to time.
For 1998, the Company paid KKR a management fee of $1.35 million and reimbursed
expenses in the amount of approximately $10,800.
In 1991, Mr. Hazen purchased 41,668 shares of Common Stock of the Company
pursuant to the Director Plan. In connection with such purchase, Mr. Hazen
delivered to the Company a full recourse note in the amount of $99,900 which was
to mature in 2001 and bore interest at 8.87% per annum. Mr. Hazen repaid this
note in full in April 1998. During 1998, the largest aggregate amount of
indebtedness outstanding for Mr. Hazen was $99,900 (plus accrued interest).
In 1998, Mr. Tauscher purchased 4,467 shares of Common Stock of the Company
pursuant to the Director Plan. In connection with such purchase, Mr. Tauscher
delivered to the Company a full recourse note in the amount of $133,070 which
matures in 2008 and bears interest at 5.75% per annum. Mr. Tauscher remained
indebted to the Company for such amount (plus accrued interest) as of March 16,
1999.
* * * * *
The following Report of the Compensation Committee and of the Section
162(m) Committee and the Stock Performance Graph are not to be deemed to be
"soliciting material" or to be "filed" with the SEC or subject to Regulation 14A
or 14C or to the liabilities of Section 18 of the Exchange Act except to the
extent the Company specifically requests that such information be treated as
soliciting material or specifically incorporates it by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act.
K-13
<PAGE> 273
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
REPORT OF THE SECTION 162(m) COMMITTEE
The Company's policies with respect to the compensation of executive
officers, which policies are approved by the Compensation Committee, are (1) to
base a significant portion (up to approximately 55%) of total yearly
compensation of executive officers on the performance of the Company and the
individual performances of the executive officers, (2) to award the Company
performance-based portions of compensation only when overall Company performance
reaches pre-established levels, and (3) to pay base salaries and, subject to
approval by the Section 162(m) Committee, award stock options to executive
officers based on a review of competitive compensation practices of various
industry groups and comparable size companies, overall financial, strategic and
operational Company performance, improvement in market value of the Company's
stock and each individual executive officer's performance.
The relationship of Company performance to the compensation of executive
officers, including the Chief Executive Officer ("CEO"), is as follows.
The Company undertakes an annual planning process which culminates in the
adoption and approval of an operating plan for the Company. The operating plan
includes a target level for Company operating performance for the following
year. The specific elements of Company operating performance that are relevant
to compensation determinations are sales, operating profit and working capital.
No operating performance-based compensation is awarded to executive officers,
including the CEO, unless an operating performance threshold based upon target
level performance is met. The operating performance threshold can be met only if
specific performance thresholds for sales and operating profit are met. The
amount of operating performance-based compensation awardable is then increased
or decreased depending on the extent to which the working capital threshold is
or is not met. If the operating performance threshold is met, operating
performance-based compensation of up to 120% of the CEO's base salary is awarded
based upon the extent to which Company performance exceeds the threshold, and
executive officers other than the CEO are eligible to receive operating
performance-based compensation up to a maximum percentage of each such executive
officer's base salary, which maximum percentage ranges from 48% to 120%. The
amount of operating performance-based compensation awarded to such executive
officers may be reduced by the CEO and is based on individual,
participant-specific performance factors, and the amount of a particular
individual's award cannot exceed the maximum percentage for such individual. The
foregoing ranges of percentages of base salary payable to the CEO and other
executive officers were established based on a review of competitive
compensation levels with a view to allowing for higher than average incentive
compensation to supplement lower than average base compensation.
Operating performance-based compensation may, at the option of the
executive, be paid in cash, in stock, or in a combination of cash and stock.
Based on actual operating results in 1998, Company performance exceeded the
threshold of operating performance and, accordingly, operating performance-based
compensation was awarded to the CEO and other executive officers.
In addition to operating performance-based compensation, the most senior
executive officers who are responsible for making capital investment decisions,
including the CEO, are also eligible for capital performance-based compensation,
payment of which is contingent on new capital investments of the Company
achieving targeted rates of return established at the outset of each new capital
investment project. Capital performance is
K-14
<PAGE> 274
measured for the first and third years following completion of a particular
project. With respect to each such year, if the capital performance threshold is
met, compensation of up to 15% (for a total of up to 30%) of the executive
officer's base salary is awarded based upon the extent to which capital
performance exceeded the threshold. The foregoing percentage was established at
a level intended to emphasize the importance of capital spending to the
Company's business. Based on the results of the measured projects, all of which
exceeded the pre-established targeted rates of return, the CEO and certain other
executive officers earned a capital performance-based bonus in 1998 with respect
to measured first and third year projects.
Base salaries are evaluated annually for all executive officers, including
the CEO. Base salaries for executive officers, including the CEO, are based in
part on overall financial, strategic and operational Company performance,
improvement in market value of the Company's stock, individual performance and
competitive salary levels. Of these factors, the most significance is accorded
to overall Company performance and improvement in market value of the Company's
stock, followed by individual performance and competitive salary levels. The
determination of whether to make certain one-time payments, such as signing
bonuses, including the amount of any such payments, is evaluated on a case-by-
case basis. Competitive compensation practices are reviewed by position and
various industry groups, and this competitive data is used to determine
appropriate ranges of base salary levels and annual increases to attract and
retain qualified executives. The companies surveyed for this purpose include
grocery companies and non-grocery companies. The non-grocery companies were
selected because they were considered to be the significant competitors with
respect to executive officer positions. All grocery companies whose executive
pay practices were surveyed for this purpose are included in the peer group
identified in footnote (a) to the Stock Performance Graph set forth elsewhere in
this proxy statement, except for those companies whose common stock was not
publicly traded for the period covered by the Stock Performance Graph. The
Company's executive salary levels, including with respect to the CEO, generally
are at the median of or lower than the executive compensation levels of the
companies surveyed.
Stock option grants are considered periodically by the Section 162(m)
Committee for all executive officers, including the CEO. A primary consideration
in granting stock options is to encourage members of management to hold
significant equity ownership in the Company. The aggregated option exercise
table shows stock options owned by the individuals named in the Summary
Compensation Table. The amounts of stock options granted in any given year,
including those granted to executive officers, are derived based upon the same
factors, and with the same relative significance, as are set forth in the
preceding paragraph with respect to establishment of base salary levels,
although less weight is accorded to competitive compensation levels because of
the difficulty in making a meaningful comparison with respect to stock options.
During 1998, options to purchase 1,200,000 shares of Common Stock were granted
to the CEO based on the above factors, with significant weight given to the
improvement in market value since the last stock option grant to the CEO,
overall Company performance and individual performance. All stock option grants
to executive officers are subject to approval by the Section 162(m) Committee.
The Compensation Committee and the Section 162(m) Committee believe that
the executive compensation policies and programs described above serve the
interests of all stockholders and the Company and substantially link
compensation of the Company's executive officers with the Company's performance.
K-15
<PAGE> 275
During 1993, the Internal Revenue Code of 1986, as amended (the "Code"),
was amended to include a provision which denies a deduction to any publicly held
corporation for compensation paid to any "covered employee" (defined as the CEO
and the Company's other four most highly compensated officers, as of the end of
a taxable year) to the extent that the compensation exceeds $1 million in any
taxable year of the corporation beginning after 1993. Compensation which is
payable pursuant to written binding agreements entered into before February 18,
1993 and compensation which constitutes "performance-based compensation" is
excludable in applying the $1 million limit. It is the Company's policy to
qualify all compensation paid to its top executives, in a manner consistent with
the Company's compensation policies, for deductibility under the 1993 law in
order to maximize the Company's income tax deductions. However, this policy does
not rule out the possibility that compensation may be approved that may not
qualify for the compensation deduction, if in light of all applicable
circumstances it would be in the best interests of the Company for such
compensation to be paid.
<TABLE>
<S> <C>
Compensation and Stock Option Committee: Section 162(m)
William Y. Tauscher Committee:
James H. Greene, Jr. William Y. Tauscher
Paul Hazen Paul Hazen
Robert I. MacDonnell
</TABLE>
K-16
<PAGE> 276
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative total stockholder return on its common stock to that of the S&P 500
and a group of peer companies in the retail grocery industry.
- -------------------------
(a) The peer group companies are: The Kroger Co., American Stores Company,
Safeway Inc., The Great Atlantic & Pacific Tea Company, Inc., Winn-Dixie
Stores, Inc., Albertson's Inc., Food Lion, Inc., Fred Meyer, Inc. and
Hannaford Bros. Co. The peer group does not include Giant Food Inc. or The
Penn Traffic Company, each of which had been included in the 1997 peer
group, because Giant Food Inc. was acquired by Royal Ahold N.V. in October
1998, and the Penn Traffic Company's common stock was delisted from the New
York Stock Exchange in November 1998.
K-17
<PAGE> 277
OPTION GRANTS IN 1998 FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made during fiscal 1998 to each of the individuals identified in
the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED
NUMBER ANNUAL RATES
OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(B)
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION ------------------------
NAME GRANTED(#) IN FISCAL 1998 ($/SHARE) DATE 5%($) 10%($)
---- ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven A. Burd....... 1,200,000(a) 24.12 41.25 6/29/08 31,130,284 78,890,252
Kenneth W. Oder...... -- --
Michael C. Ross...... -- --
David G. Weed........ 100,000(a) 2.01 36.6875 5/22/08 2,307,257 5,847,043
Larree M. Renda...... -- --
Gary D. Smith........ -- --
</TABLE>
- -------------------------
(a) Options granted under the 1994 Amended and Restated Stock Option and
Incentive Plan for Key Employees. Options vest at a rate of 15% per year
beginning with the anniversary of the date of grant through the sixth
anniversary of the date of grant, with the remaining 10% becoming
exercisable on the seventh anniversary of the date of the grant. Upon the
occurrence of a Change of Control of the Company, options shall become
exercisable as to all shares covered thereby, notwithstanding that such
options may not have fully vested at such time. A "Change of Control of the
Company" is deemed to have occurred (pursuant to the provisions of the
individual stock option agreement) generally when: (i) any person (other
than an employee benefit plan of the Company) becomes the beneficial owner
of 50% or more of the Company's then-outstanding voting securities; or (ii)
as a result of a tender offer or exchange offer for Company securities, or
as a result of a proxy contest, merger, consolidation or sale of assets,
individuals who at the beginning of any two-year period constitute the
Board, plus new directors whose election was approved by a vote of at least
2/3 of the continuing board members (the "Continuing Board Members"), cease
to constitute a majority of the Board; or (iii) the Company's security
holders approve (A) a merger or consolidation of the Company with any other
corporation, other than that which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent at
least 80% of the surviving corporation's then outstanding voting securities,
or (B) a plan of complete liquidation of the Company or a sale of all or
substantially all of the Company's assets. Notwithstanding the foregoing
definition, none of the foregoing events shall constitute a Change of
Control of the Company if (x) immediately after the occurrence of the event,
SSI Associates, L.P., KKR Partners II, L.P. or any other affiliated entity
is the beneficial owner of 30% or more of the Company's then-outstanding
voting securities or (y) prior to the occurrence of the event, the
Continuing Board Members unanimously approve the event.
(b) The assumed annual rates of appreciation in the table are shown for
illustrative purposes only pursuant to applicable SEC requirements. Actual
values realized on stock options are dependent on actual future performance
of the Company's stock, among other factors. Accordingly, the amounts shown
may not necessarily be realized.
K-18
<PAGE> 278
AGGREGATED OPTION EXERCISES DURING 1998
FISCAL YEAR AND 1998 FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercise of stock
options during fiscal 1998 by each of the individuals identified in the Summary
Compensation Table and the value of unexercised options at the end of fiscal
1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT 1998 AT 1998
SHARES VALUE YEAR-END(#) YEAR-END($)(B)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($)(A) UNEXERCISABLE UNEXERCISABLE
---- ----------- --------- ------------------- --------------------
<S> <C> <C> <C> <C>
Steven A. Burd......... -- -- 3,682,262/ 209,234,909/
2,000,000 67,125,000
Kenneth W. Oder........ 200,000 7,093,760 1,890,000/ 105,170,625/
910,000 37,591,875
Michael C. Ross........ 100,000 4,112,500 620,000/ 35,336,250/
280,000 15,882,500
David G. Weed.......... 50,000 1,590,956 190,000/ 10,536,875/
280,000 12,546,250
Larree M. Renda........ 94,000 2,817,498 279,000/ 14,907,279/
233,000 10,990,152
Gary D. Smith.......... 106,000 3,890,875 155,800/ 8,666,087/
86,200 3,005,277
</TABLE>
- -------------------------
(a) Value realized is (i) the fair market value of the stock at the date of
exercise less the exercise price of the options exercised multiplied by (ii)
the number of shares represented by such options.
(b) Potential unrealized value is (i) the fair market value at fiscal 1998
year-end ($60.9375 per share) less the exercise price of "in-the-money,"
unexercised options multiplied by (ii) the number of shares represented by
such options.
PENSION PLANS
Pension benefits are paid to executive officers under the Employee
Retirement Plan, a qualified defined benefit pension plan, and the Retirement
Restoration Plan. The Retirement Restoration Plan, which became effective on
January 1, 1994, provides benefits to certain employees, including the
individuals named in the Summary Compensation Table, that cannot be paid under
the qualified Retirement Plan due to Internal Revenue Code limitations on the
amount of compensation that may be recognized and the amount of benefits that
may be paid.
The Employee Retirement Plan and the Retirement Restoration Plan
(collectively, the "Retirement Plans") provide benefits under a formula based in
part on years of service, age at retirement date, and the employee's highest
60-month average compensation out of the 120 consecutive months preceding
retirement. Unreduced benefits under the formula are payable as early as age 62,
and reduced early retirement benefits are available at ages 55 through 61.
K-19
<PAGE> 279
The following table illustrates the total estimated annual benefits payable
as of January 2, 1999 from the Retirement Plans to persons in specified
remuneration and years of credited service classifications. The benefits shown
in the table are based on the Retirement Plans' final average earnings benefit
formula, retirement at age 65, and payment in the form of a single life annuity.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL FINAL YEARS OF CREDITED SERVICE UNDER PLANS
AVERAGE EARNINGS --------------------------------------------------------
USED FOR PLANS 15 20 25 30 35
- --------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 100,000............ $ 19,410 $ 25,880 $ 32,350 $ 38,820 $ 45,290
200,000........... 41,160 54,880 68,600 82,320 96,040
300,000........... 62,910 83,880 104,850 125,820 146,790
400,000........... 84,660 112,880 141,100 169,320 197,540
500,000........... 106,410 141,880 177,350 212,820 248,290
600,000........... 128,160 170,880 213,600 256,320 299,040
800,000........... 171,660 228,880 286,100 343,320 400,540
1,000,000........... 215,160 286,880 358,600 430,320 502,040
1,500,000........... 323,910 431,880 539,850 647,820 755,790
</TABLE>
Remuneration under the final average earnings formula illustrated in the
foregoing table includes pay earned from full-time employment, contingent pay
and pay for part-time employment, but excludes stock options and any special pay
made solely in the discretion of the employer. Remuneration under this final
average earnings formula for the individuals named in the Summary Compensation
Table generally corresponds with the aggregate of the earned salary, plus
bonuses and long-term compensation for each such person. Credited years of
service as of January 2, 1999 under the final average earnings formula for the
individuals named in the Summary Compensation Table were: S. A. Burd, five; K.
W. Oder, six; M.C. Ross, five; D.G. Weed, four; L.M. Renda, 15; and G.D. Smith,
30.
In addition to benefits provided under the final average earnings benefit
formula, the Retirement Plans provide retirement benefits under an account
balance feature. The normal form of benefit under this feature is a life annuity
commencing at age 65, and early retirement benefits are available at ages 55 and
greater. The annual account balance benefit at age 65 is equal to 12% of an
employee's accumulated account balance. Additions to an employee's account
balance are based on the employee's salary, exclusive of bonuses and other
contingent or special pay, and interest in accordance with an interest index.
Estimated annual retirement benefits under the account balance feature for the
individuals named in the Summary Compensation Table are shown below, and assume
a 6% annual interest index factor and no increases in salary.
<TABLE>
<CAPTION>
YEAR ESTIMATED
REACHING ANNUAL
NAME AGE 65 BENEFIT
---- -------- ---------
<S> <C> <C>
S. A. Burd................................ 2014 $180,463
K. W. Oder................................ 2012 100,526
M. C. Ross................................ 2013 73,031
D. G. Weed................................ 2016 79,641
L. M. Renda............................... 2023 140,799
G. D. Smith............................... 2008 50,495
</TABLE>
K-20
<PAGE> 280
PROPOSAL 2
APPROVAL OF PROPOSAL TO ADOPT THE
1999 AMENDED AND RESTATED EQUITY PARTICIPATION PLAN
OF SAFEWAY INC.
At the Annual Meeting, stockholders are being asked to approve the 1999
Amended and Restated Equity Participation Plan of Safeway Inc. (the "1999 Equity
Plan"), as adopted by the Board of Directors as of March 15, 1999. The 1999
Equity Plan will be effective upon approval by the stockholders of the Company.
The 1999 Equity Plan amends and restates, on a consolidated basis, the Company's
1994 Amended and Restated Stock Option and Incentive Plan for Key Employees of
Safeway Inc., the Director Plan and the Stock Option Plan for Consultants of
Safeway Inc. (collectively, the "Prior Equity Plans"), all of which were
previously approved by the Company's stockholders.
The principal features of the 1999 Equity Plan are summarized below, but
the summary is qualified in its entirety by reference to the 1999 Equity Plan.
Copies of the 1999 Equity Plan will be available at the Annual Meeting and may
also be obtained by making written request of the Company's Secretary.
GENERAL NATURE AND PURPOSE
The principal purpose of the 1999 Equity Plan is to provide incentives for
employees, non-employee directors and consultants to further the growth,
development and financial success of the Company and to enable the Company to
obtain and retain the services of employees, non-employee directors and
consultants considered essential to the long-range success of the Company.
Safeway's equity incentive program is offered to approximately 10,000 employees
throughout the Company. Management believes that granting equity incentives to
more line managers rewards performance while also enabling Safeway to continue
to recruit and develop top quality employees. Safeway considers broad employee
ownership of its shares a key to its long-term success and believes that its
equity incentive program is the most inclusive in the industry.
Under the 1999 Equity Plan, a maximum of 24 million shares of Common Stock
(or equivalent in other equity securities) is authorized for issuance upon
exercise or granting of options, stock appreciation rights ("SARs"), restricted
stock and other awards (collectively, "Awards"), and no more than 1.2 million
shares of restricted stock may be awarded under the 1999 Equity Plan in any
fiscal year. As of the end of fiscal 1998, the total number of shares available
for issuance under the Prior Equity Plans was approximately 18.4 million.
Accordingly, the incremental amount of shares being authorized for issuance
under the 1999 Equity Plan is approximately 5.6 million.
ADMINISTRATION
A committee of the Board that consists solely of two or more members of the
Board, each of whom is both a "non-employee director" for purposes of Rule 16b-3
under the Exchange Act ("Rule 16b-3") and an "outside director" for the purposes
of Section 162(m) of the Code (the "Committee"), will administer the 1999 Equity
Plan with respect to Awards to employees or consultants of the Company, and the
full Board will administer the 1999 Equity Plan with respect to options granted
to non-employee directors.
Subject to the terms and conditions of the 1999 Equity Plan, the Committee
has the authority to select the employees and consultants, if any, to whom
Awards are to be made,
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to determine the number of shares to be subject thereto and the terms and
conditions thereof, and to make all other determinations and to take all other
actions necessary or advisable for the administration of the 1999 Equity Plan.
The Board or the Committee may at any time suspend or terminate the Plan subject
to rights under Awards previously granted, and may amend or modify the Plan
except that stockholder approval is generally required to increase the maximum
number of shares subject to Awards which may be granted to any employee or
consultant in any given year under the 1999 Equity Plan and for certain other
matters.
ELIGIBILITY
Awards under the 1999 Equity Plan may be granted to individuals who are
employees or consultants of the Company (or any current or future subsidiaries)
selected by the Committee for participation in the 1999 Equity Plan. In
addition, the 1999 Equity Plan provides for automatic grants of non-qualified
stock options to non-employee directors.
GRANTS TO NON-EMPLOYEE DIRECTORS
Upon effectiveness of the 1999 Equity Plan, it is expected that eight
directors will be eligible to participate in the 1999 Equity Plan. The 1999
Equity Plan provides for (i) automatic grants of non-qualified stock options to
purchase a set number of shares of Common Stock (A) to each non-employee
director serving as of the effective date of the 1999 Equity Plan (other than a
non-employee director who received any grant of options pursuant to the Director
Plan) on the date of the annual meeting of stockholders coinciding with the
effective date of the 1999 Equity Plan and (B) to each non-employee director
initially elected or appointed to the Board of Directors on or after the
effective date of the 1999 Equity Plan on the date of such person's election or
appointment (in each case, "Election Options"), and (ii) automatic grants of
non-qualified stock options to purchase 2,000 shares of Common Stock to each
non-employee director as of the date of each subsequent annual meeting of
stockholders ("Annual Options"). The grant of Election Options is subject to the
non-employee director's purchase of a set number of shares (to the extent such
non-employee director does not then beneficially own or is not then deemed to
beneficially own such number of shares) at a purchase price of 80% of the fair
market value of a share of Common Stock on the date of purchase. In addition,
the 1999 Equity Plan provides that any non-employee director who received an
initial grant of stock options under the Director Plan, but had not yet received
a grant of stock options after three continuous years of service as provided
under the Director Plan, will be granted non-qualified stock options to purchase
100,000 shares after serving on the Board for three continuous years. Each grant
to a non-employee director shall be set forth in a written agreement between the
Company and the non-employee director indicating the terms and conditions of the
option. The exercise price of Election Options shall be 80% of the fair market
value of a share of Common Stock on the date of grant, and the exercise price of
all other options granted to non-employee directors shall be no less than the
fair market value of a share of Common Stock on the date of grant. Each option
shall become exercisable in cumulative annual installments of one-third each on
each of the first three anniversaries of the date of the grant so long as the
non-employee director continues to serve as a director of the Company; provided,
however, to the extent permitted by Rule 16b-3, the Board of Directors may
accelerate the exercisability of options upon the occurrence of certain
specified extraordinary corporate transactions or events. No portion of an
option granted to any non-employee director shall be exercisable after the tenth
anniversary of the date of grant or more than three months after the termination
of the
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non-employee director's services as director of the Company; provided, however,
that in the event of the non-employee director's death or disability, the option
may be exercised until the earlier of 12 months following such death or
disability of the tenth anniversary of the date of grant.
AWARDS TO EMPLOYEES AND CONSULTANTS
The 1999 Equity Plan provides that the Committee may grant or issue stock
options, SARs, restricted stock, deferred stock, dividend equivalents, and other
stock related benefits, or any combination thereof to any eligible employee or
consultant. Each such Award will be set forth in a separate agreement with the
person receiving the Award and will indicate the type, terms and conditions of
the Award.
The 1999 Equity Plan provides that (a) Awards covering not more than
2,000,000 shares may be granted to any executive officer of the Company in any
year or to any employee (other than an executive officer) in the year of his or
her hiring, and options covering not more than 800,000 shares may be granted to
any employee (other than an executive officer) in any subsequent year and (b)
awards covering not more than 1,600,000 shares may be granted to any consultant
in any year after their date of hire (collectively the "Award Limits"). These
Award Limits are the same (taking into account subsequent stock splits) as were
approved by the stockholders with respect to the Prior Equity Plans.
Non-Qualified Stock Options ("NQSOs") will provide for the right to
purchase Common Stock at a specified price which may not be less than the fair
market value of a share of Common Stock on the date of grant, and usually will
become exercisable (in the discretion of the Committee) in one or more
installments after the grant date, subject to the participant's continued
employment with the Company. NQSOs may be granted for any term specified by the
Committee up to a maximum term of ten years.
Incentive Stock Options ("ISOs") will be designed to comply with certain
restrictions contained in the Code. Among such restrictions, ISOs must have an
exercise price of not less than the fair market value of a share of Common Stock
on the date of grant, may only be granted to employees, must expire within a
specified period of time following the Optionee's termination of employment, and
must be exercised within ten years after the date of grant. ISOs may be
subsequently modified to disqualify them from treatment as ISOs. In the case of
an ISO granted to an individual who owns (or is deemed to own) at least 10% of
the total combined voting power of all classes of stock of the Company, the 1999
Equity Plan provides that the exercise price must be at least 110% of the fair
market value of a share of Common Stock on the date of grant, and the ISO must
expire no later than the fifth anniversary of the date of its grant.
Restricted Stock may be awarded and made subject to such restrictions as
may be determined by the Committee. Stock bonuses awarded under the Operating
Performance Bonus Plan for Executive Officers of Safeway Inc. and under any
other operating performance bonus plan for employees shall be awarded as
restricted stock under the 1999 Equity Plan. In general, restricted stock may
not be sold, or otherwise transferred or hypothecated, until the restrictions
(if any) are removed or expire. Recipients of restricted stock, unlike
recipients of options, will have voting rights and will receive any dividends
paid with respect to such stock prior to the time when the restrictions lapse.
Deferred Stock may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on
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performance criteria established by the Committee. Like restricted stock,
deferred stock may not be sold, or otherwise transferred or hypothecated, until
vesting conditions are removed or expire. Unlike restricted stock, deferred
stock will not be issued until the deferred stock award has vested, and
recipients of deferred stock generally will have no voting or dividend rights
prior to the time when vesting conditions are satisfied.
Stock Appreciation Rights may be granted in connection with stock options
or separately. SARs granted by the Committee in connection with stock options
will provide for payments to the holder based upon increases in the price of the
Company's Common Stock over the exercise price of the related option. Except as
required by Section 162(m) of the Code, there are no restrictions specified in
the 1999 Equity Plan on the amount of gain realizable from the exercise of SARs,
although restrictions may be imposed by the Committee in the SAR agreements. The
Committee may elect to pay SARs in cash or in Common Stock or in a combination
of both.
Dividend Equivalents represent the value of any dividends per share paid by
the Company, calculated with reference to the number of shares covered by the
stock options, SARs or other Awards held by the participant. This value is
converted into additional shares of Common Stock. Dividend equivalents may be
awarded to non-employee directors as well as employees and consultants.
Stock Payments may be authorized by the Committee in the form of shares of
Common Stock or an option or other right to purchase Common Stock as part of a
deferred compensation arrangement or otherwise in lieu of or in addition to all
or any part of compensation, including bonuses, that would otherwise be payable
in cash to the employee or consultant.
Exercisability of Options. Options granted under the 1999 Equity Plan will
be exercisable in installments in such amounts (which may be cumulative) as the
Committee shall provide in the terms of each stock option agreement; provided,
however, that options must vest over a minimum of three years from the date of
grant. The exercisability of options may be accelerated in the event of a Change
of Control of the Company (as defined in the individual stock option agreement).
Subject to the following, the expiration date, maximum number of shares
purchasable, conditions to exercise and other provisions of individual stock
option agreements are established by the Committee at the time of grant. Option
terms may not exceed ten years. No portion of an option which is unexercisable
upon the termination of employment or consultancy for any reason may thereafter
become exercisable. Generally, options which are exercisable upon termination of
an optionee's employment or consultancy with the Company or its subsidiaries
expire three months following such termination. However, options may be
exercised up until the expiration date of the full term of the options after
termination of employment due to an optionee's death, disability or retirement
at age 55 or older in accordance with the Company's retirement policies (unless
earlier terminated by reason of the optionee's willful misconduct), if permitted
by the Company either in granting new options or amending previously granted
options.
GENERAL
Method of Exercise. To exercise an option, the optionee must deliver to the
Company a notice of exercise and full payment for the shares. The option price
may be paid in cash, or, with the Committee's consent, by tendering shares of
the Company's Common Stock already issued or issuable upon exercise of the
option or by any other form of payment which is approved by the administrator
and is consistent with the 1999 Equity Plan or
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applicable law, or by any combination of the above. The administrator may in its
discretion permit an optionee to elect to defer receipt of shares otherwise
issuable pursuant to the exercise of an option, upon such terms and conditions
as the administrator may determine.
Non-Transferability. Options may be transferred only by will or by the laws
of descent and distribution, and during a participant's lifetime are exercisable
only by the participant. However, the administrator may in its discretion permit
transfers by gift to a member of the holder's immediate family or related
entities or pursuant to certain domestic relations orders.
Adjustments Upon Change in Capitalization. If the outstanding shares of
Common Stock of the Company subject to options are changed into or exchanged for
a different number or kind of shares of the Company or other securities of the
Company by reason of merger, consolidation, recapitalization, reclassification,
stock split, stock dividend, combination of shares or otherwise, the
administrator will make an appropriate and equitable adjustment in the number
and kind of shares as to which all outstanding options, or portions thereof then
unexercised, will be exercisable, to the end that after such event the
optionee's proportionate interests will be maintained as before the occurrence
of such event, and the administrator shall make appropriate adjustments in the
number and kind of shares for the purchase of which options may be granted and
in the number and kind of shares subject to Awards which may be awarded,
including adjustments of the limitations on the maximum number and kind of
shares which may be issued on exercise of options and of the Award Limits.
DESCRIPTION OF THE CANADIAN STOCK OPTION PROGRAM
In order to benefit from certain provisions of Canadian federal income tax
law, options granted to Canadian employees will be granted pursuant to both the
1999 Equity Plan and the Share Appreciation Rights Plan of Canada Safeway
Limited (the "SAR Plan"). Although the method of grant of options to Canadian
employees differs from grants to U.S. employees, options granted to Canadian
employees are intended to have the same economic value to the recipients as
options granted to U.S. employees. The terms of the SAR Plan are generally the
same as those of the 1999 Equity Plan and are designed to operate in conjunction
with the 1999 Equity Plan. Grants of options under the Canadian program work as
follows: each Canadian employee selected to receive an option will be granted
pursuant to a single agreement (i) a right (issued pursuant to the 1999 Equity
Plan) to purchase shares of Common Stock of the Company at the fair market value
on the date of purchase (a "Stock Right"), and (ii) an undertaking (issued
pursuant to the SAR Plan) by Canada Safeway Limited ("CSL") pursuant to which
CSL will pay on the participant's behalf that portion of the fair market value
of the Common Stock on the date of purchase which exceeds the fair market value
of a share of Common Stock on the date of grant of the aforementioned stock
purchase right (a "Canadian SAR", and, together with a Stock Right, an
"Option"). Accordingly, when a Canadian employee exercises an Option, to receive
shares of Common Stock he or she pays the same amount per share as U.S.
employees, which is generally the fair market value on the date of grant of the
Option. Generally, Canadian SARs which are exercisable upon a termination of the
participating employee's employment with the Company or any of its subsidiaries
expire three months following such termination. However, Canadian SARs may be
exercised up until the expiration of the term of the Canadian SARs (which is the
same as the expiration of the term of the related Stock Right) after termination
of employment due to the participating employee's death, disability or
retirement at age 55 or older in accordance
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with the Company's retirement policies, unless earlier terminated by reason of
the optionee's willful misconduct, if permitted by the Company.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The 1999 Equity Plan is neither a qualified pension, profit sharing or
stock bonus plan under Section 401(a) of the Code nor an "employee benefit plan"
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). The following discussion is a general summary of the
material U.S. Federal income tax consequences that are generally applicable to
U.S. participants in the 1999 Equity Plan. The discussion is based on the Code,
regulations thereunder and rulings and decisions now in effect, all of which are
subject to change. The summary does not discuss all aspects of federal income
taxation that may be relevant to a particular participant in light of such
participant's personal investment circumstances. A discussion of the income tax
consequences to Canadian employees under Canadian law follows.
Non-Qualified Stock Options. The grant of a non-qualified stock option is
generally not a taxable event either for the optionee or for the Company. Upon
exercise of a non-qualified stock option, the optionee generally will recognize
ordinary income in an amount equal to the excess of the fair market value of the
shares of Common Stock acquired upon exercise, determined at the date of
exercise, over the exercise price of such option. Subject to Section 162(m) of
the Code, the Company will be entitled to a business expense deduction equal to
such amount in the fiscal year of the Company in which the optionee exercises
the non-qualified stock option. The ordinary income recognized by the optionee
is subject to income and employment tax withholding. The optionee's tax basis in
the shares acquired pursuant to the exercise of a non-qualified stock option
will be equal to the option price paid plus the amount of ordinary income
recognized upon exercise. Any gain or loss on a disposition of the Common Stock
acquired upon the exercise of a non-qualified stock option will be treated as
short-term or long-term capital gain or loss, subject to income taxation at
short-term, mid-term or long-term capital gains rates depending on the holding
period of the optionee measured from the date of the exercise of such option.
There are generally no federal income tax consequences to the Company by reason
of the disposition by an optionee of Common Stock acquired upon the exercise of
a non-qualified stock option. If an optionee elects to defer receipt of shares
upon exercise (provided the administrator has permitted such election), the
optionee will recognize ordinary income and the Company will be entitled to a
business expense deduction when the shares are received, in each case based on
the fair market value of the shares issued, determined at the date the shares
are received.
If an optionee delivers previously acquired shares of Common Stock of the
Company to pay the option price upon exercise of a non-qualified option, the
shares of Common Stock so acquired that are equal in fair market value to the
shares surrendered, measured at the date of exercise, generally will qualify for
nonrecognition of gain. The tax basis of such shares will be equal to the
optionee's basis in the shares surrendered, and the holding period for purposes
of determining capital gain or loss treatment with respect to subsequent
appreciation or depreciation will be measured to include the optionee's holding
period with respect to the surrendered shares. Shares of Common Stock of the
Company so acquired that exceed the fair market value of the shares surrendered
will be taxable as ordinary income to the optionee. The Company will be subject
to a withholding obligation for income and employment taxes with respect to the
amount of ordinary income recognized by the optionee and will be entitled to a
deduction equal to the amount of such ordinary income. The optionee's tax basis
in such shares will be equal to the amount of ordinary
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income so recognized, and the holding period for subsequent capital gain (or
loss) will be measured from the exercise date.
Incentive Stock Options. Generally, an optionee recognizes no taxable
income upon the grant or exercise of an incentive stock option that meets the
requirements of Section 422 of the Code. However, the amount by which the fair
market value of the Common Stock acquired at the time of exercise exceeds the
option exercise price (the "spread") is taken into account in determining the
amount, if any, of the alternative minimum tax due from the optionee in the year
in which the option is exercised. In addition, if the optionee exercises the
option by paying the option price with shares of Common Stock, the transfer of
such Common Stock may result in taxable income to the optionee even though the
transfer itself will not affect the favorable tax treatment of the Common Stock
received as a result of exercising the option.
If an optionee holds the Common Stock acquired through the exercise of an
incentive stock option for more than two years from the date on which the option
was granted and more than one year from the date on which the option was
exercised, and if the optionee is an employee of the Company at all times from
the date of the grant of the incentive stock option through the date that is
three months before the date of exercise, any gain or loss on the subsequent
disposition of such Common Stock will be taxed to such optionee as long-term
capital gain or loss equal to the difference between the consideration received
upon such disposition and the option exercise price.
Generally, if an optionee disposes of the Common Stock received on exercise
of an incentive stock option less than two years after the date the option was
granted or less than one year after the date the option was exercised, it is
considered to be a "disqualifying disposition." At the time of such
disqualifying disposition, the optionee will recognize ordinary income in an
amount equal to the lesser of (i) the fair market value of the Common Stock on
the date of exercise over the option exercise price, or (ii) the amount received
for the Common Stock over the option exercise price. Any gain in excess of this
amount will be taxed as capital gain.
To the extent that an optionee recognizes ordinary income by reason of a
disqualifying disposition of Common Stock acquired upon the exercise of any
incentive stock option, the Company generally will be entitled to a
corresponding business expense deduction in the fiscal year of the Company in
which the disqualifying disposition occurs, subject to Section 162(m) of the
Code.
Restricted Stock. A holder of restricted stock generally will recognize
ordinary income in an amount equal to the excess of the fair market value of the
Common Stock (determined without regard to any restrictions other than those
that by their terms never lapse) over the amount, if any, paid for the Common
Stock on the earlier of the date on which (i) the Common Stock is no longer
subject to a substantial risk of forfeiture or (ii) is transferable (without the
transferee being subject to a substantial risk of forfeiture). If, as of such
date, the holder cannot sell the Common Stock without incurring liability under
Section 16(b) of the Exchange Act, the holder generally will not recognize
ordinary income with respect to the receipt of the Common Stock until such time
as the holder can sell the Common Stock without incurring liability under
Section 16(b) of the Exchange Act. For purposes of determining the holder's
income resulting from the receipt of the Common Stock, the fair market value
will be determined as of that date.
In the alternative, if the holder files an election with the Internal
Revenue Service pursuant to Section 83(b) of the Code within 30 days of the
receipt of the Common Stock
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pursuant to an award of restricted stock, the holder will be taxed in the year
the Common Stock is received on the difference between the fair market value of
the Common Stock at the time of receipt and the amount paid for the Common
Stock, if any. This amount will be taxed as ordinary income. If shares with
respect to which a Section 83(b) election has been made are later forfeited, the
holder generally will be entitled to a capital loss only in an amount equal to
the amount, if any, that the holder had paid for the forfeited shares, not the
amount that the holder had recognized as income as a result of the Section 83(b)
election. Subject to Section 162(m) of the Code, the Company is entitled to a
business expense deduction that corresponds to the amount of ordinary income
recognized by the holder in the fiscal year of the Company in which such
ordinary income is recognized by the holder.
Stock Appreciation Rights. Generally, the holder of a stock appreciation
right recognizes no income upon the grant of a stock appreciation right. Upon
exercise, the holder will recognize as ordinary income the excess of the value
of the stock appreciation right on the date of exercise over the value as of the
date of grant. If the stock appreciation right is paid in cash, the appreciation
is taxable under Section 61 of the Code. If the Committee determines to transfer
shares of Common Stock to the holder in full or partial payment of the
appreciation, the fair market value of the Common Stock so received over the
amount paid therefor by the holder, if any, is taxable as ordinary income under
Section 83 of the Code as of the date the stock appreciation right is exercised.
Subject to Section 162(m) of the Code, the Company is entitled to a business
expense deduction that corresponds to the amount of ordinary income recognized
by the holder in the fiscal year of the Company in which the stock appreciation
right is exercised.
Dividend Equivalents, Deferred Stock and Stock Payments. In general,
recipients of dividend equivalents, deferred stock and stock payments are
taxable under Section 83 of the Code upon their receipt of Common Stock or under
Section 61 of the Code upon their receipt of cash, as applicable. Subject to
Section 162(m) of the Code, the Company is entitled to a business expense
deduction that corresponds to the amount of ordinary income recognized by the
recipient of the award.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material Canadian
federal income tax consequences to Canadian resident participants in the 1999
Equity Plan and the SAR Plan. The discussion is based upon the Income Tax Act
(Canada), the Income Tax Regulations, the published administrative policies of
Revenue Canada, and the Company's understanding of the administrative practice
of Revenue Canada, all of which are subject to change. The summary does not
discuss all aspects of Canadian federal income tax that may be relevant to a
particular participant in light of such participant's personal investment
circumstances, nor does it address provincial income tax consequences.
The 1999 Equity Plan and the SAR Plan will effectively be treated for
Canadian federal income tax purposes together as a single stock option plan,
pursuant to which the employees are granted rights to acquire shares of Common
Stock at a price equal to the fair market value of the shares on the date of
purchase. In the taxation year in which the employee exercises options to
acquire Common Stock, the amount paid in connection with such exercise by CSL
pursuant to the SAR Plan will be required to be included in computing the
employee's income from employment. Provided the Common Stock qualifies as a
share prescribed by Section 6204 of the Income Tax Regulations, the employee
will be entitled to deduct one-quarter of this amount in computing his or her
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taxable income. As in the case of stock option plans, CSL will not be entitled
to deduct, in computing its income for tax purposes, amounts paid pursuant to
the SAR Plan.
BOARD RECOMMENDATION
The Board unanimously recommends a vote FOR approval of the adoption of the
1999 Equity Plan. The affirmative vote of the holders of a majority of the
shares present in person or by proxy and entitled to vote at the meeting is
necessary to approve the adoption of the 1999 Equity Plan. Unless otherwise
instructed, proxies will be voted FOR approval of the adoption of the 1999
Equity Plan.
PROPOSAL 3
REAPPROVAL OF THE OPERATING PERFORMANCE BONUS
PLAN FOR EXECUTIVE OFFICERS
At the Annual Meeting, stockholders are being asked to reapprove the
Operating Performance Bonus Plan for Executive Officers of Safeway Inc., as
amended (the "Bonus Plan"). The original Bonus Plan was approved by the
stockholders in May 1994. The Second and Third Amendments were approved by the
Board of Directors in October 1997 and March 1998, respectively, and by the
stockholders in May 1998. Section 162(m) of the Code requires that certain
executive compensation plans be reapproved by the stockholders after five years
in order to continue qualification of compensation awarded under such plans as
performance-based compensation pursuant to Section 162(m) of the Code.
Accordingly, the Board is seeking stockholder reapproval of the Bonus Plan in
order for all bonuses paid thereunder to continue to satisfy the requirements
for qualified performance-based compensation under the Internal Revenue
Service's regulations under Section 162(m) of the Code and, accordingly, be
eligible for deductibility by the Company.
DESCRIPTION OF THE BONUS PLAN
There are currently 14 executive officers eligible to participate in the
Bonus Plan. The following information includes summaries of certain provisions
of the Bonus Plan. This information does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Bonus Plan.
Copies of the Bonus Plan will be available at the Annual Meeting and may also be
obtained by making written request of the Company's Secretary.
Bonus Awards to CEO.
Eligibility. The CEO is eligible for a bonus award for each fiscal year in
an amount not to exceed 120% of the amount determined by multiplying his regular
weekly base salary rate by the number of weeks during such year that he served
as CEO, up to a maximum bonus of $1.5 million.
Business Criteria. The CEO's bonus is based on a preestablished performance
target which shall include three components which shall be based on (i)
identical store sales, (ii) income and (iii) working capital, respectively. For
purposes of such goal, planned identical store sales and income shall include
all Company operations.
Bonus Amount. The bonus award for the CEO is based on the achievement of
specified levels above the performance target. Prior to the payment of a bonus
award to the CEO, the Section 162(m) Committee must certify in writing the level
of the performance goals attained by the Company.
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Bonus Awards to Executive Officers.
Eligibility. Each executive officer of the Company (including the Senior
Vice President -- Supply but excluding the CEO) is eligible for a bonus award
for each fiscal year in an amount equal to a preestablished percentage,
determined in the discretion of the CEO but ranging from 30% to 120%, of the
amount determined by multiplying his or her regular weekly base salary rate by
the number of weeks during such year that he or she served as an executive
officer, up to a maximum bonus of $1.5 million.
Business Criteria. Each executive officer's bonus is based on a
preestablished performance target which shall include three components which
shall be based on (i) identical store sales, (ii) income and (iii) working
capital, respectively. For purposes of such goal, planned identical store sales
and income shall include all Company operations.
Bonus Amount. The bonus award for any executive officer is based on the
achievement of specified levels above the performance target; provided, however,
that the CEO, in his discretion, may reduce the amount payable to any executive
officer. Prior to the payment of a bonus award to an executive officer, the
Section 162(m) Committee must certify in writing the level of the performance
goals attained by the Company.
Additional Bonus Award to Senior Vice President -- Supply.
Eligibility. The Senior Vice President -- Supply is eligible for a bonus
award for each fiscal year in an amount not to exceed 55% of the amount
determined by multiplying his regular weekly base salary rate by the number of
weeks during such year that he served as Senior Vice President -- Supply, up to
a maximum bonus of $550,000.
Business Criteria. The Senior Vice President -- Supply's bonus is based on
a preestablished performance target which shall include three components which
shall be based on (i) total Supply Division earnings, (ii) plant performance,
and (iii) outside sales profit contribution, respectively. Each of the
components shall be based on total Supply Division operations.
Bonus Amount. In calculating the bonus award to be paid to the Senior Vice
President -- Supply, the relative weight given to each component is as follows:
(i) 60% to total Supply Division earnings, (ii) 20% to plant performance, and
(iii) 20% to outside sales profit contribution. The bonus award for the Senior
Vice President -- Supply is based on the achievement of specified levels above
the performance target. Prior to the payment of a bonus award to the Senior Vice
President -- Supply, the Section 162(m) Committee must certify in writing the
level of the performance goals attained by the Supply Division.
General
Base Salary Adjustments. Any change in base salary effected after the first
day of the fiscal year may be taken into account, on a proportionate basis, in
computing any bonus award for the fiscal year.
Method of Payment. Each bonus award may be paid, at the option of the
recipient, in cash or in stock, or in any combination of cash and stock. Stock
bonuses shall be awarded in accordance with the provisions of the 1999 Equity
Plan.
Amendment. The Bonus Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the Board.
However, to the extent required by Section 162(m) with respect to bonus awards
which the Section 162(m) Committee determines should qualify as
performance-based compen-
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sation as described in Section 162(m)(4)(C) of the Code, no action of the Board
may modify the performance targets, target bonus awards, or the percentages to
be used to determine such bonus awards after the commencement of the fiscal year
with respect to which such bonus awards relate.
BOARD RECOMMENDATION
The Board unanimously recommends a vote FOR the reapproval of the Bonus
Plan because the Board believes it is in the best interest of the Company to
qualify performance-based compensation for deductibility under Section 162(m) of
the Code in order to maximize the Company's income tax deductions. The
affirmative vote of the holders of a majority of shares present in person or by
proxy and entitled to vote at the meeting is necessary to reapprove the Bonus
Plan. Unless otherwise instructed, proxies will be voted FOR reapproval of the
Bonus Plan.
PROPOSAL 4
STOCKHOLDER PROPOSAL #1
Mr. Emil Rossi, P.O. Box 249, Boonville, California 95415, who is the owner
of 2,232 shares of Common Stock, has given notice that he intends to present for
action at the Annual Meeting the following proposal:
The shareholders of Safeway Corporation [sic] request the Board of
Directors to take the necessary steps to amend the company's governing
instruments to adopt the following: Beginning on the 2000 Safeway fiscal
year the policy of the company shall be to tie at least half of Executive
Management's compensation to the amount of comon [sic] dividends paid out
each year.
The following statement was submitted in support of such proposal:
Dividends are the real gauge of how a corporation is doing and it behooves
management to pay out at least a certain percentage of earnings in
dividends to the shareholders who have faithfully held on to their shares.
There has to be a reward. That's what the whole American economic system is
all about. Management wants big money up front. They don't want promises or
total return or other hocus pocus. They want cash so they can go forth and
enjoy the finer things in life. Like buying baseball teams and yachts. The
little things of life that make one's existence bearable.
BOARD RECOMMENDATION
The Board of Directors recommends a vote against this proposal for the
following reasons:
Safeway is committed to enhancing stockholder value over the long term. In
order to do so, the Board must have the flexibility to exercise its business
judgment regarding the best use of the Company's capital. During the past five
years, the Company's Common Stock has appreciated at an average annual rate of
over 63%. The Company continues to believe that it can achieve significantly
greater returns for its stockholders by reinvesting free cash flow into the
business than by paying out a portion of these funds in the form of dividends on
Common Stock. Moreover, the Board believes that the Company's policies regarding
executive compensation, as more fully described in the Report of the
Compensation and Stock Option Committee and Report of the Section 162(m)
Committee contained elsewhere in this proxy statement, serve the best interests
of the
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<PAGE> 291
Company and its stockholders and substantially link executive compensation with
the Company's performance.
The Board unanimously recommends a vote AGAINST the adoption of this
stockholder proposal. The affirmative vote of holders of a majority of shares
present in person or by proxy at the meeting and entitled to vote on this matter
is necessary to approve the adoption of this stockholder proposal. Unless
otherwise instructed, proxies will be voted AGAINST approval of adoption of this
stockholder proposal.
PROPOSAL 5
STOCKHOLDER PROPOSAL #2
Mrs. Evelyn Y. Davis, 2600 Virginia Ave., N.W. #215, Washington, D.C.
20037, who is the owner of 800 shares of Common Stock, has given notice that she
intends to present for action at the Annual Meeting the following resolution:
RESOLVED: That the stockholders of Safeway Inc., assembled in Annual
Meeting in person and by proxy, hereby request the Board of Directors to
take the necessary steps to provide for cumulative voting in the election
of directors, which means each stockholder shall be entitled to as many
votes as shall equal the number of shares he or she owns multiplied by the
number of directors to be elected, and he or she may cast all of such votes
for a single candidate, or any two or more of them as he or she may see
fit.
The following statement was submitted in support of such resolution:
REASONS: Many states have mandatory cumulative voting, so do National
Banks. In addition, many corporations have adopted cumulative voting. Last
year, the owners of 147,778,196 shares, representing approximately 38.7% of
the shares voting, voted FOR this proposal.
If you AGREE, please mark your proxy FOR this resolution.
BOARD RECOMMENDATION
The Board of Directors recommends a vote against this proposal for the
following reasons:
This proposal was presented at the 1997 and 1998 Annual Meetings. Owners of
311,073,422 and 235,129,073 shares, respectively, representing approximately
81.5% and 61.3%, respectively, of the shares voting on the proposal, voted
against the proposal or abstained.
The Company's present system for election of directors, which is like that
of many major publicly traded corporations, allows all stockholders to vote on
the basis of their share ownership. The Board of Directors believes that this
method is the fairest and is most likely to produce a Board which will
effectively represent the interests of all of the Company's stockholders. In
addition, the Company's performance in recent years, including an average annual
return to stockholders of over 63% since 1993, suggests that a change in the
method of voting for directors is not necessary or desirable.
In contrast, cumulative voting promotes special interest representation on
the Board. This, in turn, can lead to factionalism and contention among
directors, which could have a negative impact on the Company and its
stockholders. Moreover, the proponent of this stockholder proposal has offered
no evidence that cumulative voting produces a more
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<PAGE> 292
qualified or effective board. In fact, the proponent has not expressed any
concerns regarding the members of the Board or the effectiveness of the Board.
Furthermore, the use of cumulative voting has declined significantly over
the years. Many companies have eliminated cumulative voting, and most states
that once mandated cumulative voting in corporate elections have repealed that
requirement.
Accordingly, the Company believes that the present method of voting best
promotes the election of directors who will represent the interests of the
stockholders as a whole and that there have been no valid reasons submitted for
implementing cumulative voting.
The Board unanimously recommends a vote AGAINST the adoption of this
stockholder proposal. The affirmative vote of holders of a majority of shares
present in person or by proxy at the meeting and entitled to vote on this matter
is necessary to approve the adoption of this stockholder proposal. Unless
otherwise instructed, proxies will be voted AGAINST approval of adoption of this
stockholder proposal.
PROPOSAL 6
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors, acting on the recommendation of its Audit
Committee, has selected the firm of Deloitte & Touche LLP, which has served as
independent auditors of the Company since 1987, to conduct an audit, in
accordance with generally accepted auditing standards, of the Company's
consolidated financial statements for the 52-week fiscal year ending January 1,
2000. A representative of that firm is expected to be present at the Annual
Meeting to respond to appropriate questions and will be given an opportunity to
make a statement if he or she so desires. This selection is being submitted for
ratification at the meeting. If not ratified, the selection will be reconsidered
by the Board, although the Board of Directors will not be required to select
different independent auditors for the Company. Unless otherwise instructed,
proxies will be voted FOR ratification of the selection of Deloitte & Touche
LLP.
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<PAGE> 293
GENERAL
STOCKHOLDER PROPOSALS
Stockholder proposals for presentation at the 2000 Annual Meeting of
Stockholders must be received at the Company's principal executive offices on or
before December 1, 1999. The Company's Bylaws provide that stockholders desiring
to nominate a director or bring any other business before the stockholders at an
annual meeting must notify the Secretary of the Company thereof in writing 50 to
75 days before the meeting (or, if less than 65 days' notice or prior public
disclosure of the meeting date is given, within 15 days after such notice was
mailed or publicly disclosed, whichever first occurs). Such notice must set
forth certain information specified in the Company's Bylaws.
ANNUAL REPORT
The Company's Annual Report to Stockholders for the year ended January 2,
1999 is being mailed to all stockholders of record with this Proxy Statement.
By Order of the Board of
Directors,
MICHAEL C. ROSS
Secretary
Dated: March 24, 1999
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<PAGE> 294
ANNEX L
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-35457
------------------------
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 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
</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)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT:
NONE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10K. [X]
There were 30,053,191 shares of the Registrant's Common Stock, par value
$0.25 per share, outstanding as of the close of business on August 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE -- NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
L-1
<PAGE> 295
PART I
ITEM 1. BUSINESS
COMPANY HISTORY
Randalls Food Markets, Inc. (the "Company") was founded by Robert R.
Onstead, R. C. Barclay, and Norman N. Frewin in Houston, Texas on July 4, 1966
with the purchase of two existing grocery stores. The Company continued to
expand in the Houston area, operating 39 stores by 1989. 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
that 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.
In April 1997, the Company completed certain financings and related
transactions whereby RFM Acquisition LLC ("RFM Acquisition"), a Delaware limited
liability company formed at the direction of Kohlberg Kravis Roberts & Co., L.P.
("KKR"), invested $225.0 million in the Company as consideration for the
Company's issuance to RFM Acquisition of 18,579,686 shares of common stock and a
25-year option to purchase 3,606,881 shares of common stock at $12.11 per share,
subject to adjustments, including the related financings and related
transactions (the "Recapitalization").
GENERAL
The Company is the second largest supermarket operator in its principal
markets, with 115 stores located in major Texas metropolitan areas including
Houston (50 stores), Dallas/Fort Worth (53 stores), and Austin (12 stores). With
over 30 years of operations in Houston and 50 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 and Dallas and a number three market share in Austin.
For the year ended June 27, 1998 ("Fiscal Year 1998"), the Houston, Dallas, Fort
Worth and Austin markets represented approximately 45%, 37%, 8% and 10% of the
Company's net sales, respectively. For Fiscal Year 1998, the Company generated
net sales of approximately $2.42 billion, EBITDA (earnings before net interest
expense, taxes, depreciation, amortization, LIFO provision and extraordinary
items) of $124.2 million and net income of $20.7 million.
The Company operates combination food and drug stores which appeal 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 74 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 50,600 square feet. For Fiscal Year 1998, these stores
generated sales of approximately $1.5 billion, or 63% of net sales, and average
weekly sales per store of approximately $375,000.
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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 24
New Generation Stores operate under the Randalls banner in Houston and
Austin and the Tom Thumb banner in Dallas, and average approximately 65,400
square feet. For Fiscal Year 1998, New Generation Stores generated sales of
approximately $556.5 million, or 23% of net sales, and average weekly sales
per store of approximately $514,000.
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 many higher margin specialty products
and services, including in-store gourmet coffee bars and eating areas,
expanded bakery departments, 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 57,800 square feet and
two stores averaging approximately 24,900 square feet under the Simon David
banner in Dallas. For Fiscal Year 1998, Flagship Stores generated sales of
approximately $251.6 million, or 11% of net sales, and average weekly sales
per store of approximately $586,000.
The Company also operates eight 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 21,200 square feet. For Fiscal Year 1998,
conventional stores generated sales of approximately $76.3 million, or 3% of net
sales, and average weekly sales per store of approximately $172,000.
STORE DEVELOPMENT
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. The Recapitalization has provided 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 and remodeling in the Austin market. In Fiscal Year 1998, the
Company opened one store in Houston and three stores in Dallas (including two
replacement stores), while closing four stores in Houston, two stores in Dallas
(which were replaced) and four 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 initiated in the year ended June 28, 1997 ("Fiscal Year
1997"). The Company's plans to remodel existing stores and construct new stores
are reviewed continually and are subject to change. The Company has been
selective in acquiring store locations and attempts to take advantage of market
research and its knowledge of Texas markets in evaluating opportunities. 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.
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The following table sets forth additional information concerning the
Company's stores for the indicated period:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
JUNE 27, JUNE 28, JUNE 29, JUNE 24, JUNE 25,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of period...................... 121 120 120 121 109
Newly constructed..................... 4 8 4 3 5
Acquired.............................. 0 2 0 0 15(a)
Closed................................ (10) (9) (4) (4) (8)(a)
--- --- --- --- -----
End of period............................ 115 121 120 120 121
=== === === === =====
MAJOR REMODELS(b).......................... 11 0 5 5 5
=== === === === =====
</TABLE>
- ---------------
(a) 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.
(b) Includes the completion of major remodels involving expenditures of at least
$1.0 million per store.
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 appealingly
displayed 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, dry-cleaning 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 entrees prepared on the premises by the culinary staff 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 most Flagship Stores are 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.
The majority of the stores also 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 3,500 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 and car 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, meat, 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. In addition, the
Company uses private label products as negotiating leverage with branded
suppliers to enhance margins on branded products as well. 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 30 retail, wholesale and
food service operators and offering over 7,000 private label branded goods. In
addition, Daymon Associates, a leading sales and marketing company for private
label brands, helps manage the Company's private label program. The Company has
not entered into any contractual agreements with Daymon Associates. 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's frequent shopper program has become the cornerstone of its
marketing efforts since its inception in the fall of 1996. Currently, frequent
shopper card
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<PAGE> 299
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
the consumer.
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 6,500 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
During Fiscal Year 1998, approximately 42% of the Company's purchases were
supplied through its own distribution network, approximately 33% were supplied
directly from vendors and approximately 25% were supplied by a third party
supplier, Fleming Companies, Inc. ("Fleming"). Fleming has been a long-term
supplier of the Company and had a contract with the Company which was to expire
in June 2001. However, the Company initiated an arbitration proceeding against
Fleming on July 30, 1997 for breach of the supply agreement. On July 7, 1998,
the arbitration panel found that Fleming did materially breach the supply
agreement and the contract was terminated as of July 7, 1998. Currently, Fleming
is continuing to distribute products to the Company under the terms of a
standstill agreement. See the discussion under LEGAL PROCEEDINGS "Fleming
Dispute" for further information related to the Fleming arbitration.
Currently, the Company operates two distribution centers in Houston (the
Telge Road facility and the Rogerdale facility) and one in Dallas (the Inwood
facility) which in the aggregate total approximately 600,000 square feet. The
Telge Road facility in Houston houses refrigerated perishable goods and dry
grocery. It is located on 70 acres of Company-owned land, approximately 10 of
which have been developed. The Rogerdale facility in Houston houses dry grocery
and is located on approximately 29 acres of Company-owned land, approximately 20
of which have been developed. The Inwood facility located in Dallas houses
refrigerated perishable goods and dry grocery and is located on 25 acres of
Company-owned land, substantially all of which has been developed. See the
discussion under PROPERTIES "Distribution Facilities" for additional information
regarding these properties.
Each store submits orders to the distribution facilities through a
centralized processing system, and merchandise is normally received by the store
the next day. Merchandise is delivered from the distribution facilities through
a leased fleet of 27 tractors, 66 refrigerated trailers and 23 dry trailers and
another 6 refrigerated trailers and 2 dry trailers which the Company owns. The
majority of the Company's stores in Houston and Dallas are located within a
70-mile radius of the distribution facilities.
With the termination of the 1993 supply agreement with Fleming, the Company
is moving towards its objective of self-distribution through an enhancement of
its distribution network. During Fiscal Year 1998, the Company began an
approximately $35.0 million expansion of the Telge Road facility that will
increase the square footage from approximately 150,000 square feet to
approximately 525,000 square feet. Such expansion will facilitate the
consolidation of the Rogerdale facility, which has approximately 175,000
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<PAGE> 300
square feet, into the Telge Road facility. The expansion of the Telge Road
facility and consolidation of the Rogerdale facility are expected to be complete
and operational during the fiscal year ending June 26, 1999 ("Fiscal Year
1999"). On August 7, 1998, the Company sold the Rogerdale facility and entered
into a 24 month operating lease on the facility which allows the Company to
terminate the lease after 12 months and the lessor to terminate the lease after
18 months. Additionally, the Company has entered into negotiations to lease a
distribution facility in Roanoke, Texas (the "Alliance facility"). The Alliance
facility has approximately 1.2 million square feet, 975,000 of which the Company
would lease. The Alliance facility is a full-line distribution center with dry,
perishable and frozen facilities. The Company plans to move the operations of
the approximately 295,000 square foot Inwood facility to the Alliance facility
during Fiscal Year 1999. The Company anticipates that it will spend
approximately $13.0 million on fixtures and equipment for the Alliance facility.
The Company will accordingly expand the size of its fleet to maintain the
distribution facilities' level of service to the stores in connection with its
move to self distribution.
While the Company has distributed products to its stores for many years,
the anticipated expansion and move to self distribution presents multiple risks
that could potentially have an adverse impact on the Company's financial results
for a particular quarter or annual reporting period. Such risks include, but are
not limited to, excess inventory levels and disruptions of product delivery and
sourcing. Additionally, the Company could have disruption of product flow during
the transition from Fleming. The Company has developed extensive transition
plans including the testing of the distribution network prior to the transition.
Management believes its prior experience in distribution and its planning
process mitigate the risks associated with the transition and has no reason to
believe that it will experience a significant disruption of supply during the
transition to self distribution.
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 27%, 11% and 10%, respectively. The Company's
market share in Houston is approximately 21%. The Company's principal
competitors in Dallas are Albertsons Inc. ("Albertsons"), Minyard Food Stores
("Minyard") and Kroger, with market shares of approximately 24%, 16% and 16%,
respectively. The Company's market share in Dallas is approximately 17%. The
Company's principal competitors in Fort Worth are Albertsons, Winn-Dixie Stores,
Kroger and Minyard, with market shares of approximately 24%, 19%,
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18% and 10%, respectively. The Company's market share in Fort Worth is
approximately 6%. The Company's principal competitors in the Austin metropolitan
area are H.E.B. and Albertsons, with market shares of approximately 53% and 17%,
respectively. The Company's market share in Austin is approximately 15%.
EMPLOYEES AND LABOR RELATIONS
The Company is one of the largest private employers in Texas. As of June
27, 1998, the Company employed 18,368 persons, of whom approximately 40.0% were
full-time and approximately 60.0% were part-time employees. Of this number,
17,378 were employed in supermarkets, 455 were employed in the warehouse
operations and 535 were employed in the Company's corporate offices. The Company
currently employs an average of 151 employees in each store.
<TABLE>
<CAPTION>
EMPLOYEE TYPE: TOTAL
-------------- ------
<S> <C>
Salaried................................................... 2,010
Hourly:
Full-time................................................ 5,332
Part-time................................................ 11,026
------
Total............................................ 18,368
======
</TABLE>
The Company's employees are not members of unions or parties to collective
bargaining agreements.
TRADENAMES AND TRADEMARKS
The Company uses a variety of tradenames and trademarks. Except for
Randalls, Tom Thumb and Remarkable, the Company does not believe any of such
tradenames or trademarks are material to its business. The Company has granted
the right to certain retail shopping centers to use the Randalls, Tom Thumb and
Simon David tradenames as part of the tradenames of such shopping centers, so
long as the Company's stores are operating in such shopping centers.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of hazardous materials. Under various
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property and may be held liable
to a governmental entity or to third parties for damages and for investigation
and clean-up costs incurred by such parties in connection with the
contamination. The Company believes that it currently conducts its operations,
and in the past has operated its business, in substantial compliance with
applicable environmental laws and regulations. There can be no assurance that
(i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Company's properties will not be affected by tenants, by the condition of land
or operations in the vicinity of such 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.
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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. 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 or more. Remediation of the
Nebraska site had been initiated but was suspended due to shortfalls in the
Nebraska Fund dedicated to remediation of leaking underground storage tanks.
Future remedial work at the Nebraska site (if any) may be borne by either the
Company or the aforementioned 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 or cash flow.
The Company has not incurred material capital expenditures for
environmental controls during the previous three fiscal years, nor does the
Company anticipate incurring any such material expenditures to comply with
environmental regulations during the Fiscal Year 1999 or the fiscal year ending
June 24, 2000.
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.
ITEM 2. PROPERTIES
The Company operates a total of 115 supermarkets, with 50 located in the
Houston area, 53 in the Dallas/Fort Worth area and 12 in the Austin area. Five
of the Company's stores are owned and 110 are leased (two of which are held
through interests in joint ventures).
As a result of acquisitions, new store construction and remodelings, total
square footage in the Company's stores has increased approximately 15% since
1993 from approximately 5,172,000 square feet to approximately 5,939,000 square
feet in 1998 and average store size has increased from approximately 47,500
square feet to approximately 51,600 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. Eighty of the Company's stores are larger than 50,000 square feet.
The Company's real estate holdings consist of 139 leasehold interests (the
"Leased Properties") and 30 owned properties (the "Fee 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 50.0% to 83.3%. As of June 27, 1998, the book value of the
Company's investments in the five Joint
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Venture Properties is $2.8 million. As of June 27, 1998, the Joint Venture
Properties had approximately $9.0 million of indebtedness, all of which is
nonrecourse to the Company. The Company shares in the profits and losses on the
Joint Venture Properties on a pro rata basis with the other joint venture
owners. See Footnote 4 to the Consolidated Financial Statements.
Leased Properties
The Company leases 139 properties under standard commercial leases which
generally obligate the Company to pay its proportionate share of real estate
taxes, common area maintenance charges and insurance costs. In addition, such
leases generally provide for percentage of sales rent when sales from the store
exceed a certain dollar amount. Generally these leases have 20-year terms, with
four five-year renewal options. The Company owns a majority of the fixtures and
equipment in each leased location and has made various leasehold improvements to
the store sites. Company stores are located on 110 of the 139 Leased Properties
and, of the remaining 29 leases, ten leases are for closed stores, two leases
are for satellite warehouse space, and 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 (see
"Distribution Facilities"), two shopping centers which are occupied by Company
stores, and one shopping center which is not occupied by a Company store, three
free-standing supermarkets, one store leased to an unaffiliated party, 14
undeveloped properties and four properties currently under construction. The
Company has entered into sale leaseback arrangements with third parties in
connection with the two shopping centers which are occupied by Company stores
and two of the properties 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
currently does not intend to enter into any additional joint venture or similar
arrangements in the future.
Distribution Facilities
The Company currently operates two distribution facilities in Houston and
one in Dallas, which in the aggregate total approximately 600,000 square feet.
The Telge Road facility in Houston consists of 109,640 square feet of
refrigerated space to store perishable goods, 33,040 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 161,279 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. During Fiscal Year 1998, the
Company began an approximately
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$35.0 million expansion of the Telge Road facility that will increase the square
footage to approximately 525,000 square feet. Such expansion will facilitate the
consolidation of the Rogerdale facility into the Telge Road facility. The
expansion of the Telge Road facility and consolidation of the Rogerdale facility
are expected to be complete and operational during Fiscal Year 1999. On August
7, 1998, the Company sold the Rogerdale facility and entered into a 24 month
operating lease on the facility which allows the Company to terminate the lease
after 12 months and the lessor to terminate the lease after 18 months.
Additionally, the Company has entered into negotiations to lease a distribution
facility in Roanoke, Texas (the "Alliance facility"). The Alliance facility has
approximately 1.2 million square feet, 975,000 of which the Company would lease.
The Alliance facility is a full-line distribution center with dry, perishable
and frozen facilities. The Company plans to move the operations of the
approximately 295,000 square foot Inwood facility to the Alliance facility
during Fiscal Year 1999. The Company anticipates that it will spend
approximately $13.0 million on fixtures and equipment for the Alliance facility.
See "Purchasing and Distribution" for a more complete discussion related to the
expansion of the distribution facilities.
ITEM 3. LEGAL PROCEEDINGS
MSP Litigation
Following the Cullum Acquisition in August 1992, the Company terminated
Cullum's Management Security Plan for Cullum Companies, Inc. ("the MSP"). In
respect of such termination, the Company paid MSP participants the greater of
(i) the amount of such participant's deferral or (ii) the net present value of
the participant's accrued benefit, based upon the participant's current salary,
age and years of service. Thirty-four of the former MSP participants have
instituted a claim against the Company on behalf of all persons who were
participants in the MSP on its date of termination (which is alleged by
plaintiffs to be approximately 250 persons). On May 7, 1997, the plaintiffs
filed an amended complaint for the Court to recognize their action as a class
action, to recover additional amounts under the MSP, for a declaration of rights
under an employee pension benefit plan and for breach of fiduciary duty. The
plaintiffs assert that the yearly plan agreement executed by each participant in
the MSP was a contract for a specified retirement and death benefit set forth in
such plan agreements and that such benefits were vested and nonforfeitable. A
pre-trial order in the MSP litigation, which was submitted to the Court on
October 22, 1997, states that an expert for the plaintiffs, assuming class
certification, may testify that the damages allegedly sustained by the plaintiff
class may range from approximately $18.0 million to $37.2 million and, assuming
that a court were to award additional damages based on a rate of return achieved
by an equity index over the relevant period, such damages may range from
approximately $37.4 million to $70.6 million. On December 30, 1997, the Court
issued an order denying the plaintiffs' summary judgment motion on the
plaintiffs' claim that the MSP was not an exempt "top hat plan" (a plan which is
unfunded and maintained by an employer primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees). The order also granted the Company's summary judgment motions on two
of the plaintiffs' ancillary claims, but did not address the plaintiffs' request
for certification as a class action. On June 16, 1998, the Court certified the
case as a class action for the limited issue of determining if the MSP was an
exempt "top hat plan". The Court defined the class as all persons who, on the
date of the termination of the MSP, were participants in the MSP and were
employed by Randall's Food Markets, Inc. On June 5, 1998, the Court ruled that
the plan was "unfunded", meaning that the trial of the
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limited class action issue will deal only with the question of whether the MSP
was "maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees." On September 8,
1998, a pre-trial conference was held to discuss burden of proof, expert
testimony and meaning of "select group" and the evidence to be considered at the
trial. The Court has set the trial of the limited class action issue for the
week of October 26, 1998. After the initial class issue is resolved, the Court
will then evaluate whether any other issues should be addressed in a class
action context. Based upon current facts, the Company is unable to estimate any
meaningful range of possible loss that could result from an unfavorable outcome
of the MSP litigation. It is possible that the Company's results of operations
or cash flows in a particular quarterly or annual period or its financial
position could be materially affected by an ultimate unfavorable outcome of the
MSP litigation. However, the Company intends to vigorously contest the MSP claim
and, although there can be no assurance, management currently does not
anticipate an unfavorable outcome based on management's independent analysis of
the facts relating to such litigation.
Fleming Dispute
On July 30, 1997, the Company initiated an arbitration proceeding before
the American Arbitration Association (the "Arbitration Panel") against Fleming
Companies, Inc. ("Fleming"), its principal and long-time supplier. In the
action, the Company alleged, 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
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 $2.5 billion in products
from Fleming.
On July 7, 1998, the Arbitration Panel unanimously found that Fleming
materially breached the supply agreement and the contract was terminated as of
July 7, 1998. The Arbitration Panel awarded $23,664 to Fleming on a
counterclaim. Under the binding decision, the contract was terminated without
payment of any termination fee. On July 10, 1998, in response to Fleming's
threat to immediately discontinue supply of product to the Company, the United
States District Court issued a temporary restraining order requiring Fleming to
continue selling product and the Company to continue paying for those products
until July 20, 1998 while both parties addressed all issues with the Arbitration
Panel. Shortly after the issuance of the temporary restraining order, the
Company entered into negotiations with Fleming on a transition agreement which
would allow the Company to continue to buy, and Fleming to continue to sell,
products during the transition period under generally the same terms in place
prior to the contract termination. On July 16, 1998, the Company and Fleming
went before the Arbitration Panel to argue the issues. A stand-still agreement
was reached whereby both parties agreed to conduct business during the
negotiation phase of the transition agreement on the same terms as prior to the
termination of the contract. Although the temporary restraining order has lapsed
by its own terms, the Company continues to have a lawsuit on file with the
United States district court, and Fleming is required to give the Company five
calendar days notice of its intent to discontinue supply of product in the event
Fleming determines that the parties are no longer negotiating in good faith.
While the Company cannot predict with certainty the
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ultimate outcome of this matter, it continues to work with Fleming on a smooth
transition plan. The Company has no reason to believe that it will experience a
significant disruption of supply during the negotiation of the transition
agreement and transition to self distribution.
During Fiscal Year 1998, the Company commenced expansion of its
distribution system in a move towards self-distribution. Such expansion will
optimize the Company's distribution system and is expected to be completed
during Fiscal Year 1999. See Purchasing and Distribution for discussion related
to the expansion of the distribution facilities.
John Paul Mitchell Lawsuit
On August 26, 1998, a jury in the 126th District Court, Travis County,
Texas, returned a verdict against the Company and a co-defendant, Jade Drug
Company, Inc. ("Jade"), finding both parties intentionally conspired with each
other to interfere with contracts between John Paul Mitchell Systems
("Mitchell") and one or more of its distributors and/or salons. The jury found
the Company guilty of having in its possession, selling or offering for sale
Mitchell products that it knew, or that a reasonable person in the position of
the Company would know, had serial numbers or other permanent identification
markings removed, altered or obliterated. The jury found that the company
unfairly competed with Mitchell by purchasing and distributing the products and
infringed on Mitchell's trademark. The jury also found that the harm caused
Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., $3.25 million in joint and several damages from the Company and Jade, $4.5
million in exemplary damages from the Company and $3.0 million in actual damages
and $4.5 million in exemplary damages from Jade.
The judge has yet to enter a judgment in the matter. The Company intends to
vigorously seek to have the verdict, if it stands, overturned on appeal.
Nonetheless, the Company is currently reviewing its insurance coverage and other
remedies. Although the outcome of this matter cannot be predicted with
certainty, management believes it will not have a material impact on the
Company's financial position, results of operations or cash flows.
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, its financial condition, or its cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's equity securities sold during the period covered by
this Form 10-K were registered under the Securities Act except as disclosed in
the Company's Quarterly Report on Form 10-Q for the quarter ended January 10,
1998.
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PART II
ITEM 6. SELECTED FINANCIAL 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 52 weeks ended June 27, 1998 ("Fiscal Year 1998")
and 52 weeks ended June 28, 1997 ("Fiscal Year 1997") have been audited by
Deloitte & Touche LLP and the historical consolidated financial statements for
53 weeks ended June 29, 1996 ("Fiscal Year 1996"), 52 weeks ended June 24, 1995
("Fiscal Year 1995"), and the 52 weeks ended June 25, 1994 ("Fiscal Year 1994")
have been audited by Arthur Andersen LLP. The historical consolidated financial
data as of June 27, 1998 and June 28, 1997 and for the Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996 have been derived from, and
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should be read in conjunction with, the audited consolidated financial
statements of the Company and notes thereto included elsewhere in this Form
10-K.
SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996 JUNE 24, 1995 JUNE 25, 1994
---------------------- ------------- ------------- ------------- ------------- -------------
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................... $2,419,023 $2,344,983 $2,368,645 $2,328,247 $2,304,524
Cost of sales(1)............ 1,755,203 1,711,832 1,739,832 1,728,698 1,718,761
---------- ---------- ---------- ---------- ----------
Gross profit.............. 663,820 633,151 628,813 599,549 585,763
Selling, general and
administrative
expenses.................. 541,497 559,578 506,049 501,634 495,280
Depreciation and
amortization.............. 50,908 48,875 45,814 47,447 45,065
Interest expense, net(2).... 32,949 36,828 38,981 43,411 50,442
Gain on sale of warehouse... -- -- -- -- (5,187)
Litigation charge(3)........ -- 9,500 1,000 -- --
Severance/benefits
charge(4)................. -- 4,512 -- -- --
Estimated store closing
costs(1).................. -- 29,790 1,215 -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
extraordinary item...... 38,466 (55,932) 35,754 7,057 163
(Provision) benefit for
income taxes.............. (17,730) 15,215 (16,316) (7,020) (3,667)
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item...... 20,736 (40,717) 19,438 37 (3,504)
Loss on early extinguishment
of debt(5)................ -- (9,798) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)......... $ 20,736 $ (50,515) $ 19,438 $ 37 $ (3,504)
========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges(6)................ 1.77x -- 1.67x 1.13x 1.00x
OTHER DATA:
EBITDA(7)(8)................ $ 124,224 $ 33,205 $ 122,641 $ 98,982 $ 97,801
Stores open at end of
year(9)................... 115 121 120 120 121
BALANCE SHEET DATA (END OF
PERIOD):
Working capital (deficit)... $ (12,315) $ 11,429 $ 29,895 $ 30,186 $ 44,211
Total assets................ 883,747 862,374 823,265 816,790 876,820
Total long-term debt and
capital lease
obligations............... 342,506 362,148 437,982 463,944 533,273
Redeemable common stock..... 5,155 5,002 31,045 18,749 16,097
Stockholders' equity........ 231,290 213,361 136,650 134,753 128,165
CASH FLOW DATA:
Cash flows from operating
activities................ $ 110,600 $ 28,698 $ 63,846 $ 53,508 $ 62,239
Cash flows from investing
activities................ (87,194) (50,006) (33,782) (108) 7,651
Cash flows from financing
activities................ (10,278) 12,737 (31,229) (54,331) (107,037)
</TABLE>
See Notes to Selected Historical Consolidated Condensed Financial and Other Data
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NOTES TO SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA
(1) Cost of sales for Fiscal Year 1997 includes inventory losses of
approximately $3.0 million recorded in connection with the Company's plan to
close, replace or sell certain stores, two of which were closed during
Fiscal Year 1997 and ten of which were closed during Fiscal Year 1998.
Estimated store closing costs in Fiscal Year 1997 represents an additional
charge recorded in connection with such planned closures.
(2) Represents interest expense net of interest income.
(3) During Fiscal Year 1997, the Company increased its litigation reserve by
$9.5 million to fully reserve for the settlement of a lawsuit in which two
individuals alleged on behalf of the Company Employee Stock Ownership Plan
("ESOP") and certain participants and former participants in and
beneficiaries of the ESOP 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. The Company concluded it was desirable to settle
the litigation in order to avoid further expense, inconvenience and
distractions, as well as the uncertainty and risks inherent in litigation.
(4) Represents a charge recorded in connection with 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."
(5) Represents an extraordinary item of $9.8 million, net of taxes of $6.0
million, resulting from the early extinguishment of debt.
(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 interest expense on all
indebtedness and capitalized interest, amortization of deferred financing
cost, 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,
depreciation, amortization, extraordinary items and LIFO provisions. The
LIFO provision for Fiscal Year 1998, Fiscal Year 1997, Fiscal Year 1996,
Fiscal Year 1995 and Fiscal Year 1994 was approximately $1.9 million, $3.4
million, $2.1 million, $1.1 million, and 2.1 million, respectively. EBITDA
is not intended to represent cash flows from operations as defined by
generally accepted accounting principles 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 report 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. EBITDA should not be used as a
measure of performance between companies as computations differ among
companies.
(8) Included in EBITDA for Fiscal Year 1997 are approximately $63.4 million of
charges to record an inventory charge, a year-end closed store accrual (see
note (1)), the settlement of the ESOP litigation (see note (3)), costs
associated with implementation of the Company's frequent shopper program, a
severance accrual (see note (4)), compensation expense related to the
issuance of shares of restricted common stock to certain employees, accruals
for transaction costs related to the Recapitalization, sales
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taxes, payroll taxes, legal expenses, rent and other payables. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION."
(9) The following sets forth additional information concerning changes in the
Company's store base:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
JUNE 27, JUNE 28, JUNE 29, JUNE 24, JUNE 25,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of year........ 121 120 120 121 109
Newly constructed..... 4 8 4 3 5
Acquired.............. 0 2 0 0 15(a)
Closed................ (10) (9) (4) (4) (8)(a)
--- --- --- --- -----
End of year.............. 115 121 120 120 121
=== === === === =====
</TABLE>
- ---------------
(a) Reflects the acquisition of 15 stores in Austin and Houston from AppleTree
Markets, Inc. and the immediate closure of three such stores in Austin.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the results of operations of the
Company covers certain periods before completion of the Recapitalization and the
related transactions. Accordingly, the discussion and analysis of such periods
do not reflect the significant impact that the Recapitalization and the related
transactions have had and will continue to 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.
See the discussion below under "LIQUIDITY AND CAPITAL RESOURCES" for further
discussion relating to the impact that the Recapitalization had and may in the
future have on the Company.
The Company operates on a 52 or 53 week fiscal year ending on the last
Saturday of each June. Same store sales is defined as net sales for stores in
operation in each of the current fiscal periods and the comparable periods of
the prior fiscal year. Replacement stores are included in the same store sales
calculation. A replacement store is defined as a store that is opened to replace
a store that is closed nearby. During Fiscal Year 1997, the Company recorded a
charge of approximately $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
stores the Company planned to close, replace or sell. Approximately $29.8
million of such Fiscal Year 1997 charge is reflected as estimated store closing
costs, and approximately $3.0 million is included in cost of sales. During
Fiscal Year 1998, the Company closed or sold ten such stores. The Company
continually reviews its portfolio of stores and may decide to close, replace or
sell additional stores in the future.
Presented below is a table showing the percentage of net sales represented
by certain items in the Company's consolidated condensed statements of
operations (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales................. $2,419,023 100.0% $2,344,983 100.0% $2,368,645 100.0%
Cost of sales............. 1,755,203 72.6 1,711,832 73.0 1,739,832 73.5
---------- ----- ---------- ----- ---------- -----
Gross profit............ 663,820 27.4 633,151 27.0 628,813 26.5
Selling, general and
administrative
expenses................ 541,497 22.4 559,578 23.9 506,049 21.4
Depreciation and
amortization............ 50,908 2.1 48,875 2.1 45,814 1.9
Interest expense, net..... 32,949 1.4 36,828 1.6 38,981 1.6
Litigation charge......... -- 0.0 9,500 0.4 1,000 0.0
Severance/benefits
charge.................. -- 0.0 4,512 0.2 -- 0.0
Estimated store closing
costs................... -- 0.0 29,790 1.3 1,215 0.1
---------- ----- ---------- ----- ---------- -----
Income before income taxes
and extraordinary
item.................... 38,466 1.60 (55,932) (2.4) 35,754 1.5
(Provision) benefit for
income taxes............ (17,730) (0.7) 15,215 0.6 (16,316) (0.7)
Loss on early
extinguishment of
debt.................... -- 0.0 (9,798) 0.4 -- 0.0
---------- ----- ---------- ----- ---------- -----
Net income (loss)......... $ 20,736 0.9% $ (50,515) (2.2)% $ 19,438 0.8%
========== ===== ========== ===== ========== =====
EBITDA.................... $ 124,224 5.1% $ 33,205 1.4% $ 122,641 5.2%
========== ===== ========== ===== ========== =====
</TABLE>
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COMPARISON OF FISCAL YEAR 1998 AND FISCAL YEAR 1997
Net Sales
Net sales for Fiscal Year 1998 increased by $74.1 million (3.2%) compared
to Fiscal Year 1997. Such increase is partially attributable to additional sales
of $81.4 million generated from the opening of two new stores (excluding two
replacement stores) during Fiscal Year 1998 and the operation during such period
of six stores (excluding four replacement stores) opened during the Fiscal Year
1997 which were not in operation during the entire Fiscal Year 1997. In
addition, the Company experienced an increase in same store sales of
approximately $87.5 million in Fiscal Year 1998 as compared to Fiscal Year 1997.
These increases were offset by a decline of approximately $95.4 million
primarily resulting from the closure of eight stores (excluding two replacement
stores) during Fiscal Year 1998 and five stores (excluding four replacement
stores) in Fiscal Year 1997 which were operating during part of Fiscal Year
1997. Same store sales during Fiscal Year 1998 increased approximately 3.9%
compared to a decrease of approximately 1.3% during Fiscal Year 1997. Such
improvement has resulted primarily from increased sales at newly remodeled
stores, the contribution of four replacement stores, the success of other
merchandising, marketing and promotional initiatives and favorable economic
conditions.
Gross Profit
Gross profit for Fiscal Year 1998 increased by $30.7 million (4.8%)
compared to Fiscal Year 1997. The dollar increase in gross profit is primarily
attributable to the increased sales volume and more effective promotional
efforts during the Fiscal Year 1998. Gross profit as a percentage of net sales
increased to 27.4% for Fiscal Year 1998 from 27.0% for Fiscal Year 1997. Such
increases are primarily due to more effective promotional efforts and higher
gross margins at new and replacement stores. Such higher gross margins at new
and replacement stores are due primarily to the more expansive specialty
departments and the broader range of products and services offered by such
stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $18.1 million (3.2%)
during Fiscal Year 1998 compared to Fiscal Year 1997. Selling, general and
administrative expenses as a percentage of net sales decreased to 22.4% for
Fiscal Year 1998 from 23.9% for Fiscal Year 1997. Such decrease is due primarily
to the Company's expense management efforts and approximately $19.3 million of
other charges incurred in Fiscal Year 1997, 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 the implementation of the frequent shopper program and
transaction costs related to the Recapitalization.
EBITDA (Earnings before net interest expense, taxes, depreciation,
amortization, LIFO provision and extraordinary items) and Operating Income
(Loss)
EBITDA for Fiscal Year 1998 increased by $91.0 million (274.1%) compared to
Fiscal Year 1997. EBITDA as a percentage of net sales increased to 5.1% for
Fiscal Year 1998 from 1.4% for Fiscal Year 1997. EBITDA for Fiscal Year 1998 and
Fiscal Year 1997 is defined to exclude LIFO provisions of approximately $1.9
million and $3.4 million, respectively, and $9.8 million of loss on early
extinguishment of debt in Fiscal Year 1997.
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Operating income for Fiscal Year 1998 increased by $90.5 million (473.8%)
compared to Fiscal Year 1997. Such increases are primarily attributable to the
increases in gross profit, $19.3 million of selling, general and administrative
expenses described above incurred in Fiscal Year 1997 which did not recur in
Fiscal Year 1998, and approximately $44.1 million of additional other charges
incurred in Fiscal Year 1997 which did not recur in Fiscal Year 1998. Such
additional other charges included a year end closed store charge of
approximately $30.1 million (of which, approximately $29.1 million related to
stores the Company planned to close subsequent to Fiscal Year 1997 and
approximately $1.0 million related to stores closed previously), settlement of
litigation for approximately $9.5 million and a severance charge of
approximately $4.5 million.
Depreciation and Amortization
Depreciation and amortization expense for Fiscal Year 1998 increased by
$2.0 million (4.2%). Such increase is primarily due to new store openings and
the remodeling of certain existing stores in Fiscal Year 1997 and 1998. Looking
forward, the Company expects depreciation expense to increase as the Company
continues its program of remodeling and new store construction.
Interest Expense, Net
Net interest expense for Fiscal Year 1998 declined by $3.9 million (10.5%)
compared to Fiscal Year 1997, due primarily to a net reduction of debt. Looking
forward, the Company expects interest expense will increase in future periods as
the Company utilizes the revolving credit facility available under its bank
credit agreement to finance its working capital needs and expected capital
expenditures. See "LIQUIDITY AND CAPITAL RESOURCES".
Provision (Benefit) for Income Taxes
The provision for income taxes for Fiscal Year 1998 was $17.7 million
compared to a benefit of $15.2 million for Fiscal Year 1997. Such increase is
primarily due to the Company's increased pre-tax income.
Net Income (Loss)
Net income for Fiscal Year 1998 increased $71.3 million (141.0%) compared
to Fiscal Year 1997.
COMPARISON OF FISCAL YEAR 1997 AND FISCAL YEAR 1996
Net Sales
Net sales decreased by $23.7 million (1.0%) during Fiscal Year 1997 as
compared to Fiscal Year 1996. Such decrease in net sales was 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. Such increase
was 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. Such increase
was offset by a decline in same store sales of approximately 1.3% 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.
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The Company's same store sales during Fiscal Year 1997 decreased 1.3%
compared to a decrease of 2.5% during Fiscal Year 1996. This improvement
resulted primarily from the introduction of the frequent shopper program and
other marketing initiatives and the contribution of three replacement stores.
Gross Profit
Gross profit increased by $4.3 million (0.7%) and, as a percentage of net
sales, increased to 27.0% for Fiscal Year 1997 from 26.5% 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $53.5 million
(10.5%) and, as a percentage of net sales, increased to 23.9% for Fiscal Year
1997 from 21.4% 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 selling, general and administrative
expenses for Fiscal Year 1997 are $19.3 million of other 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.
EBITDA (Earnings before net interest expense, taxes, depreciation,
amortization, LIFO provision and extraordinary items) and Operating Income
(Loss)
EBITDA declined by $89.4 million (72.9%) from Fiscal Year 1996 and, as a
percentage of net sales, declined to 1.4% for Fiscal Year 1997 from 5.2% for
Fiscal Year 1996. EBITDA for Fiscal Year 1997 and Fiscal Year 1996 is defined to
exclude LIFO provisions of approximately $3.4 million and $2.1 million,
respectively. Operating income (loss) declined by $93.9 million (125.6%) from
Fiscal Year 1996 and, as a percentage of net sales, declined to (0.8%) for
Fiscal Year 1997 from 3.2% for Fiscal Year 1996. This decrease is attributable
to the increase in selling, general 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. Such additional other
charges included a year end closed store charge of approximately $30.1 million
(of which, approximately $29.1 million related to stores the Company planned to
close subsequent to Fiscal Year 1997 and approximately $1.0 million related to
stores closed previously), settlement of litigation for approximately $9.5
million and a severance charge of approximately $4.5 million.
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Depreciation and Amortization
Depreciation and amortization expense increased by $3.0 million (6.7%) 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 $2.2 million (5.5%)
compared to Fiscal Year 1996 due primarily to a net reduction of debt. The
refinancing of the Company's previous bank credit facility and other debt that
occurred on June 27, 1997 had minimal impact on interest expense for Fiscal Year
1997.
Litigation Charge
During Fiscal Year 1995, the Company was named as a defendant in a class
action lawsuit alleging the violation of various federal and state laws in
connection with the operation of the ESOP. The Company and other defendants
elected to settle the suit for $16.5 million, of which the Company was liable
for $11.3 million plus $0.2 million in administrative expenses. Net of insurance
proceeds, the Company paid $10.5 million in the aggregate in connection with the
settlement. During Fiscal Year 1997 the Company increased its existing
litigation reserves by $9.5 million to fully reserve for such matter.
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 stores the Company planned to close, replace
or sell, two of which had been closed as of June 28, 1997. These costs included
estimated inventory losses of $3.0 million charged to cost of sales and $29.8
million charged to estimated store closing costs, consisting of 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.
Benefit (Provision) for Income Taxes
The benefit from 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
$15.8 million. Such 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company, and as a result, its operating cash flow
and its ability to service its indebtedness, including the Company's $150.0
million aggregate principal amount outstanding of 9 3/8% Series B Senior
Subordinated Notes due 2007, are dependent upon the operating cash flow of its
subsidiaries and the payment of funds by such subsidiaries to the Company in the
form of loans, dividends or otherwise.
The Company's principal sources of liquidity are expected to be cash flow
from operations, borrowings under the $225.0 million revolving credit facility
("Revolver") available under the Company's current bank credit agreement and
proceeds from lease financing arrangements. As of June 27, 1998, the Company had
approximately $224.0 million available (net of approximately $1.0 million of
outstanding letters of credit) to be borrowed under the Revolver. Management
anticipates that the Company's principal uses of liquidity will be to provide
working capital, meet debt service requirements and finance the Company's
expansion and remodeling plans. Management believes that cash flows generated
from operations, borrowings under the Revolver and lease financing will
adequately provide for its working capital and debt service needs and will be
sufficient to fund the Company's expected capital expenditures.
During Fiscal Year 1998, Fiscal Year 1997, and Fiscal Year 1996, operating
activities generated cash of $110.6 million, $28.7 million and $63.8 million,
respectively. During Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year 1996,
net cash (used in) provided by financing activities were ($10.3 million), $12.7
million and ($31.2 million), respectively. During Fiscal Year 1998, the use of
cash in financing activities reflects the redemption of the Company's common
stock of approximately $4.1 million, a reduction in capital lease obligations of
approximately $3.8 million and repayments of debt of approximately $3.3 million.
Net (repayments) borrowings of revolving loans under the Company's credit
facilities were ($3.0) million, $17.0 million and ($14.0) million during Fiscal
Year 1998, Fiscal Year 1997 and Fiscal Year 1996, respectively.
Net cash used in investing activities during Fiscal Year 1998 were $87.2
million, consisting primarily of capital expenditures of approximately $113.0
million, which were partially offset by proceeds from the sale of assets in the
amount of approximately $25.2 million. Capital expenditures primarily include
expenditures related to the construction of new stores, the purchase of real
estate, the remodeling of existing stores, ongoing store expenditures for
equipment and capitalized maintenance, as well as expenditures relating to
warehousing and distribution equipment, software development and computer
equipment. To finance store development, the Company has traditionally purchased
real estate and constructed stores from operating cash flows and from the
proceeds of its revolving credit facility and then entered into sale and
leaseback transactions, the proceeds of which were applied to reduce debt
incurred to construct the stores. During Fiscal Year 1998, Fiscal Year 1997 and
Fiscal Year 1996 capital expenditures were approximately $113.0 million, $106.0
million and $66.1 million, respectively. Proceeds from asset sales were
approximately $25.2 million during Fiscal Year 1998 compared to $55.4 million
during Fiscal Year 1997 and $30.3 million in Fiscal Year 1996.
During Fiscal Year 1998, the Company embarked upon a program to accelerate
its store development and remodeling and to optimize its distribution system.
This program is expected to result in a level of capital expenditures
significantly in excess of historical levels. The Company currently estimates
that its capital expenditures for Fiscal Year 1999 will be approximately $255.0
million, including approximately $60.0 million for store
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remodeling, approximately $115.0 million for land purchases and construction of
new stores, approximately $47.0 million for expansion of its distribution
centers, approximately $23.0 million for computer hardware and software related
expenditures and approximately $10.0 million for maintenance related capital
expenditures. The Company anticipates funding its future capital expenditures
with cash flow from operations, borrowings under the revolver and proceeds from
lease financings.
NEW ACCOUNTING STANDARDS
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement on Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires the reporting and display of comprehensive
income and its components in an entity's financial statements. SFAS No. 130 is
not expected to materially impact the Company's financial statements. The
Company is required to adopt SFAS No. 130 in its Fiscal Year ending June 26,
1999.
Disclosures about Segments of an Enterprise and Related Information
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information required to be disclosed. Management believes that the
implementation of SFAS No. 131 will not have a significant impact on the
Company's financial statement disclosure. The Company is required to adopt SFAS
No. 131 in its Fiscal Year ending June 26, 1999.
Employers' Disclosures About Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. Management
believes that the implementation of SFAS No. 132 will not have a significant
impact on the Company's financial statement disclosures. The Company is required
to adopt SFAS No. 132 in its fiscal year ending June 26, 1999.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at its fair value. Depending on the intended use of the derivative, changes in
its fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income. The Company has not
quantified the impact of adoption on its financial statements. The Company is
required to adopt SFAS No. 133 in its fiscal year ending June 24, 2000.
Retroactive application to periods prior to adoption is not allowed.
EFFECTS OF INFLATION
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including inflation, availability and
price of
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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.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year, as well as hardware
that is designed with similar constraints. Some of the Company's computer
programs and hardware that have date-sensitive functions may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions in operations including,
among other things, a temporary inability to process transactions, receive
invoices, make payments or engage in similar normal business activities.
A project to address the year 2000 issue began in February 1997. This
project is being managed by the Company's Chief Information Officer. The Company
is utilizing both internal and external resources to identify, correct and test
the Company's hardware and software for year 2000 compliance. In July 1997, the
Company completed a comprehensive inventory and impact assessment of its
computer systems. Based on the findings of the assessment, the Company has
determined various software and hardware computer systems will have be to
upgraded. To complete this task the Company developed the Y2K Migration Plan
(the "Y2K Plan").
The Y2K Plan is currently underway and includes testing and implementing
the upgrades for all year 2000 non-compliant hardware and software computer
systems. The Y2K Plan is expected to be complete by the end of Fiscal Year 1999.
The Company estimates the cost of upgrading its systems to be approximately $2.0
million. In addition, the Company currently anticipates investing approximately
$23.0 million for hardware and software programs to replace systems that are
inefficient and in need of replacement regardless of their year 2000 compliance
status. Such planned purchases are currently expected to occur in Fiscal Year
1999. In addition the Company is in the process of resolving year 2000 issues
related to its non-data related systems and supplier compliance. Any remaining
costs are not anticipated to have a material impact on the Company's financial
position, results of operations or cash flows.
The Company intends its year 2000 date conversion project to be completed
on a timely basis so as to not significantly impact business operations. If the
necessary upgrades are not completed as planned, the year 2000 issue may have a
material impact on the Company. The Company has suppliers and other third
parties that it relies on for business operations and currently believes those
suppliers and other third parties are taking the appropriate action for year
2000 compliance. The Company cannot provide assurance that failure of such
suppliers and other third parties to address the year 2000 issue will not have
an adverse impact on the Company. While the Company has limited ability to test
and control its suppliers' and other third parties' year 2000 readiness, the
Company is contacting major suppliers and critical other third parties and
obtaining and assessing whether they will be year 2000 compliant. Based on the
responses, the Company will develop contingency plans to reduce the impact of
transactions with non-compliant major suppliers and other critical parties.
Although there can be no assurance that multiple business disruptions caused by
technology failures can be adequately anticipated, the Company is identifying
second and third sources of supply for major suppliers to minimize the risk of
business interruptions.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed below,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report, including, without
limitation, in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," in the Company's related press release and in oral
statements made by authorized officers of the Company. When used in this report,
any press release or oral statements, the words "looking forward", "estimate,"
"project," "anticipate," "expect," "intend," "believe" and similar expressions
are intended to identify forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions made by
management of the Company, which, although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be placed upon such
estimates and statements. No assurance can be given that any of such statements
or estimates will be realized and actual results will differ from those
contemplated by such forward-looking statements. Accordingly, the Company hereby
identifies the following important factors which could cause the Company's
financial results to differ materially from any such results which might be
projected, forecast, estimated or budgeted by the Company in forward-looking
statements: heightened competition, including specifically the intensification
of price competition and the expansion, renovation and opening of new stores by
competitors; failure to obtain new customers or retain existing customers;
inability to carry out strategies to accelerate new store development and
remodeling programs, reduce operating costs, differentiate products and
services, leverage frequent shopper program and increase private label sales;
insufficiency of financial resources to renovate and expand store base; outcome
of the MSP Litigation; prolonged dispute with labor; economic downturn in the
State of Texas; loss or retirement of key executives; higher selling, general
and administrative expenses occasioned by the need for additional advertising,
marketing, administrative, or management information systems expenditures;
adverse publicity and news coverage.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During Fiscal Year 1998, the Company had no investments in derivative
financial instruments. Subsequent to June 27, 1998 the Company entered into two
interest rate swap agreements to hedge interest rate costs and risks associated
with variable interest rates. Such agreements effectively convert variable-rate
debt, to the extent of the notional amount, to fixed-rate debt with effective
per annum interest rates of 5.493% and 5.295%, with respect to the London
Interbank Offered Rate portion of such borrowings. The aggregate notional
principal amount of such agreements is $100.0 million, $50.0 million of which
became effective August 25, 1998 and matures August 25, 2001, and $50.0 million
of which became effective September 2, 1998 and matures September 2, 2001. The
counterparty to such agreements can terminate either agreement after two years,
at its sole discretion. The counterparty to such agreements is a major financial
institution, and therefore, credit losses from counterparty nonperformance are
not anticipated.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To Randall's Food Markets, Inc.:
We have audited the accompanying consolidated balance sheets of Randalls
Food Markets, Inc. and subsidiaries (the "Company") as of June 27, 1998 and June
28, 1997, and the related consolidated statements of operations, redeemable
common stock and stockholders' equity, and cash flows for the fiscal years ended
June 27, 1998 and 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 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 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 27, 1998 and June 28, 1997, and the results of their
operations and their cash flows for the fiscal years ended June 27, 1998 and
June 28, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 26, 1998
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Randall's Food Markets, Inc.:
We have audited the accompanying consolidated statements of operations,
redeemable common stock and stockholders' equity, and cash flows of Randall's
Food Markets, Inc. and subsidiaries (the "Company") for the fiscal year ended
June 29, 1996. 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 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 results of operations and cash flows of Randall's
Food Markets, Inc. and subsidiaries for the fiscal year ended June 29, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 19, 1996 (except with respect
to the matter discussed in the seventh
paragraph of Note 5, as to which the
date is June 27,1997)
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RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 27, 1998 AND JUNE 28, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 36,243 $ 23,115
Receivables, net.......................................... 44,187 44,664
Merchandise inventories................................... 166,332 164,174
Deferred tax asset........................................ 11,792 21,109
Prepaid expenses and other................................ 5,986 9,703
-------- --------
Total current assets.............................. 264,540 262,765
PROPERTY AND EQUIPMENT, net................................. 365,853 336,548
GOODWILL, net............................................... 217,968 224,350
OTHER ASSETS, net........................................... 35,386 38,711
-------- --------
TOTAL....................................................... $883,747 $862,374
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 789 $ 774
Current maturities of obligations under capital leases.... 3,755 4,166
Accounts payable.......................................... 135,834 112,026
Accrued expenses and other................................ 136,477 131,736
Accrued income taxes...................................... -- 2,634
-------- --------
Total current liabilities......................... 276,855 251,336
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities................. 276,447 279,729
Obligations under capital leases, net of current
maturities............................................. 61,515 77,479
Deferred income tax liability............................. 8,711 11,067
Other liabilities......................................... 23,774 24,400
-------- --------
Total liabilities................................. 647,302 644,011
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10) REDEEMABLE
COMMON STOCK, $13.30 and $12.11 redemption value per
share, 387,651 and 413,022 shares issued and
outstanding,.............................................. 5,155 5,002
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value, 75,000,000 shares
authorized, 29,697,979 shares issued and 29,679,597
shares outstanding at June 27, 1998, 29,301,239 shares
issued and outstanding at June 28, 1997................ 7,425 7,326
Additional paid-in capital................................ 174,337 169,823
Stockholders' notes receivable............................ (6,213) --
Retained earnings......................................... 56,506 36,212
Restricted common stock................................... (547) --
Treasury stock, 18,382 shares, at cost.................... (218) --
-------- --------
Total stockholders' equity........................ 231,290 213,361
-------- --------
TOTAL....................................................... $883,747 $862,374
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.................................... $2,419,023 $2,344,983 $2,368,645
COST OF SALES................................ 1,755,203 1,711,832 1,739,832
---------- ---------- ----------
Gross profit....................... 663,820 633,151 628,813
---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative
expenses................................ 541,497 559,578 506,049
Depreciation and amortization.............. 50,908 48,875 45,814
Litigation and severance/benefits.......... -- 14,012 1,000
Estimated store closing costs.............. -- 29,790 1,215
---------- ---------- ----------
Total operating expenses........... 592,405 652,255 554,078
---------- ---------- ----------
OPERATING INCOME (LOSS)...................... 71,415 (19,104) 74,735
INTEREST EXPENSE, net........................ 32,949 36,828 38,981
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................... 38,466 (55,932) 35,754
(PROVISION) BENEFIT FOR INCOME TAXES......... (17,730) 15,215 (16,316)
========== ========== ==========
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM...... 20,736 (40,717) 19,438
---------- ---------- ----------
EXTRAORDINARY ITEM -- Loss on early
extinguishment of debt (Net of taxes of
$6,006).................................... -- (9,798) --
---------- ---------- ----------
NET INCOME (LOSS)............................ $ 20,736 $ (50,515) $ 19,438
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
L-30
<PAGE> 324
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 29, 1996, JUNE 28, 1997 AND JUNE 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE STOCK
--------------------------------- STOCKHOLDERS' EQUITY
8% -------------------------------------------
CLASS A CONVERTIBLE ADDITIONAL RESTRICTED
PREFERRED PREFERRED COMMON COMMON PAID-IN RETAINED COMMON
STOCK STOCK STOCK STOCK CAPITAL EARNINGS STOCK
--------- ----------- ------- ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 25, 1995............. $825 $6,903 $11,021 $3,985 $ 37,114 $ 93,779 $ (125)
Preferred stock dividends........ (5,886)
Issuance of common stock......... 11 608
Reversal of contingent shares of
Tom Thumb acquisition.......... (10) (93)
Accretion to redemption value.... 4,720 7,586 (12,306)
Earned portion of restricted
common stock compensation...... 125
Net income....................... 19,438
---- ------ ------- ------ -------- -------- -------
BALANCE, JUNE 29, 1996............. 825 11,613 18,607 3,996 37,629 95,025 --
Preferred stock dividends........ (2,407)
Issuance of restricted stock..... 34 2,405 (2,439)
Issuance of common stock......... 4,645 220,355
Accretion to redemption value.... (3,865) (5,404) 9,269
Earned portion of restricted
common stock compensation...... 29 2,439
Purchase of treasury stock.......
Retirement of treasury stock..... (158) (10) (906) 155
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) (780)
Redemption of preferred stock.... (825) (7,748) (20,052)
Cancellation of putable rights... (5,617) 100 5,517
Impairment of loan to ESOP....... (472)
Net loss......................... (50,515)
---- ------ ------- ------ -------- -------- -------
BALANCE, JUNE 28, 1997............. -- -- 5,002 7,326 169,823 36,212 --
Issuance of restricted stock..... 21 882 (903)
Issuance of common stock......... 154 7,294
Purchase and retirement of common
stock.......................... (81) (4,184)
Accretion to redemption value.... 442 (442)
Earned portion of restricted
common stock compensation...... 324
Cancellation of restricted common
stock.......................... (1) (31) 32
Purchase of treasury stock.......
Sale of treasury stock...........
Cancellation of redemption
rights......................... (280) 6 274
Purchase of redeemable common
shares......................... (9)
Impairment of loan to ESOP....... (263)
Repayment of loan to ESOP........ 542
Net income....................... 20,736
---- ------ ------- ------ -------- -------- -------
BALANCE, JUNE 27, 1998............. $ -- $ -- $ 5,155 $7,425 $174,337 $ 56,506 $ (547)
==== ====== ======= ====== ======== ======== =======
<CAPTION>
STOCKHOLDERS' EQUITY
------------------------
STOCKHOLDERS'
TREASURY NOTES
STOCK RECEIVABLE
-------- -------------
<S> <C> <C>
BALANCE, JUNE 25, 1995............. $ -- $ --
Preferred stock dividends........
Issuance of common stock.........
Reversal of contingent shares of
Tom Thumb acquisition..........
Accretion to redemption value....
Earned portion of restricted
common stock compensation......
Net income.......................
----- -------
BALANCE, JUNE 29, 1996............. -- --
Preferred stock dividends........
Issuance of restricted stock.....
Issuance of common stock.........
Accretion to redemption value....
Earned portion of restricted
common stock compensation......
Purchase of treasury stock....... (919)
Retirement of treasury stock..... 919
Purchase and retirement of ESOP
and Non-ESOP shares............
Redemption of common stock.......
Redemption of putable common
stock..........................
Redemption of preferred stock....
Cancellation of putable rights...
Impairment of loan to ESOP.......
Net loss.........................
----- -------
BALANCE, JUNE 28, 1997............. -- --
Issuance of restricted stock.....
Issuance of common stock......... (6,503)
Purchase and retirement of common
stock.......................... 180
Accretion to redemption value....
Earned portion of restricted
common stock compensation......
Cancellation of restricted common
stock..........................
Purchase of treasury stock....... (348) 200
Sale of treasury stock........... 130 (90)
Cancellation of redemption
rights.........................
Purchase of redeemable common
shares.........................
Impairment of loan to ESOP.......
Repayment of loan to ESOP........
Net income.......................
----- -------
BALANCE, JUNE 27, 1998............. $(218) $(6,213)
===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
L-31
<PAGE> 325
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 20,736 $ (50,515) $ 19,438
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 50,908 48,874 45,814
Amortization of debt issuance costs................. 2,053 662 360
LIFO reserve........................................ 1,901 3,434 2,092
Loss on early extinguishment of debt................ -- 15,804 --
Settlement of ESOP litigation....................... -- 10,500 --
Severance benefits.................................. -- 3,594 --
(Gain) loss from sale of assets..................... (1,241) (905) 793
Store closing costs................................. -- 32,790 --
Earned portion of restricted common stock
compensation..................................... 324 2,468 125
Equity in earnings of unconsolidated joint
venture.......................................... (127) (137) (69)
Deferred tax provision (benefit).................... 6,961 (13,735) (9,552)
Increase in receivables............................. (12,879) (2,291) (1,777)
(Increase) decrease in merchandise inventories...... (4,059) 184 (10,005)
Decrease (increase) in prepaid expenses and other... 1,746 (1,216) (2,798)
Decrease (increase) in note receivable from ESOP.... 2,250 (2,250) (1,500)
Decrease (increase) in federal income tax
receivable....................................... 13,356 (16,409) --
Decrease (increase) in other assets................. 3,217 (15,963) (1,423)
Increase in accounts payable........................ 23,808 33,614 7,163
Increase (decrease) in accrued expenses and other... 7,485 (18,994) 10,453
(Decrease) increase in accrued income taxes......... (2,634) (3,366) 2,549
(Decrease) increase in other long-term
liabilities...................................... (3,205) 2,555 2,183
--------- --------- --------
Net cash provided by operating activities...... 110,600 28,698 63,846
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... (112,957) (105,993) (66,131)
Proceeds from sale of assets.......................... 25,167 55,434 30,317
Contributions to joint ventures....................... (163) (138) (13)
Proceeds from sale of joint ventures.................. 496 167 1,808
Distributions from joint ventures..................... 263 524 237
--------- --------- --------
Net cash used in investing activities.......... (87,194) (50,006) (33,782)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt.................................... (3,267) (399,524) (50,711)
Cost of early extinguishment of debt.................. -- (15,804) --
Proceeds from issuance of debt........................ -- 178,000 27,000
Proceeds from issuance of senior subordinated notes... -- 149,755 --
Reductions of obligations under capital leases........ (3,754) (3,378) (2,251)
Proceeds from issuance of common stock................ 945 225,000 619
Redemption of common stock............................ (4,094) (89,363) --
Redemption of preferred stock......................... -- (28,645) --
Purchase of treasury stock............................ (148) (919) --
Proceeds from sale of treasury stock.................. 40 -- --
Preferred dividends paid.............................. -- (2,385) (5,886)
--------- --------- --------
Net cash (used in) provided by financing
activities................................... (10,278) 12,737 (31,229)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 13,128 (8,571) (1,165)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 23,115 31,686 32,851
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 36,243 $ 23,115 $ 31,686
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
L-32
<PAGE> 326
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION -- 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). All significant intercompany accounts and transactions have been
eliminated in consolidation.
CONCENTRATION OF RISK -- The Company operates in a highly competitive
marketplace with its retail grocery stores concentrated in north, central and
southeast Texas. The Company is also subject to certain litigation and
administrative matters (Note 10).
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
STATEMENTS OF CASH FLOWS -- The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
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 $277.0 million and $281.0
million at June 27, 1998, and June 28, 1997, 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
$5.8 million, $3.1 million and $1.0 million at June 27, 1998, June 28, 1997 and
June 29, 1996, respectively. The activity in the allowance for uncollectible
amounts for Fiscal Years 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Balance at beginning of year.......... $ 3,053 $ 1,002 $ 395
Additions............................. 4,301 4,714 1,176
Deductions............................ (1,549) (2,663) (569)
------- ------- ------
Balance at end of year................ $ 5,805 $ 3,053 $1,002
======= ======= ======
</TABLE>
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
were 52 weeks in the fiscal years ended June 27, 1998 ("Fiscal Year 1998") and
June 28, 1997 ("Fiscal Year 1997") and 53 weeks in the fiscal year ended June
29, 1996 ("Fiscal Year 1996").
L-33
<PAGE> 327
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MERCHANDISE INVENTORIES -- The Company uses the last-in first-out ("LIFO")
method of costing for its inventories. If the FIFO method had been used for
costing inventories, the valuation assigned to inventories would have been
approximately $20.9 million and $19.0 million higher as of June 27, 1998 and
June 28, 1997, 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 27, 1998 and June 28, 1997,
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 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 shorter of the useful life or lease term. 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 or when indicators of impairment to long-lived assets used in
operations are present, and any resulting gain or loss is reflected in
operations for that period.
Goodwill in the amount of $256 million resulted from the acquisition of
Cullum Companies, Inc. ("Cullum") in August 1992 (the "Cullum Acquisition").
Such goodwill is being amortized on a straight-line basis over 40 years. The
accumulated amortization was $38.2 million and $31.8 million at June 27, 1998
and June 28, 1997, 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 27,
1998 and June 28, 1997, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Payroll and related benefits................. $ 42,162 $ 39,875
Rent......................................... 7,666 7,527
Property taxes............................... 5,585 6,480
Insurance and related costs.................. 21,712 17,957
Deferred income, current..................... 6,109 3,288
Legal and other contingencies................ 7,280 6,947
Accrual for planned store closings........... 27,519 34,005
Accrued transaction costs.................... 435 5,800
Accrued interest............................. 7,921 61
Other........................................ 10,088 9,796
-------- --------
$136,477 $131,736
======== ========
</TABLE>
L-34
<PAGE> 328
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 incurred. Estimated costs associated
with closing a store are recognized in the period the Company determines to
close the store. During Fiscal Year 1997, the Company recorded a charge of
approximately $32.8 million in connection with the closure, replacement or sale
of certain of its stores. Such charge included estimated inventory losses of
approximately $3.0 million (included in cost of sales during Fiscal Year 1997),
estimated lease termination costs of approximately $11.7 million and asset
write-offs of approximately $18.1 million (included in operating expenses during
Fiscal Year 1997). Approximately $3.7 million of such charge related to stores
that were closed or sold in Fiscal Year 1997, and approximately $29.1 million
related to stores the Company planned to close, replace or sell through the
Fiscal Year ending June 26, 1999. During Fiscal Year 1998, the Company closed
ten stores and charged approximately $6.5 million of related closure costs
against the accrual recorded in connection with the charge in Fiscal Year 1997.
ACCOUNTING FOR JOINT VENTURES -- The Company accounts for its investment in
joint ventures under the equity method.
STOCK OPTIONS -- The Company has adopted only the disclosure requirements
of Statement of Financial Accounting Standard ("SFAS") No. 123 "Accounting for
Stock Based Compensation." The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its stock options and have not recognized
compensation for options granted.
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
years' financial statements to conform to the current year presentation.
NEW ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting
Standards Board (the "FASB") issued "SFAS" No. 130, "Reporting Comprehensive
Income", which requires the reporting and display of comprehensive income and
its components in an entity's financial statements. SFAS No. 130 is not expected
to materially impact the Company's financial statements. In June 1997 the FASB
also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information
required to be disclosed. Management believes that the implementation of SFAS
No. 131 will not have a significant impact on the Company's financial
statements. The Company is required to adopt SFAS No. 130 and SFAS No. 131 in
its Fiscal Year ending June 26, 1999.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. Management
believes that the implementation of SFAS No. 132 will not have a significant
impact on the Company's financial statement disclosures. The Company is required
to adopt SFAS No. 132 in its fiscal year ending June 26, 1999.
L-35
<PAGE> 329
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at its fair value. Depending on the intended use of the derivative, changes in
its fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income. The Company has not
quantified the impact of adoption on its financial statements. The Company is
required to adopt SFAS No. 133 in its fiscal year ending June 24, 2000.
Retroactive application to periods prior to adoption is not allowed.
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 approximately $225.0
million to the Company (the Equity Investment), including approximately $210.0
million as consideration for the Company's issuance to RFM Acquisition of
18,579,686 shares of common stock and approximately $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 in the event of stock dividends,
subdivisions and combinations, distributions to common stockholders 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.
3. PROPERTY AND EQUIPMENT
Property and equipment at June 27, 1998 and June 28, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land......................................... $ 55,232 $ 51,115
Buildings and improvements................... 39,904 42,399
Fixtures, leaseholds and equipment........... 445,457 374,022
Property held under capital leases........... 78,484 91,921
Construction-in-progress..................... 21,867 22,560
-------- --------
640,944 582,017
Accumulated depreciation and amortization:
Property and Equipment..................... 250,004 223,297
Capital leases............................. 25,087 22,172
-------- --------
Property and equipment, net.................. $365,853 $336,548
======== ========
</TABLE>
L-36
<PAGE> 330
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Fiscal Years 1998, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period....... $(3,624) $(3,208) $(5,188)
Equity in earnings of
unconsolidated joint ventures... 127 137 69
Contributions made................. 163 138 13
Distributions received............. (263) (524) (237)
Sales of certain joint ventures.... 2,054 (167) 2,135
------- ------- -------
Balance at end of period............. $(1,543) $(3,624) $(3,208)
======= ======= =======
</TABLE>
The balance for investments in unconsolidated joint ventures is included in
other assets. The unconsolidated joint ventures have debt outstanding at June
27, 1998 and June 28, 1997 of approximately $8.9 million and $20.6 million,
respectively, that is nonrecourse. The debt outstanding at June 27, 1998 and
June 28, 1997 represents 100 percent of the joint ventures debt.
During Fiscal Year 1998, the Company sold its interest in two
unconsolidated joint ventures. The Company continues to operate stores at each
of these locations which are accounted for as sale leaseback transactions. A
gain of approximately $2.6 million related to these transactions was deferred
and is being recognized over the remaining lease term. During Fiscal Year 1997,
the Company sold its interest in one unconsolidated joint venture and is
recognizing the sale on a cash basis. Approximately $70,000 and $167,000 have
been recognized for Fiscal Year 1998 and Fiscal Year 1997, respectively.
The Company paid the joint ventures approximately $1.1 million, $3.4
million and $4.1 million in Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year
1996, respectively, in rent, common area maintenance and other lease-related
costs for shopping centers owned by the joint ventures.
L-37
<PAGE> 331
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
At June 27, 1998 and June 28, 1997, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Senior subordinated notes:
9.375% Series B Senior Subordinated Notes, due
2007............................................ $150,000 $150,000
Discount on senior subordinated notes.............. (229) (245)
-------- --------
Total Senior Subordinated Notes............ 149,771 149,755
-------- --------
Notes payable to banks:
Principal due in annual installments beginning June
29, 1998 and interest due in quarterly or
monthly installments, final installment due June
27, 2006, interest at the London Interbank
Offered Rate ("LIBOR") plus an adjustable margin
rate (1.5%), interest at 7.15% at June 27,
1998............................................ 125,000 125,000
Principal due June 22, 2004, principal and interest
paid in full in Fiscal Year 1998................ -- 3,000
-------- --------
Total notes payable to banks............... 125,000 128,000
-------- --------
Notes payable to insurance companies:
Principal and interest due in monthly installments,
final installment due in 2005, interest from
8.3% to 9.0%, interest at 9.0% at June 27,
1998............................................ 2,465 2,748
-------- --------
Total long-term debt................................. 277,236 280,503
Less current maturities of long-term debt............ 789 774
-------- --------
Long-term debt, net of current maturities............ $276,447 $279,729
======== ========
</TABLE>
Aggregate principal payments applicable to existing long-term debt
outstanding as of June 27, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
------------------
<S> <C>
1999........................................................ $ 789
2000........................................................ 798
2001........................................................ 798
2002........................................................ 798
2003........................................................ 798
Thereafter................................................ 273,255
--------
Total....................................................... $277,236
========
</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.
L-38
<PAGE> 332
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 27, 1998 and June 28, 1997, the Company was in compliance
with all such covenants.
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 approximately $225.0 million, and the
insurance companies provided three series of private placement debt aggregating
approximately $135.5 million. In conjunction with the Equity Investment
described in Note 2, the Company paid in full the notes payable to the insurance
companies and the term loan to the banks. In connection with this early
extinguishment of debt, the Company recorded extraordinary charge of $9.8
million, consisting primarily of a make whole premium in the amount of
approximately $14.9 million including interest payable to the insurance
companies, net of an income tax benefit of $6.0 million.
As part of the credit agreement dated June 27, 1997, a revolving credit
commitment for $225.0 million, a swingline credit commitment for $25.0 million
and a letter of credit limit of $25.0 million were established, with the
outstanding revolving credit loans, swingline borrowings and the letters of
credit loans not to exceed $225.0 million. As of June 27, 1998, the Company had
no borrowings outstanding under the revolver or under the swingline and had
approximately $1.0 million of letters of credit outstanding. As of June 28,
1997, the Company had no borrowings under the revolver, approximately $3.0
million of borrowings under the swingline and approximately $1.8 million of
letters of credit outstanding. There are no scheduled reductions to the amounts
available to the Company under the credit agreement 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 27, 1998 and June 28, 1997 the Company was in
compliance with all such covenants.
The note payable to insurance companies is secured by a first lien on the
related property. The note payable to bank due June 27, 2006 is secured by
pledges for all capital
L-39
<PAGE> 333
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock of the Company's Subsidiaries and all evidence of indebtedness in excess
of $5.0 million received by the Company in connection with any disposition of
assets.
Interest capitalized associated with construction was $794,000, $556,000
and $115,000 in Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year 1996,
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 Fiscal Year 1998, Fiscal Year 1997 and
Fiscal Year 1996, is summarized below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Current provision (benefit)......... $10,769 $ (7,486) $25,868
Deferred provision (benefit)........ 6,961 (13,735) (9,552)
------- -------- -------
Total tax provision
(benefit)............... 17,730 (21,221) 16,316
Less: tax on extraordinary item..... -- 6,006 --
------- -------- -------
Total tax provision
(benefit), net of
extraordinary item...... $17,730 $(15,215) $16,316
======= ======== =======
</TABLE>
Deferred tax assets and liabilities result from differences in the bases of
assets and liabilities for income tax and financial reporting purposes. The
cumulative tax effect of such items at June 27, 1998 and June 28, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Assets:
Deferred income.............................. $ (9,884) $ (8,422)
Employee benefits............................ (11,105) (11,723)
Insurance.................................... (8,576) (6,824)
Closed store accruals........................ (8,875) (12,922)
Other........................................ (997) (5,137)
-------- --------
Total gross deferred tax assets.... (39,437) (45,028)
-------- --------
Liabilities:
Property and equipment....................... 12,217 11,035
Tax benefit lease............................ 4,429 5,206
LIFO......................................... 13,206 13,051
Other........................................ 6,504 5,694
-------- --------
Total gross deferred tax
liabilities...................... 36,356 34,986
-------- --------
Net deferred income tax asset................ (3,081) (10,042)
Current deferred income tax asset............ (11,792) (21,109)
-------- --------
Long-term deferred income tax liability...... $ 8,711 $ 11,067
======== ========
</TABLE>
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<PAGE> 334
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The actual provision (benefit) for income taxes differs from that
calculated using the statutory federal income tax rate as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Taxes at federal statutory tax
rate.............................. $13,463 $(25,108) $12,514
Increase (decrease) in income taxes
resulting from:
Goodwill.......................... 2,233 2,233 2,271
State taxes based on income....... 2,018 (2,152) 1,899
Nondeductible transaction costs... -- 2,800 --
Previously overprovided taxes and
other, net..................... 16 1,006 (368)
Tax on extraordinary item......... -- 6,006 --
------- -------- -------
Total tax provision
(benefit)............... $17,730 $(15,215) $16,316
======= ======== =======
</TABLE>
Income taxes paid were approximately $6.3 million during Fiscal Year 1998.
As of June 28, 1997 the Company had a tax credit of approximately $1.7 million
from an overpayment of estimated taxes paid in a prior year. In addition, the
Company obtained a tax benefit for carryback of the net operating loss which was
generated in the prior Fiscal Year 1997. The carryback gave the Company a tax
benefit of approximately $4.7 million to use against taxes incurred in the
current year.
The Company's 1994, 1995 and 1996 tax years are currently under audit by
the Internal Revenue Service.
7. BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN -- The Company has a noncontributory, defined
benefit pension 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 Fiscal Year 1998, Fiscal Year 1997 and
Fiscal Year 1996 include the following components (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost/benefits earned during
the year........................... $ 1,849 $ 1,796 $ 1,677
Interest cost on projected benefit
obligation......................... 1,642 1,354 1,180
Actual return on assets.............. (5,711) (1,969) (1,601)
Amortization of unrecognized net
transition asset and net losses.... 4,219 672 537
------- ------- -------
Net periodic pension expense......... $ 1,999 $ 1,853 $ 1,793
======= ======= =======
</TABLE>
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<PAGE> 335
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the plan's funded status and the amount
recognized in the Company's consolidated balance sheets at June 27, 1998, June
28, 1997 and June 29, 1996 (in thousands):
Actuarial present value of benefit obligations:
<TABLE>
<S> <C> <C> <C>
Vested............................ $ 18,839 $ 13,023 $ 11,075
======== ======== ========
Accumulated..................... $ 21,536 $ 14,847 $ 12,801
======== ======== ========
Projected....................... $(27,039) $(18,814) $(15,454)
Plan assets at fair value....... 24,498 17,491 15,765
-------- -------- --------
(Estimated benefit obligations)
Excess of plan assets........... (2,541) (1,323) 311
Unrecognized net loss............. 954 5 223
-------- -------- --------
Accrued pension (liability) asset
recognized in the accompanying
consolidated balance sheets..... $ (1,587) $ (1,318) $ 534
======== ======== ========
Contributions by the Company to
the plan........................ $ -- $ 705 $ 2,810
======== ======== ========
</TABLE>
Assumptions used in determining the actuarial present value of plan
benefits reflect a weighted average discount rate of 7.0 percent, 8.0 percent
and 7.9 percent for Fiscal Years 1998, 1997 and 1996, respectively, and an
investment rate of return of 9.0 percent for Fiscal Years 1998, 1997 and 1996.
The assumed rate of salary increase averaged 5.0 percent, 5.0 percent and 6.0
percent for Fiscal Years 1998, 1997 and 1996, respectively.
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 up to an additional 10 percent of
their compensation, unmatched by the Company. The Company's cash contributions
to the ESOP/401k for Fiscal Years 1998, 1997 and 1996 totaled approximately $3.9
million, $3.3 million and $3.4 million, respectively.
During Fiscal Year 1997 and Fiscal Year 1996, the Company loaned the ESOP
$2.3 million and $1.5 million, respectively (together, the "ESOP Notes"). Such
ESOP Notes were non-interest bearing and secured by 244,482 shares of the
Company's common stock. During Fiscal Year 1998 and Fiscal Year 1997, the
Company recorded impairment reserves related to the ESOP Notes in the amount of
$262,722 and $472,000, respectively, because the value of the Company's stock
securing the ESOP Notes was not adequate to secure the fair value of such notes.
During Fiscal Year 1998, the ESOP sold 275,174 shares of the Company's common
stock to the Company for $3.7 million and used the proceeds from such sale to
repay the $2.3 million note in full. As of June 27, 1998, the outstanding
balance of the remaining ESOP Note was $988,126 and the related impairment
reserve, which is recorded as a reduction of equity, was $192,460. At June 28,
1997, the aggregate outstanding balance of the ESOP notes was $3.8 million and
the
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<PAGE> 336
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
impairment reserve was $472,000. The ESOP Notes are included in prepaid expenses
and other in the accompanying consolidated balance sheets at June 27,1998 and
June 28, 1997.
During Fiscal Year 1996, the ESOP purchased 43,000 shares of the Company's
common stock. The ESOP did not purchase shares of the Company's common stock in
Fiscal Year 1998 and Fiscal Year 1997.
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.
CULLUM RETIREMENT PLANS -- Following the Cullum Acquisition, the Company
terminated Cullum's Management Security Plan ("MSP") and the Senior Corporate
Officer Plan effective December 31, 1992. The present value (based on a discount
rate of 8.56 percent) of the remaining obligation to participants in such plans
who retired prior to the termination of the plans was approximately $5.4
million, net of the current portion of $0.6 million, at June 27, 1998 and
approximately $5.5 million, net of the current portion of $1.1 million, at June
28, 1997. As discussed further in Note 10, certain MSP participants who received
payments in connection with the termination of the MSP 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. 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 28, 1997. 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 Cullum Acquisition, 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 27, 1998, there
were approximately 60,000 shares of common stock subject to this agreement and
outstanding.
The Company also has approximately 328,000 shares of redeemable common
stock, not associated with the Cullum 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
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<PAGE> 337
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
other existing stockholders. During Fiscal Year 1998, the redeemable rights on
approximately 25,000 shares of such redeemable common stock were cancelled.
During Fiscal Year 1998, the Company purchased 29,117 shares of its common
stock. Of such shares 10,735 shares have been retired and 18,382 shares recorded
as treasury shares at cost. During Fiscal Year 1997, the Company purchased
53,027 shares of its common stock from certain stockholders for approximately
$919,023. Such shares were recorded as treasury stock at cost and all such
shares were retired during Fiscal Year 1997. Treasury shares were purchased at
the then estimated fair values.
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. Additionally, as discussed
in Note 2, RFM Acquisition has a 25-year option to purchase 3,606,881 shares of
the Company's common stock at $12.11 per share, subject to certain adjustments.
STOCK PURCHASE AND OPTION PLAN -- During Fiscal Year 1998, the Company
adopted the 1997 Stock Purchase and Option Plan for key employees of the Company
(the "1997 Plan"). The 1997 Plan authorizes grants of stock and stock options
covering 2.4 million shares of the Company's common stock. Grants or awards
under the 1997 Plan may take the form of purchased stock, restricted stock,
incentive or non-qualified stock options, or other types of rights specified in
the 1997 Plan and are typically issued at prices greater than or equal to the
fair market value of the Company's common stock at the time of such grants and
awards.
During Fiscal Year 1998, the Company sold approximately 589,000 shares of
common stock under the 1997 Plan to key executives and certain members of
management at prices ranging from $12.11 to $12.61 per share. As consideration,
the Company accepted payment of cash or a combination of cash and notes
receivable from the purchasers. The notes receivable bear interest at rates
ranging from 5.7% to 6.1% per annum. At June 27, 1998, the Company held notes
receivable from management stockholders in the aggregate amount of approximately
$6.2 million. Such notes receivable are shown as a reduction of stockholders'
equity in the accompanying consolidated balance sheet.
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 28, 1997,
were exercisable for a ten-year period. At June 27, 1998, approximately 800,000
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 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.
During Fiscal Year 1998, 13,334 shares vested with an exercise price of $15.00.
During Fiscal Year 1997,
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<PAGE> 338
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25,209 shares vested with an exercise price of $11.90. During the Fiscal Year
1996, 31,086 shares vested with an exercise price of $9.65. During Fiscal Year
1998, 43,697 of such options were cancelled. The unvested portion of the grant
would be issuable into approximately 19,879 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. During
Fiscal Year 1998, the Company granted 86,000 shares of restricted stock. The
$903,000 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 were exercisable at June 29,
1996.
During 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 in Fiscal Year 1997 and 55,090 in Fiscal Year 1998, of the
Company's common stock. The exercise price of such options is $18.15, the
estimated fair value at the date of grant. These options become exercisable on
September 30, 2000 and expire on September 30, 2006.
Stock option activity under the Company's plans for the three years ended
June 27, 1998, June 28, 1997 and June 29, 1996 are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ----------------------- ----------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ------------ -------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding, beginning
of year........................... 635,044 $16.76 137,634 $11.16 128,951 $10.44
Change in Option Value.............. (4,794) 19,100 (28,817)
Changes during the year:
Granted (per share):
1998, $10.50 to $12.61.......... 1,404,106 12.02
1997, at $18.15................. 523,355 18.15
1996, $9.65 to $15.00........... 37,500 10.75
Exercised/forfeited (per share):
1998, at $12.11 to $12.48....... (38,073)
1997, at $18.15................. (55,090) (27,545)
1996, at $10.75................. (5,000) (17,500)
1995, $9.65 to $15.00........... (43,697)
---------- -------- -------
Stock options outstanding, end of
year.............................. 1,892,496 13.42 635,044 16.63 137,634 12.71
========== ======== =======
Stock options exercisable, end of
year.............................. 309,436 11.99 96,296 11.58 93,795 10.69
========== ======== =======
Weighted Average fair value of
options granted during the year... $ 5.10 $ 8.88 $ 4.96
</TABLE>
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<PAGE> 339
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at June 27, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVG WEIGHTED-AVG NUMBER WEIGHTED-AVG
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT JUNE 27, 1998 CONTRACTUAL LIFE PRICE AT JUNE 27, 1998 PRICE
--------------- ---------------- ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
$ 9.65 to $13.30..... 1,438,442 9.2 years $11.96 296,102 $11.86
$15.00 to $18.15..... 454,054 8.2 years $18.06 13,334 $15.00
$ 9.65 to $18.15..... 1,892,496 9.0 years $13.42 309,436 $11.99
</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 1998, 1997 and 1996 respectively: risk-free interest rates of 5.8,
6.72 and 6.18 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.
Stock-based compensation costs would have reduced net income by
approximately $7.0 million, $4.4 million and $0.2 million in Fiscal Year 1998,
Fiscal Year 1997 and Fiscal Year 1996, respectively, if the fair values of the
options granted in those years had been recognized as compensation expense over
the vesting period of the grant.
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>
1999.................................... $ 49,556 $ 39,578 $ 9,978
2000.................................... 49,051 39,244 9,807
2001.................................... 48,485 38,678 9,807
2002.................................... 46,550 37,983 8,567
2003.................................... 44,439 36,758 7,681
Thereafter.............................. 505,815 421,768 84,047
-------- -------- --------
$743,896 $614,009 129,887
======== ========
Amount representing interest.............. 64,617
--------
Present value of net minimum lease
payments including current maturities of
$3,755:................................. $ 65,270
========
</TABLE>
The Company leases substantially all of its store facilities and some equipment.
Included in the above operating lease commitments are future minimum rentals to
the joint ventures discussed in Note 4 aggregating approximately $9.6 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.
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<PAGE> 340
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in selling, general, and administrative expense for the Fiscal
Years ended June 27, 1998, June 28, 1997 and June 29, 1996 is rent expense
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Minimum rental....................... $50,254 $47,073 $42,998
Percentage rental.................... 744 939 713
------- ------- -------
$50,998 $48,012 $43,711
======= ======= =======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
MSP LITIGATION -- Former participants in the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP") have instituted a claim against the
Company on behalf of all participants in the MSP on the date the Company
terminated it following the Cullum Acquisition. In respect of such termination,
the Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. The plaintiffs seek 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. Based upon current facts, the Company is unable to estimate any
meaningful range of possible loss that could result from an unfavorable outcome
of the MSP litigation. It is possible that the Company's results of operations
or cash flows in a particular quarterly or annual period or its financial
position could be materially affected by an ultimate unfavorable outcome of the
MSP litigation. However, the Company intends to vigorously contest the MSP claim
and, although there can be no assurance, management currently does not
anticipate an unfavorable outcome based on management's independent analysis of
the facts relating to such litigation.
ESOP LITIGATION -- On November 28, 1995, two individuals filed a lawsuit on
behalf of the Company's Employee Stock Ownership Plan (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
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<PAGE> 341
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Year 1997 to fully reserve for such matters and concurrently with the
closing of the Equity Investment, 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. At
June 28, 1997, the Company reserved $3.3 million for expected expenditures in
connection with the EEOC settlement and as of June 27, 1998, approximately $2.8
million of such accrual remained. Qualified promotion claimants will be placed
on a preferential promotion list from which future promotions will be made by
the Company. The Consent Decree includes certain requirements to properly notify
potential claimants and certain enhanced reporting requirements. The Consent
Decree will be effective for a two-year period, except that the obligations to
distribute back pay, offer employment, retain information and make reports will
extend beyond the two-year term.
During the course of the EEOC investigation evidence was uncovered that the
Company may not have hired certain persons for age and other reasons. The
Company has agreed to settle these charges for an immaterial amount of money.
FLEMING DISPUTE -- On July 30, 1997, the Company initiated an arbitration
proceeding before the American Arbitration Association against Fleming
Companies, Inc. ("Fleming"), one of its long-time suppliers, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and that the contract was terminated as
of July 7, 1998 without payment of any termination fee.
On July 16, 1998, the Company and Fleming entered into a stand-still
agreement whereby both parties agree to conduct business on the same terms as
prior to the termination of the contract while they negotiate a transition
agreement. Fleming is required to give the Company five days notice of its
intent to discontinue supply of product in the event Fleming determines that the
parties are no longer negotiating in good faith. While
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<PAGE> 342
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company cannot predict with certainty the ultimate outcome of this matter,
the Company continues to work with Fleming on a smooth transition plan. During
Fiscal Year 1998, the Company commenced expansion of its distribution system in
a move towards self distribution. Such expansion will optimize the Company's
distribution system and is expected to be completed during the fiscal year
ending June 26,1999. The Company currently has no reason to believe that it will
experience a significant disruption of supply during the negotiations of the
transition agreement and transition to self distribution.
John Paul Mitchell Lawsuit -- On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The Jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., $3.25 million in joint and several damages from the Company and Jade, $4.5
million in exemplary damages from the Company and $3.0 million in actual damages
and $4.5 million in exemplary damages from Jade.
The judge has yet to enter a judgment in the matter. The Company intends to
vigorously seek to have the verdict, if it stands, overturned on appeal.
Nonetheless, the Company is currently reviewing its insurance coverage and other
remedies. Although the outcome of this matter cannot be predicted with
certainty, management believes it will not have a material impact on the
Company's financial position, results of operations, or cash flows.
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, its financial condition, or its cash flows.
INSURANCE -- The Company maintains a self-insurance program covering
portions of workers' compensation (employee safety program) a Company sponsored
employee injury and disability program (Randall's Employee Safety Plan),
designed to replace the State's workers compensation 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.
COMMITMENTS -- The Company has entered into severance and employment
agreements with certain officers and employees. Expected severance payments and
postemployment benefits in the amount of approximately $1.8 million and $4.5
million are accrued in the accompanying consolidated financial statements as of
June 27, 1998 and June 28, 1997, respectively.
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<PAGE> 343
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the Company's capital expenditure program, as of June
27, 1998, the Company had commitments to make $85.5 million in capital
expenditures.
The Company is continually evaluating possible additional site locations
and related financing opportunities.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information with respect to payments of interest and
income taxes made for Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest paid........................ $22,310 $37,542 $39,200
Income taxes paid.................... 6,300 17,700 23,300
</TABLE>
The Company incurred capital lease obligations of $8.8 million in Fiscal
Year 1997 and no obligations for Fiscal Year 1998 and Fiscal Year 1996.
In connection with the 1997 Plan, the Company sold stock to key executives
and certain members of management during Fiscal Year 1998 for cash or a
combination of cash and notes receivable. At June 27, 1998, the notes receivable
had an aggregate amount of $6.2 million.
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
OCTOBER 18, JANUARY 10, APRIL 4, JUNE 27,
1997 1998 1998 1998
----------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 27, 1998:
Net sales.......................... $719,377 $579,916 $552,524 $567,207
Gross profit....................... 197,140 157,210 153,024 157,149
Operating income................... 18,044 21,355 16,604 15,411
Net income......................... 3,742 7,845 4,862 4,284
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
OCTOBER 19, JANUARY 11, APRIL 5, JUNE 28,
1996 1997 1997 1997
----------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 28, 1997:
Net sales.......................... $683,705 $575,341 $545,540 $540,397
Gross profit....................... 182,781 155,622 149,616 145,132
Operating income (loss)............ 14,559 16,930 (8,777) (41,817)
Income (loss) before income taxes
and extraordinary item.......... 3,397 8,241 (17,251) (50,319)
Net income (loss).................. 1,209 4,550 (11,173) (45,100)
</TABLE>
Schedules are omitted for the reason that they are not required and/or are
not applicable, or the required information is shown in the consolidated
financial statements or notes thereto.
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<PAGE> 344
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. 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........... 67 Chairman Emeritus
R. Randall Onstead.......... 42 Chairman of the Board and Chief Executive Officer
Douglas G. Beckstett........ 46 Senior Vice President, Human Resources
Michael M. Calbert.......... 36 Chief Financial Officer and Senior Vice President
Frank Lazaran............... 41 Senior Vice President, Sales and Merchandising
D. Mark Prestidge........... 39 President, Dallas Division
J. Russell Robinson......... 56 Senior Vice President, Chief Information Officer
Joe R. Rollins.............. 42 Senior Vice President, Real Estate and Assistant
Secretary
Lee E. Straus............... 49 Senior Vice President, Finance, Secretary and Treasurer
John W. Sullivan............ 41 Senior Vice President, Houston Operations
Henry R. Kravis............. 54 Director
George R. Roberts........... 55 Director
Paul E. Raether............. 51 Director
James H. Greene, Jr. ....... 48 Director
Nils P. Brous............... 33 Director
A. Benton Cocanougher....... 60 Director
</TABLE>
Robert R. Onstead is a co-founder of the Company and served as its Chairman
from 1966 through July 1998. Mr. Onstead attended the University of North Texas.
R. Randall Onstead was elected President and Chief Executive Officer of the
Company in April 1996 and became Chairman of the Board and Chief Executive
Officer in July 1998. He has been a Director of the Company for 12 years and has
been with the Company for 20 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. He was promoted to Senior Vice President
Corporate Planning and
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<PAGE> 345
Development in 1996 and became Chief Financial Officer in 1998. From 1984 to
1994, he served as a Manager in the audit and consulting groups of Arthur
Andersen LLP. Mr. Calbert is a Certified Public Accountant and received a B.B.A.
degree from Stephen F. Austin State University and his M.B.A. from the
University of Houston.
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 Ralphs 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.
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.
J. Russell Robinson joined the Company as Senior Vice President, Chief
Information Officer in June 1997. Prior to joining the Company, he served as
Director of Information Systems for MCI Systemhouse from June 1996 to June 1997.
Prior to June 1996, he served as Vice President, Information Services for Ralphs
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, leasing arrangements
for stores, warehouses and other facilities and facilities planning. 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 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.
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 Accuride Corporation, Amphenol Corporation, Borden, Inc., Bruno's,
Inc., The Boyds Collection, Ltd., Evenflo Company Inc., The Gillette Company,
IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreation Corporation,
Newsquest plc, Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., RELTEC
Corporation, Safeway Inc., Sotheby's Holdings, Inc., Spalding Holdings
Corporation and World Color Press, Inc.
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<PAGE> 346
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 Accuride Corporation, Amphenol Corporation, AutoZone, Inc., Borden,
Inc., Bruno's, Inc., The Boyds Collection, Ltd., Evenflo Company Inc., IDEX
Corporation, KinderCare Learning Centers, Inc., KSL Recreation Corporation,
Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., RELTEC Corporation,
Safeway Inc., Spalding Holdings Corporation 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., IDEX Corporation and KSL Recreation Corporation.
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
Accuride Corporation, Bruno's, Inc., Owens-Illinois, Inc., RELTEC Corporation
and Safeway 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. 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.
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<PAGE> 347
ITEM 11. EXECUTIVE COMPENSATION
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 1998 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 four other most highly compensated
executive officers of the Company, determined as of June 27, 1998 (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- --------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) OPTIONS COMPENSATION
------------------ ------ -------- -------- --------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert R. Onstead.... 1998 $500,000 -- $ 2,605 -- -- --
Chairman
Emeritus(3)...... 1997 500,096 -- 35,385 -- -- $255,639(4)
R. Randall Onstead... 1998 425,000 $425,000 78,324 -- 371,595 --
President and Chief 1997 375,192 185,589 9,807 $103,480(5) -- 169,064(4)
Executive Officer
Michael M. Calbert... 1998 197,115 197,115 18,756 -- 77,877 --
Senior Vice
President and 1997 175,000 133,000 11,289 58,382(5) 6,667 --
Chief Financial
Officer
Douglas G.
Beckstett.......... 1998 178,077 178,077 85 -- 51,610 --
Senior Vice
President, 1997 -- -- -- -- -- --
Human Resources
J. Russell
Robinson........... 1998 178,077 178,077 -- -- 51,610 --
Senior Vice
President, 1997 -- -- -- -- -- --
Chief Information
Officer
D. Mark Prestidge.... 1998 174,038 174,038 11,096 -- 51,610 --
President, Dallas
Division 1997 138,558 25,000 14,618 12,110(5) -- --
</TABLE>
- ---------------
(1) The amounts shown in this column represent annual payments for reimbursement
of medical expenses and/or country club dues.
(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) Mr. Onstead became Chairman Emeritus in July 1998.
(4) Includes income recognized by such executive upon the purchase of a whole
life insurance policy for the benefit of such executive.
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<PAGE> 348
(5) Includes income recognized upon the vesting of restricted Common Stock as of
the closing of the Recapitalization.
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 23,952 shares at $9.65 per share; options to purchase 16,806 shares at
$11.90 per share; options to purchase 15,000 shares at $10.75 per share; options
to purchase 13,334 shares at $15.00 per share; options to purchase 9,132 shares
at $10.95 per share; options to purchase 440,720 shares at $18.15 per share; and
options to purchase 95,230 shares at $10.50 per share. As of June 28, 1997
approximately 65,864 shares subject to options were exercisable.
During Fiscal Year 1998, the Company adopted the 1997 Stock Purchase and
Option Plan for Key Employees of Randall's Food Markets, Inc. and Subsidiaries
(the "1997 Plan"). Grants made pursuant to the Stock Plan will become subject
to, and be exercisable only in accordance with, the provisions of the 1997 Plan.
See "1997 Stock Purchase and Option Plan".
Option Grants
On December 31, 1994, the Company granted options to purchase Common Stock
to three employees including each of Messrs. Calbert and Straus (the "1994
Option Grant"). The options granted to Mr. Calbert consisted of five tranches of
formula grants each in the amount of $100,000, the exercise price of which was
determined or is to be determined, as the case may be, on the last business day
of the five consecutive calendar years commencing December 31, 1994. The options
granted to Mr. Straus consisted of three tranches of formula grants each in the
amount of $100,000, the exercise price of which was determined on the last
business day of the three consecutive calendar years commencing December 31,
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 for options granted on December 31, 1994, $11.90 for options granted on
December 31, 1995 and $15.00 for options granted on December 31, 1996 for each
of Messrs. Calbert and Straus and $10.95 for options granted on December 31,
1997 to Mr. Calbert. The exercise price of the remaining tranche for Mr. Calbert
will be determined on the last business day of calendar year 1998.
1997 STOCK PURCHASE AND OPTION PLAN
The 1997 Plan provides for the issuance of 2.4 million shares of authorized
but unissued or reacquired shares of Common Stock, subject to adjustment to
reflect certain events such as stock dividends, stock splits, recapitalizations,
mergers or reorganizations of or by the Company. The 1997 Plan is intended to
assist the Company in attracting and retaining employees of outstanding ability
and to promote the identification of their interests with those of the
stockholders of the Company. The 1997 Plan permits the issuance of Common Stock
(the "1997 Plan Purchase Stock") and the grant of Non-Qualified Stock Options
and Incentive Stock Options (the "1997 Plan Options") to purchase shares of
Common Stock and other stock-based awards (the issuance of 1997
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<PAGE> 349
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 (including $6.2 million
outstanding as of June 27, 1998) 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.
During Fiscal Year 1998, the Company sold approximately 589,000 shares of
common stock under the 1997 Plan to key executives and certain members of
management at prices ranging from $12.11 to $12.61 per share. As consideration,
the Company accepted payment of cash or a combination of cash and notes
receivable from the purchasers. The notes receivable bear interest at rates
ranging from 5.7% to 6.1% per annum. At June 27, 1998, the Company held notes
receivable from management stockholders in the aggregate amount of approximately
$6.2 million. Such notes receivable are shown as a reduction of stockholders'
equity in the accompanying condensed consolidated balance sheet.
The following Option Grants Table sets forth, as to the Named Executive
Officers, certain information relating to stock options granted during Fiscal
Year 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME SARS GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Onstead.... -- -- -- -- -- --
R. Randall Onstead... 371,595 26.4 $12.11 11/14/2007 $2,871,702 $7,151,485
Michael M. Calbert... 51,610 3.7 12.11 11/14/2007 1,085,257 1,679,667
16,515 1.2 12.11 02/02/2008 351,012 548,833
620 0.0 12.61 06/23/2008 13,430 21,382
9,132 0.6 10.95 12/30/2004 166,904 225,992
Douglas G.
Beckstett.......... 51,610 3.7 12.11 11/14/2007 1,085,257 1,679,667
J. Russell
Robinson........... 51,610 3.7 12.11 11/14/2007 1,085,257 1,679,667
D. Mark Prestidge.... 51,610 3.7 12.11 11/14/2007 1,085,257 1,679,667
</TABLE>
- ---------------
(1) The value of the Common Stock was $13.30 based upon an appraisal of the
Common Stock as of April 4, 1998. 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
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<PAGE> 350
provisions of the rules of the Securities and Exchange Commission)
compounded annually over the option term and have not been discounted to
reflect the present value of such amounts. The assumed rates of stock price
appreciation are not intended to forecast the future appreciation of the
Common Stock.
Aggregated Option Exercises in Fiscal Year 1998 and Option Values as of June
28, 1998
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
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-
OPTIONS AS OF MONEY OPTIONS AS
NUMBER OF JUNE 28, 1997 OF JUNE 28, 1997
SHARES ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)(1)
---- --------------- -------- -------------- -------------------
<S> <C> <C> <C> <C>
Robert R. Onstead....... 0 $0 0 $ 0
R. Randall Onstead...... 0 0 74,319/297,276 88,440/353,758
Michael M. Calbert(2)... 0 0 39,181/65,742 76,065/90,450
Douglas G. Beckstett.... 0 0 10,322/41,288 12,283/49,133
J. Russell Robinson..... 0 0 10,322/41,288 12,283/49,133
D. Mark Prestidge....... 0 0 10,322/41,288 12,283/49,133
</TABLE>
- ---------------
(1) The value of the Common Stock was $13.30 based upon an appraisal of the
Common Stock as of April 4, 1998.
(2) The number of unexercisable options does not include one tranche of Common
Stock granted to Mr. Calbert whose exercises price will be fixed on December
31, 1998. 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."
In Fiscal Year 1998, the Company issued certain employees 86,000 shares of
restricted Common Stock, of which 4,000 have been forfeited.
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 most senior executives. Performance criteria are a combination of
corporate performance, individual and district or division goals, as
appropriate. The Company adopted a new bonus plan for Fiscal Year 1998 which
replaced 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.
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<PAGE> 351
RETIREMENT PLANS
The Company maintains two qualified retirement plans. One, Randall's Hourly
Employees' Retirement Plan, is a defined benefit pension plan. The other plan is
the Randall's Food Markets, Inc. ESOP/401(k) Savings Plan ("ESOP"), which
currently holds 1,984,784 shares of Common Stock. The ESOP provides for pass
through voting with respect to a potential change in control. No additional
shares of Common Stock will be purchased by the ESOP. Although it will no longer
acquire shares of Common Stock, the Company has combined the ESOP with a 401(k)
plan option with diversified investment alternatives. The Company also
maintained the nonqualified Key Employee Stock Purchase Plan (the "KeySOP")
which provided benefits to key employees and highly compensated employees whose
benefits under the ESOP are limited due to Internal Revenue Code requirements.
The KeySop was terminated effective September 30, 1997.
EMPLOYEE WELFARE BENEFITS AND RETIREE INSURANCE BENEFITS
The Company provides welfare and other benefits only for its full-time
employees. In addition to 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 1997, net of claims reimbursed by the stop loss
carrier, were approximately $22.0 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.
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.
The Company maintains a Directors' Deferred Compensation Plan (the
"Directors' Plan"). The Directors' Plan permits a non-employee member of the
Board of Directors of the Company to elect annually to defer payment of all or
any portion of the director's fees earned during a given year. Such deferred
fees are credited to an account for each director denominated as that number of
shares of Common Stock which would have a value equal to the amount of the
deferred fees. Once established, such account is also credited with additional
units representing that number of shares of Common Stock which would have a
value equal to the cash dividends otherwise payable on the Common Stock credited
to each director's account. Upon a director's retirement or separation from
service with the Board of Directors, such director will receive cash
distribution, either in a lump-sum or in equal installments (as elected by the
director at the time of the election to defer the fees),
L-58
<PAGE> 352
equal to the value of the number of share units reflected in his or her account
at such time.
EMPLOYMENT CONTRACTS
Effective April 1, 1997 (the "Effective Date"), the Company entered into
employment agreements with Robert R. Onstead and R. Randall Onstead (the
"Employment Agreements") which became effective upon consummation of the
Recapitalization and are subject to the terms and conditions described below.
Robert R. Onstead. Pursuant to the Employment Agreement with Robert R.
Onstead, Mr. Onstead became Chairman Emeritus for life as of July 2, 1998 and
will serve as a consultant to the Company 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 Consulting Period, the Company will pay Mr. Onstead a monthly
fee of $16,667. In addition, Mr. Onstead will receive monthly retirement
payments in the amount of $8,333 until Mr. Onstead owns less than 3% of the
outstanding Common Stock (or of the outstanding interest in a successor). The
Company will furnish Mr. Onstead (and his spouse) at no cost to them with
lifetime medical, dental and life insurance benefits. The Company will also
provide Mr. Onstead with certain office amenities for life; provided that the
annual cost thereof may not exceed $100,000.
In the event Mr. Onstead's 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 consulting fee (as applicable) upon such termination.
In the event of a change of control of the Company, Mr. Onstead's consulting
agreement shall terminate 30 days after such event and the Company (or its
successor) will cease to pay Mr. Onstead's consulting fee (as applicable) upon
such termination.
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 was also 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
L-59
<PAGE> 353
goals. In addition to receiving other benefits and perquisites available to
similarly situated executives of the Company, Mr. Onstead was also extended a
$750,000 line of credit by the Company which will be secured by his Common Stock
and be payable 180 days after termination of his Employment Agreement to the
extent not satisfied out of (i) any compensation due him and payable upon the
termination of his employment and (ii) the proceeds from the disposition of
Common Stock and options by him. This line of credit will bear interest at the
applicable federal rate, which is published in a revenue ruling each month by
the Internal Revenue Service. No advances have been made to Mr. Onstead under
this line of credit.
In the event Randall Onstead incurs a Non-Severance Termination, the
Company will cease to pay Mr. Onstead's salary upon such termination. In the
event Mr. Onstead incurs a termination of employment other than a Non-Severance
Termination (which shall include a termination of employment by Mr. Onstead due
to the assignment to him by the Board of duties materially inconsistent with his
position) within two years of the Effective Date, he shall be entitled to a
severance payment in an amount equal to three times the sum of (i) his base
salary on the date of termination and (ii) the average annual bonus paid or
payable with respect to the immediately preceding three calendar years. He shall
also be entitled to three years continued medical and dental coverage at no cost
to him for himself, his spouse and his dependents. In the event Mr. Onstead
incurs a termination of employment other than a Non-Severance Termination after
two years following the Effective Date, he shall be entitled to a severance
payment in an amount equal to two times the sum of (i) his base salary on the
date of termination and (ii) the average annual bonus paid or payable with
respect to the immediately preceding two calendar years. He shall also be
entitled to two years continued medical and dental coverage at no cost to him
for himself, his spouse and his dependents. Regardless of the timing of any such
termination, if Mr. Onstead's employment is terminated without cause, he shall
be entitled to the Company's investment in certain life insurance policies.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Paul E. Raether, James H. Greene, Jr., Nils P. Brous and A. Benton
Cocanougher are members of the Company's Compensation Committee. Messrs. Raether
and Greene are members of KKR 1996 GP L.L.C. KKR 1996 GP L.L.C. beneficially
owns approximately 62% of the Company's outstanding shares of Common Stock which
are held by RFM Acquisitions. 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. Mr. Brous
is a limited partner of KKR Associates 1996 L.P. He 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.
L-60
<PAGE> 354
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning beneficial
ownership of shares of Common Stock as of June 27, 1998 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 61.8%(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................................................... 1,984,784 6.6%
R. Randall Onstead(d)(f)................................. 209,224 *
Michael M. Calbert(d)(f)................................. 44,025 *
Douglas G. Beckstett(d)(f)............................... 20,644 *
J. Russell Robinson(d)(f)................................ 20,644 *
D. Mark Prestidge(d)(f).................................. 20,644 *
A, Benton Cocanougher.................................... 8,258 *
All directors and executive officers as group (16
persons)............................................... 25,039,866 83.2%
</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 30,085,630 shares of Common Stock outstanding as of June 27,
1998. In connection with the Recapitalization, 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.
(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.
L-61
<PAGE> 355
MacDonnell, Paul E. Raether, Michael W. Michelson, James H. Greene, Jr.,
Michael T. Tokarz, Perry Golkin, Clifton S. Robbins, Scott M. Stuart and
Edward A. Gilhuly. Messrs. Kravis, Roberts, Raether and Greene are directors
of the Company. Each of such individuals may be deemed to share beneficial
ownership of the shares shown as beneficially owned by KKR 1996 GP L.L.C.
Each of such individuals disclaims beneficial ownership of such shares. Mr.
Nils P. Brous is a limited partner of KKR Associates 1996 L.P. and also is a
director of the Company.
(c) KKR 1996 GP L.L.C. will own approximately 62.3% 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) During Fiscal Year 1998, pursuant to the Company's 1997 Plan, Mr. Onstead
was granted options to purchase 371,595 shares of Common Stock, (ii) Mr.
Calbert purchased 23,369 shares of Common Stock and was granted options to
purchase 68,745 shares of Common Stock, (iii) Mr. Beckstett purchased 20,644
shares of Common Stock and was granted options to purchase 51,610 shares of
Common Stock, (iv) Mr. Robinson purchased 20,644 shares of Common Stock and
was granted options to purchase 51,610 shares of Common Stock and (v) Mr.
Prestidge purchased 19,898 shares of Common Stock and was granted options to
purchase 51,610 shares of Common Stock. The purchase price for such shares
and the exercise price for the options ranged from $12.11 to $12.61 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. The purchase of such shares by Messrs. Calbert, Beckstett,
Robinson and Prestidge are reflected in the table.
ITEM 13. 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.
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
L-62
<PAGE> 356
(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.
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. At June 27, 1998 the balance of such loan was $40,000 and 17,272 shares
remained as security.
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
1996, 1997 and 1998 were $775,609, $1,152,483 and $1,707,580, 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 27, 1998, the obligations subject
to the Uniform Guarantees were $55,288 to UTY and $2,350 to Soffe, respectively
and the highest balances due with respect to such obligations were $65,620 to
UTY and $134,399 to Soffe, respectively for Fiscal Year 1998. The obligations
subject to the Uniform Guarantees are not interest bearing.
L-63
<PAGE> 357
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RANDALL'S FOOD MARKETS, INC.
BY: /s/ R. RANDALL ONSTEAD,
JR.
-------------------------------
Chairman of the Board and
Chief Executive Officer
Date: September 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ MICHAEL M. CALBERT Chief Financial Officer and September 18, 1998
- ------------------------------------------ Senior Vice President
/s/ CURTIS D. MCCLELLAN Vice President, Corporate September 18, 1998
- ------------------------------------------ Controller (Principal
Accounting Officer)
</TABLE>
<TABLE>
<CAPTION>
DIRECTORS: DATE
---------- ----
<C> <S> <C>
/s/ NILS P. BROUS September 18, 1998
- ------------------------------------------
/s/ A. BENTON COCANOUGHER September 18, 1998
- ------------------------------------------
/s/ JAMES H. GREENE, JR. September 18, 1998
- ------------------------------------------
/s/ HENRY R. KRAVIS September 18, 1998
- ------------------------------------------
/s/ R. RANDALL ONSTEAD, JR. September 18, 1998
- ------------------------------------------
/s/ ROBERT R. ONSTEAD September 18, 1998
- ------------------------------------------
/s/ PAUL E. RAETHER September 18, 1998
- ------------------------------------------
/s/ GEORGE R. ROBERTS September 18, 1998
- ------------------------------------------
</TABLE>
L-64
<PAGE> 358
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
The Company shall furnish to the Commission four copies of the Company's
annual report to security holders covering Fiscal Year 1998 when it is sent to
the security holders subsequent to the filing of this Form 10-K. There are no
proxy statements to be sent to security holders as of the filing of this Form
10-K.
L-65
<PAGE> 359
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
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").(1)
2.2 Letter Agreement dated as of April 1, 1997 between Randall's
and RFM Acquisition relating to certain indemnification
obligations of Randall's.(1)
2.3 Letter Agreement dated as of June 18, 1997 between Randall's
and RFM Acquisition relating to certain indemnification
obligations of Randall's.(1)
3.1 Amended and Restated Articles of Incorporation of
Randall's.(1)
3.2 By-Laws of Randall's.(1)
4.1 Indenture dated as of June 27, 1997 between Randall's and
Marine Midland Bank, as Trustee (the "Indenture").(1)
4.2 Form of 9 3/8% Senior Subordinated Note due 2007 (included
in Exhibit 4.1).(1)
4.3 Form of 9 3/8% Series B Senior Subordinated Note due 2007
(included in Exhibit 4.1).(1)
4.4 First Supplemental Indenture to the Indenture, dated as of
September 8, 1997 between Randall's and Marine Midland Bank,
as Trustee.(1)
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.(1)
10.2 Voting, Repurchase and Shareholders Agreement, dated as of
April 1, 1997, between RFM Acquisition and the shareholders
party thereto.(1)
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.(1)
10.4 Registration Rights Agreement, dated as of June 27, 1997,
between RFM Acquisition and Randall's.(1)
10.5 Employment Agreement of Robert R. Onstead.(1)
10.6 Employment Agreement of R. Randall Onstead, Jr.(1)
10.7 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.(1)
10.8 Shareholder Agreement dated March 29, 1984 among Randall's
and John N. Frewin, Rosemary Frewin Gambino and certain
other shareholders parties thereto.(1)
10.9 Shareholder Agreement dated April 8, 1985 among Randall's
and John N. Frewin, Rosemary Frewin Gambino and certain
other shareholders parties thereto.(1)
10.10 Randall's Food Markets, Inc. Corporate Incentive Plan.(1)
10.11(a) Randall's Food Markets, Inc. Key Employee Stock Purchase
Plan.(1)
10.11(b) First Amendment to Randall's Food Markets, Inc. Key Employee
Stock Purchase Plan.(1)
10.11(c) Second Amendment to Randall's Food Markets, Inc. Key
Employee Stock Purchase Plan.(1)
</TABLE>
L-66
<PAGE> 360
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.11(d) Third Amendment to Randall's Food Markets, Inc. Key Employee
Stock Purchase Plan.(1)
10.12 Supply Agreement dated as of August 20, 1993 between Fleming
Foods of Texas, Inc. and Randall's.(1)
10.13 1997 Stock Purchase and Option Plan for Key employees of
Randall's Food Markets, Inc. and Subsidiaries.(2)
10.14 Form of Management Stockholder's Agreement.(2)
10.15 Form of Non-Qualified Stock Option Agreement.(2)
10.16 Form of Sale Participation Agreement.(2)
10.17 Form of Pledge Agreement to be executed by certain employees
of Randall's in connection with the 1997 Plan.(1)
10.18 Agreement dated December 31, 1980 between Topco Associates,
Inc. (Cooperative) and Randall's.(1)
10.19 Stockholder's Agreement, dated February 3, 1998, among RFM
Acquisition LLC, Randall's Food Markets, Inc., and A. Benton
Cocanougher.(3)
10.20 Directors' Deferred Compensation Contract
12 Computation of Ratio of Earnings to Fixed Charges.
16 Letter regarding change in certifying accountant.(1)
21 List of Subsidiaries of Randalls Food Markets, Inc.(1)
23.1 Consent of Deloitte & Touche LLP, independent certified
public accountants.
23.2 Consent of Arthur Andersen LLP, independent public
accountants.
24 Powers of Attorney.(1)
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to the Exhibits filed with Randalls Food Markets,
Inc.'s Registration Statement on Form S-4 (Registration No. 333-35457) dated
January 9, 1998.
(2) Incorporated by reference to the Exhibits filed with Randalls Food Markets,
Inc.'s Registration Statement on Form S-8 dated January 13, 1998.
(3) Incorporated by reference to the Exhibits filed with Randalls Food Markets,
Inc.'s Form 10-Q for the Quarter ended April 4, 1998
L-67
<PAGE> 361
ANNEX M
----------------------------------------------------------------------------
---------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
-----------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 17, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 333-35457
------------------------
RANDALL'S FOOD MARKETS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
TEXAS 74-2134840
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
3663 BRIARPARK, HOUSTON, TEXAS 77042
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (INCLUDING ZIP CODE)
(713) 268-3500
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock, par
value $0.25 per share, as of November 13, 1998 was 30,004,702 shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
M-1
<PAGE> 362
RANDALL'S FOOD MARKETS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at October 17, 1998
and June 27, 1998........................................... M-3
Condensed Consolidated Statements of Income for the Sixteen
(16) Week Periods Ended October 17, 1998 and October 18,
1997........................................................ M-4
Condensed Consolidated Statements of Cash Flows for the
Sixteen (16) Week Periods Ended October 17, 1998 and October
18, 1997.................................................... M-5
Notes to Condensed Consolidated Financial Statements........ M-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... M-9
Item 3. Quantitative and Qualitative Disclosure about Market Risk... M-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... M-15
Item 2. Changes in Securities....................................... M-16
Item 3. Defaults Upon Senior Securities............................. M-16
Item 4. Submission of Matters to a Vote of Security Holders......... M-17
Item 5. Other Information........................................... M-17
Item 6. Exhibits and Reports on Form 8-K............................ M-18
SIGNATURES........................................................... M-19
</TABLE>
M-2
<PAGE> 363
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 17, 1998 AND JUNE 27, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
UNAUDITED AUDITED
OCTOBER 17, JUNE 27,
1998 1998
----------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 24,141 $ 36,243
Receivables, net.......................................... 46,928 44,187
Merchandise inventories................................... 181,117 166,332
Other current assets...................................... 15,899 17,778
-------- --------
Total current assets.............................. 268,085 264,540
Property and equipment, net................................. 416,478 365,853
Goodwill, net............................................... 216,004 217,968
Other assets, net........................................... 36,886 35,386
-------- --------
Total............................................. $937,453 $883,747
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and obligations under
capital leases......................................... $ 4,553 $ 4,544
Accounts payable.......................................... 131,160 135,834
Accrued expenses and other............................. 135,822 136,477
-------- --------
Total current liabilities......................... 271,535 276,855
Long-term debt, net of current maturities................... 327,795 276,447
Obligations under capital leases, net of current
maturities................................................ 60,247 61,515
Other long-term liabilities................................. 33,299 32,485
-------- --------
Total liabilities................................. 692,876 647,302
-------- --------
Commitments & Contingencies (See Note 3)
Redeemable common stock, $14.50 and $13.30 redemption value
per share, 387,651 shares issued and outstanding at
October 17, 1998 and June 27, 1998........................ 5,621 5,155
-------- --------
Stockholders' Equity:
Common stock, $0.25 par value, 75,000,000 shares authorized;
29,647,061 shares issued and 29,628,679 shares outstanding
at October 17, 1998 and 29,697,979 shares issued and
29,679,597 shares outstanding at June 27, 1998............ 7,411 7,425
Additional paid-in capital.................................. 173,854 174,337
Stockholders' notes receivable.............................. (5,905) (6,213)
Retained earnings........................................... 64,227 56,506
Restricted common stock..................................... (413) (547)
Treasury stock, 18,392 shares at cost....................... (218) (218)
-------- --------
Total stockholders' equity........................ 238,956 231,290
-------- --------
Total............................................. $937,453 $883,747
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
M-3
<PAGE> 364
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIXTEEN WEEK PERIODS ENDED OCTOBER 17, 1998 AND OCTOBER 18, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 17, OCTOBER 18,
1998 1997
----------- -----------
<S> <C> <C>
Net sales................................................... $766,741 $719,377
Cost of sales............................................... 552,880 522,940
-------- --------
Gross profit................................................ 213,861 196,437
-------- --------
Operating expenses:
Selling, general and administrative expenses.............. 171,814 163,276
Depreciation and amortization............................. 17,173 15,117
-------- --------
Total operating expenses.......................... 188,987 178,393
-------- --------
Operating income............................................ 24,874 18,044
Interest expense, net....................................... 10,052 10,522
-------- --------
Income before income taxes.................................. 14,822 7,522
Provision for income taxes.................................. 6,636 3,780
-------- --------
Net income.................................................. $ 8,186 $ 3,742
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
M-4
<PAGE> 365
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTEEN WEEK PERIODS ENDED
OCTOBER 17, 1998 AND OCTOBER 18, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 17, OCTOBER 18,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,186 $ 3,742
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 17,173 15,117
Other.................................................. 1,548 848
Change in assets and liabilities, net.................. (19,872) 5,795
-------- --------
Net cash provided by operating activities......... 7,035 25,502
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (77,472) (14,572)
Proceeds from sale of assets.............................. 7,142 12,417
Other..................................................... 210 531
-------- --------
Net cash used in investing activities............. (70,120) (1,624)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under credit agreement............ 122,000 --
Repayments of debt........................................ (70,649) (3,132)
Reduction in obligations under capital leases............. (1,168) (1,291)
Other..................................................... 800 (42)
-------- --------
Net cash provided by (used in) financing
activities...................................... 50,983 (4,465)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................................... (12,102) 19,413
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 36,243 23,115
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 24,141 $ 42,528
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
M-5
<PAGE> 366
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTEEN WEEK PERIODS ENDED OCTOBER 17, 1998 AND OCTOBER 18, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Randall's Food
Markets, Inc. and subsidiaries (the "Company") at June 27, 1998 has been derived
from the Company's audited financial statements at that date. The condensed
consolidated balance sheet at October 17, 1998, the condensed consolidated
statements of income for the sixteen week periods ended October 17, 1998 and
October 18, 1997 and the condensed consolidated statements of cash flows for the
sixteen week periods ended October 17, 1998 and October 18, 1997 are unaudited.
In the opinion of management, such condensed consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the consolidated financial position and
results of operations of the Company for the interim periods. Operating results
for the sixteen week period ended October 17, 1998 are not necessarily
indicative of the operating results that may be expected for a full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements presented in accordance with generally accepted accounting
principles have been omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 27, 1998.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period presentation.
2. STORE CLOSING COSTS
During the fiscal year ended June 28, 1997 ("Fiscal Year 1997"), the
Company recorded a charge of approximately $32.8 million in connection with the
planned closure, replacement or sale of certain of its stores during Fiscal Year
1997, the fiscal year ended June 27, 1998 ("Fiscal Year 1998") and the fiscal
year ending June 26, 1999 ("Fiscal Year 1999"). Such charge included estimated
inventory losses of approximately $3.0 million (included in cost of sales during
Fiscal Year 1997), estimated lease termination costs of approximately $11.7
million and asset write-offs of approximately $18.1 million (included in
operating expenses during Fiscal Year 1997). During the sixteen weeks ended
October 17, 1998, the Company closed and replaced three such stores and charged
approximately $6.8 million against the accrual recorded in connection with the
charge in Fiscal Year 1997.
3. CONTINGENCIES
MSP Litigation -- Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP
M-6
<PAGE> 367
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIXTEEN WEEK PERIODS ENDED OCTOBER 17, 1998 AND OCTOBER 18, 1997
(UNAUDITED)
on its date of termination (which is alleged by plaintiffs to be approximately
250 persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of fiduciary duty. The plaintiffs assert that the yearly
plan agreement executed by each participant in the MSP was a contract for a
specified retirement and death benefit set forth in such plan agreements and
that such benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that an
expert for the plaintiffs, assuming class certification, may testify that the
damages allegedly sustained by the plaintiff class may range from approximately
$18.0 million to $37.2 million and, assuming that a court were to award
additional damages based on a rate of return achieved by an equity index over
the relevant period, such damages may range from approximately $37.4 million to
$70.6 million. On December 30, 1997, the Court issued an order denying the
plaintiffs' summary judgment motion on the plaintiffs' claim that the MSP was
not an exempt "top hat plan" (a plan which is unfunded and maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees). The order also
granted the Company's summary judgment motions on two of the plaintiffs'
ancillary claims, but did not address the plaintiffs' request for certification
as a class action. On June 5, 1998, the Court ruled that the plan was
"unfunded", meaning that the trial of the limited class action issue will deal
only with the question of whether the MSP was "maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees." On June 16, 1998, the Court certified the case as
a class action for the limited issue of determining if the MSP was an exempt
"top hat plan". The Court defined the class as all persons who, on the date of
the termination of the MSP, were participants in the MSP and were employed by
Randall's Food Markets, Inc. On September 8, 1998, a pre-trial conference was
held to discuss burden of proof, expert testimony and meaning of "select group"
and the evidence to be considered at the trial. The trial of the limited class
action issue was conducted before the Court, sitting without a jury, on October
26, 1998. Upon order of the Court, both parties submitted post-trial briefs on
November 6, 1998. The Court has yet to rule on the limited class action issue.
Once the initial class issue is resolved, the Court will make an evaluation as
to whether any other issues should be dealt with in a class action context.
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 ca n be no assurance, management currently does not anticipate an
unfavorable outcome based on management's independent analysis of the facts
relating to such litigation.
Fleming Dispute -- On July 30, 1997, the Company initiated an arbitration
proceeding before the American Arbitration Association against Fleming
Companies, Inc.
M-7
<PAGE> 368
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIXTEEN WEEK PERIODS ENDED OCTOBER 17, 1998 AND OCTOBER 18, 1997
(UNAUDITED)
("Fleming"), one of its long-time suppliers, alleging, among other things, that
Fleming violated the terms of a supply agreement signed in 1993. On July 7,
1998, the arbitration panel unanimously found that Fleming materially breached
the supply agreement and the contract was terminated as of July 7, 1998 without
payment of any termination fee. The Company and Fleming entered into a
transition agreement, effective September 25, 1998, which provides for a
continued supply of products from Fleming while the Company moves to self
distribution.
John Paul Mitchell Lawsuit -- On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc. (together, the "Plaintiffs"), $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge threw out the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. As of this date, the Plaintiffs have not
indicated whether or not they are going to appeal. Although the outcome of this
matter cannot be predicted with certainty, management believes an unfavorable
outcome will not have a material adverse effect on the Company, its operations,
its financial condition or its cash flows.
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, its financial condition or its cash flows.
M-8
<PAGE> 369
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company operates a chain of 116 supermarkets primarily under the
Randalls and Tom Thumb banners in the Houston, Dallas/Fort Worth and Austin
metropolitan areas. The Company operates on a 52 or 53 week fiscal year ending
on the last Saturday of each June. Same-store sales is defined as net sales for
stores in full operation in each of the current fiscal periods and the
comparable periods of the prior fiscal year. Replacement stores are included in
the same-store sales calculation. A replacement store is defined as a store that
is opened to replace a store that is closed nearby.
Presented below is a table showing the percentage of net sales represented
by certain items in the Company's consolidated condensed statements of income
(dollars in thousands):
<TABLE>
<CAPTION>
16 WEEKS ENDED 16 WEEKS ENDED
OCTOBER 17, 1998 OCTOBER 18, 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales........................... $766,741 100.0% $719,377 100.0%
Cost of sales....................... 552,880 72.1% 522,940 72.7%
-------- ----- -------- -----
Gross profit........................ 213,861 27.9% 196,437 27.3%
Selling, general and administrative
expenses.......................... 171,814 22.4% 163,276 22.7%
Depreciation and amortization....... 17,173 2.2% 15,117 2.1%
-------- ----- -------- -----
Operating income.................... 24,874 3.2% 18,044 2.5%
Interest expense, net............... 10,052 1.3% 10,522 1.5%
-------- ----- -------- -----
Earnings before taxes............... 14,822 1.9% 7,522 1.0%
Provision for income taxes.......... 6,636 0.9% 3,780 0.5%
-------- ----- -------- -----
Net income.......................... $ 8,186 1.1% $ 3,742 0.5%
======== ===== ======== =====
EBITDA.............................. $ 42,728 5.6% $ 33,841 4.7%
======== ===== ======== =====
</TABLE>
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
NET SALES -- Net sales for the sixteen weeks ended October 17, 1998 ("First
Quarter 1999") increased by $47.4 million (6.6%) compared to the sixteen weeks
ended October 18, 1997 ("First Quarter 1998"). Such increase is partially
attributable to additional sales of $11.5 million generated from the opening of
one new store (excluding 3 replacement stores) during First Quarter 1999 and the
operation during such period of two stores opened during the fiscal year ended
June 27, 1998 (excluding 2 replacement stores) which were not in operation
during the entire comparable period of the prior year. In addition, the Company
experienced an increase in same-store sales of approximately $67.5 million in
First Quarter 1999 as compared to First Quarter 1998. These increases were
offset by a decline of approximately $31.5 million from closed and temporarily
closed stores that are excluded from same-store sales.
The Company's same-store sales for First Quarter 1999 improved
significantly over those of First Quarter 1998. Same-store sales during First
Quarter 1999 increased approximately 9.9% compared to an increase of
approximately 1.7% during First Quarter 1998. Such improvement was due primarily
to the store remodeling and expansion program, the contribution of replacement
stores, the success of other merchandising, marketing and customer service
initiatives and favorable economic conditions. The Company cannot predict
whether the improvement in the trend in same-store sales that has occurred in
First Quarter 1999 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.
M-9
<PAGE> 370
GROSS PROFIT -- Gross profit for First Quarter 1999 increased by $17.4
million or 8.9% compared to First Quarter 1998. The dollar increase in gross
profit is primarily attributable to the increased sales volume during First
Quarter 1999. Gross profit as a percentage of net sales increased to 27.9% for
First Quarter 1999 from 27.3% for First Quarter 1998. This increase, as a
percentage of net sales, was primarily due to more effective promotional efforts
and higher gross margins at new and replacement stores. Such higher gross
margins at new and replacement stores were due primarily to the more expansive
specialty departments and broader range of products and services offered by such
stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $8.5 million or 5.2% during First Quarter 1999
compared to First Quarter 1998. Selling, general and administrative expenses as
a percentage of net sales decreased to 22.4% for First Quarter 1999 from 22.7%
for First Quarter 1998. This decrease, as a percentage of net sales, was due
primarily to better expense management and the increase in net sales. The
Company intends to remain focused on expense control. Therefore, the Company
does not expect selling, general and administrative expenses as a percentage of
net sales to increase compared to corresponding periods of the prior year;
however, no assurance can be given in this regard.
EBITDA (EARNINGS BEFORE NET INTEREST EXPENSE, TAXES, DEPRECIATION,
AMORTIZATION AND LIFO PROVISION) AND OPERATING INCOME -- EBITDA for First
Quarter 1999 increased by $8.9 million or 26.3% compared to First Quarter 1998.
EBITDA as a percentage of net sales increased to 5.6% for First Quarter 1999
from 4.7% for First Quarter 1998. Operating income for First Quarter 1999
increased by $6.8 million or 37.9% compared to First Quarter 1998. Such
increases are primarily attributable to the increases in gross profit offset to
some extent by the increases in selling, general and administrative expenses, as
described above.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense for
First Quarter 1999 increased by $2.1 million or 13.6% compared to First Quarter
1998. This increase was primarily due to new store openings and the remodeling
of certain existing stores and other facilities in connection with the Company's
capital expenditure program that began in the year ended June 27, 1998. See
"Liquidity and Capital Resources".
INTEREST EXPENSE, NET -- Net interest expense for First Quarter 1999
remained relatively constant compared to First Quarter 1998. The Company expects
interest expense will increase in future periods as the Company utilizes the
revolving credit facility available under its bank credit agreement to finance
its working capital needs and expected capital expenditures. See "Liquidity and
Capital Resources".
PROVISION FOR INCOME TAXES -- The provision for income taxes for First
Quarter 1999 was $6.6 million compared $3.8 million for First Quarter 1998. This
increase was primarily due to the Company's increased pre-tax income.
NET INCOME -- Net income for First Quarter 1999 increased $4.4 million or
118.8% compared to First Quarter 1998 due primarily to the combined impact of
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES -- The Company is a holding company, and as
a result, its operating cash flow and its ability to service its indebtedness,
including the Company's $150.0 million aggregate principal amount outstanding of
9 3/8% Series B Senior Subordinated Notes due 2007, are dependent upon the
operating cash flow of its subsidiaries and the payment of funds by such
subsidiaries to the Company in the form of loans, dividends or otherwise.
M-10
<PAGE> 371
The Company's principal sources of liquidity are expected to be cash flow
from operations, borrowings under the $225.0 million revolving credit facility
("Revolver") available under the Company's current bank credit agreement and
proceeds from lease financing arrangements. As of October 17, 1998, the Company
had approximately $173.0 million available (net of approximately $18,000 of
outstanding letters of credit) to be borrowed under the Revolver. Management
anticipates that the Company's principal uses of liquidity will be to provide
working capital, meet debt service requirements and finance the Company's
expansion and remodeling plans. Management believes that cash flows generated
from operations, borrowings under the Revolver and proceeds from lease financing
arrangements will adequately provide for the Company's working capital and debt
service needs and will be sufficient to fund its expected capital expenditures.
During First Quarter 1999 and First Quarter 1998, operating activities
provided net cash of approximately $7.0 million and $25.5 million, respectively.
Net cash provided by operations during First Quarter 1999 resulted primarily
from net income during the period (adjusted for the non-cash impact of
depreciation and amortization) offset to some extent by increases in merchandise
inventories and decreases in accounts payable. Net cash provided by operations
during First Quarter 1998 resulted primarily from net income (adjusted for the
non-cash impact of depreciation and amortization), the collection of a $l0.0
million federal income tax receivable, and increases in accounts payable and
accrued expenses, offset to some extent by increases in merchandise inventories.
Financing activities provided approximately $51.0 million during First Quarter
1999, primarily from borrowings under the credit agreement offset by a reduction
of debt and capital lease obligations. During First Quarter 1998, financing
activities utilized approximately $4.5 million, primarily due to debt reduction.
Cash used in investing activities during First Quarter 1999 and First
Quarter 1998 consisted primarily of capital expenditures of approximately $77.5
million and $14.6 million, respectively, offset to some extent by proceeds from
asset sales of approximately $7.1 million and $12.4 million during First Quarter
1999 and First Quarter 1998, respectively. Capital expenditures primarily
include expenditures related to the construction of new stores, the purchase of
real estate, the remodeling of existing stores, ongoing store expenditures for
equipment and capitalized maintenance, as well as expenditures relating to the
Company's warehousing and distribution network and computer equipment.
During Fiscal Year 1998, the Company embarked upon a program to accelerate
its store development and remodeling and to optimize its distribution network.
Such program has resulted in a level of capital expenditures in excess of
historical levels. During First Quarter 1999, the Company made capital
expenditures of approximately $77.5 million primarily for the construction of
new stores, purchase of land, remodel or renovation of existing stores,
expansion of its distribution system, and computer hardware and software
expenditures. The Company currently expects to make additional capital
expenditures of approximately $177.5 million for such programs for the remainder
of the fiscal year ending June 26, 1999. The Company anticipates funding its
future capital expenditures with cash flow from operations, borrowings under the
Revolver and proceeds from lease financing arrangements, including a five-year,
$50.0 million synthetic lease arrangement that the Company entered into on
September 10, 1998.
During Fiscal Year 1998, the Company commenced expansion of its
distribution system in a strategic shift toward self distribution. Such
expansion is expected to increase the efficiency of the Company's distribution
network and is expected to be completed
M-11
<PAGE> 372
during Fiscal Year 1999. While the Company has distributed products to its
stores for many years, the anticipated expansion and move to self distribution
present multiple risks that could potentially have an adverse impact on the
Company's financial results for a particular quarter or annual reporting period.
Such risks include, but are not limited to, excess inventory levels and
disruptions of product delivery and sourcing. The Company has developed
extensive transition plans including the testing of the distribution network
prior to the transition to self distribution. Although there can be no
assurance, management believes that its prior experience in distribution and its
extensive planning process reduce the risks of a significant disruption of
supply during the transition to self distribution.
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.
YEAR 2000 COMPLIANCE -- The year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year, as well as hardware that is designed with similar constraints.
Some of the Company's computer programs and hardware that have date-sensitive
functions may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions in operations including, among other things, a temporary inability
to process transactions, receive invoices, make payments or engage in similar
normal business activities.
A project to address the year 2000 issue began in February 1997. This
project is being managed by the Company's Chief Information Officer. The Company
is utilizing both internal and external resources to identify, correct and test
the Company's hardware and software for year 2000 compliance. In July 1997, the
Company completed a comprehensive inventory and impact assessment of its
computer systems. Based on the findings of the assessment, the Company has
determined various software and hardware computer systems will have be to
upgraded. To complete this task the Company developed the Y2K Migration Plan
(the "Y2K Plan").
The Y2K Plan is currently underway and includes testing and implementing
the upgrades for all year 2000 non-compliant hardware and software computer
systems. The Y2K Plan is expected to be complete by the end of Fiscal Year 1999.
Presently, approximately 50% of the Company's systems have been upgraded and
tested, and have been found to be Year 2000 compliant. The Company currently
expects the aggregate cost of its Y2K Plan to be approximately $25.0 million for
both Year 2000 upgrades and the replacement of systems that are inefficient and
in need of replacement regardless of their year 2000 readiness. During First
quarter 1999, the Company invested approximately $7.0 million for hardware and
software programs; these new systems are Year 2000 compliant. The Company
currently expects to make additional such purchases of approximately $16.0
million during the remainder of Fiscal Year 1999. In addition, the Company is in
the process of resolving year 2000 issues related to its non-data related
systems and supplier compliance. Any remaining costs are not anticipated to have
a material impact on the Company's financial position, results of operations or
cash flows.
The Company intends its year 2000 date conversion project to be completed
on a timely basis so as to not significantly impact business operations. Year
2000 upgrades have been prioritized to complete all mission critical systems
such as procurement in the early
M-12
<PAGE> 373
phases of conversion. Currently, 90% of all systems related to procurement have
been upgraded and have been found to be Year 2000 compliant. If the necessary
upgrades are not completed as planned, the year 2000 issue may have a material
impact on the Company. The Company has suppliers and other third parties that it
relies on for business operations and currently believes those suppliers and
other third parties are taking the appropriate action for year 2000 compliance.
The Company cannot provide assurance that failure of such suppliers and other
third parties to address the year 2000 issue will not have an adverse impact on
the Company. While the Company has limited ability to test and control its
suppliers' and other third parties' year 2000 readiness, the Company is
contacting major suppliers and critical other third parties and obtaining and
assessing whether they will be year 2000 compliant. Based on the responses, the
Company will develop contingency plans to reduce the impact of transactions with
non-compliant major suppliers and other critical parties. Although there can be
no assurance that multiple business disruptions caused by technology failures
can be adequately anticipated, the Company is identifying second and third
sources of supply for major suppliers to minimize the risk of business
interruptions.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed below,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report, including, without
limitation, in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in the Company's related press release and in oral
statements made by authorized officers of the Company. When used in this report,
any press release or oral statements, the words "looking forward," "estimate,"
"project," "anticipate," "expect," "intend," "believe" and similar expressions
are intended to identify forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions made by
management of the Company, which, although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be placed upon such
estimates and statements. No assurance can be given that any of such statements
or estimates will be realized and actual results will differ from those
contemplated by such forward-looking statements. Accordingly, the Company hereby
identifies the following important factors which could cause the Company's
financial results to differ materially from any such results which might be
projected, forecast, estimated or budgeted by the Company in forward-looking
statements: heightened competition, including specifically the intensification
of price competition and the expansion, renovation and opening of new stores by
competitors; failure to obtain new customers or retain existing customers;
inability to carry out strategies to accelerate new store development and
remodeling programs, reduce operating costs, differentiate products and
services, leverage the frequent shopper program and increase private label
sales; insufficiency of financial resources to renovate and expand the store
base; increase in leverage and interest expense due to the expansion and
remodeling program; outcome of the MSP Litigation and the John Paul Mitchell
Litigation; issues arising in connection with the Y2K Plan; prolonged dispute
with labor; economic downturn in the State of Texas; loss or retirement of key
executives; higher selling, general and administrative expenses occasioned by
the need for additional advertising, marketing, administrative or management
information systems expenditures; adverse publicity and news coverage.
M-13
<PAGE> 374
The foregoing review of the factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to
this filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During First Quarter 1999, the Company entered into two interest rate swap
agreements to hedge interest rate costs and risks associated with variable
interest rates. Such agreements effectively convert variable-rate debt, to the
extent of the notional amount, to fixed-rate debt with effective per annum
interest rates of 5.493% and 5.295%, with respect to the London Interbank
Offered Rate portion of such borrowings. The aggregate notional principal amount
of such agreements is $100.0 million, $50.0 million of which became effective
August 25, 1998 and matures August 25, 2001, and $50.0 million of which became
effective September 2, 1998 and matures September 2, 2001. The counterparty to
such agreements can terminate either agreement after two years, at its sole
discretion. The counterparty to such agreements is a major financial
institution, and therefore, credit losses from counterparty nonperformance are
not anticipated.
M-14
<PAGE> 375
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MSP Litigation -- Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP on
its date of termination (which is alleged by plaintiffs to be approximately 250
persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of fiduciary duty. The plaintiffs assert that the yearly
plan agreement executed by each participant in the MSP was a contract for a
specified retirement and death benefit set forth in such plan agreements and
that such benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that an
expert for the plaintiffs, assuming class certification, may testify that the
damages allegedly sustained by the plaintiff class may range from approximately
$18.0 million to $37.2 million and, assuming that a court were to award
additional damages based on a rate of return achieved by an equity index over
the relevant period, such damages may range from approximately $37.4 million to
$70.6 million. On December 30, 1997, the Court issued an order denying the
plaintiffs' summary judgment motion on the plaintiffs' claim that the MSP was
not an exempt "top hat plan" (a plan which is unfunded and maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees). The order also
granted the Company's summary judgment motions on two of the plaintiffs'
ancillary claims, but did not address the plaintiffs' request for certification
as a class action. On June 5, 1998, the Court ruled that the plan was
"unfunded", meaning that the trial of the limited class action issue will deal
only with the question of whether the MSP was "maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees." On June 16, 1998, the Court certified the case as
a class action for the limited issue of determining if the MSP was an exempt
"top hat plan". The Court defined the class as all persons who, on the date of
the termination of the MSP, were participants in the MSP and were employed by
Randall's Food Markets, Inc. On September 8, 1998, a pre-trial conference was
held to discuss burden of proof, expert testimony and meaning of "select group"
and the evidence to be considered at the trial. The trial of the limited class
action issue was conducted before the Court, sitting without a jury, on October
26, 1998. Upon order of the Court, both parties submitted post-trial briefs on
November 6, 1998. The Court has yet to rule on the limited class action issue.
Once the initial class issue is resolved, the Court will make an evaluation as
to whether any other issues should be dealt with in a class action context.
Based upon current facts, the Company is unable to estimate any meaningful range
of possible loss that could result from an unfavorable outcome of the MSP
litigation. It is possible that the Company's results of operations or cash
flows in a particular quarterly or annual period or its financial position could
be materially affected by an ultimate unfavorable outcome of the MSP litigation.
However, the Company intends to vigorously contest the MSP claim and, although
there can be no assurance, management currently
M-15
<PAGE> 376
does not anticipate an unfavorable outcome based on management's independent
analysis of the facts relating to such litigation.
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, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and that the contract was terminated as
of July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a Transition Agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
into self distribution.
John Paul Mitchell Lawsuit -- On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc. (together, the "Plaintiffs"), $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge threw out the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. As of this date, the Plaintiffs have not
indicated whether or not they are going to appeal. Although the outcome of this
matter cannot be predicted with certainty, management believes an unfavorable
outcome will not have a material adverse effect on the Company, its operations,
its financial condition or its cash flows.
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, its financial condition or its cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
M-16
<PAGE> 377
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
M-17
<PAGE> 378
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.21 Ground Lease Agreement, dated as of September 10, 1998
between Brazos Markets Development, L.P. and Randall's Food
& Drugs, Inc. and Randall's Food Markets, Inc.
10.22 Facilities Lease Agreement, dated as of September 10, 1998
between Brazos Markets Development, L.P. and Randall's Food
& Drugs, Inc. and Randall's Food Markets, Inc.
10.23 Guarantee as of September 10, 1998 Re: Agreement for Ground
Lease, Ground Lease Agreement, Agreement for Facilities
Lease, Facilities Lease Agreement each between Brazos
Markets Development, L.P., a Delaware Corporation, and
Randall's Food & Drugs, Inc., a Delaware Corporation, and
Randall's Food Markets, Inc., a Texas Corporation and each
effective as of September 10, 1998.
10.24 Residual Guarantee as of September 10, 1998 Re: Credit
Agreement dated effective as of September 10, 1998 by and
among Brazos Markets Development, L.P., as the Borrower, the
several banks a party thereto from time to time and the
Agent.
27 Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
None.
M-18
<PAGE> 379
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RANDALL'S FOOD MARKETS, INC.
(Registrant)
<TABLE>
<S> <C>
Date: November 25, 1998 /s/ R. RANDALL ONSTEAD, JR.
--------------------------------------------------------
R. Randall Onstead, Jr.,
Chairman and Chief Executive Officer
Date: November 25, 1998 /s/ MICHAEL M. CALBERT
--------------------------------------------------------
Michael M. Calbert,
Senior Vice President and Chief Financial Officer
</TABLE>
M-19
<PAGE> 380
ANNEX N
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 9, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 333-35457.
------------------------
RANDALL'S FOOD MARKETS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
TEXAS 74-2134840
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
3663 BRIARPARK, HOUSTON, TEXAS 77042
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (INCLUDING ZIP CODE)
(713) 268-3500
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] No [ ]
The number of shares outstanding of the registrant's common stock, par
value $0.25 per share, as of February 2, 1999 was 30,038,192 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
N-1
<PAGE> 381
RANDALL'S FOOD MARKETS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Independent Certified Public Accountants' Report on Review
of Interim Financial Information............................ N-3
Condensed Consolidated Balance Sheets at January 9, 1999 and
June 27, 1998............................................... N-4
Condensed Consolidated Statements of Income for the
Twenty-eight and Twelve Week Periods Ended January 9, 1999
and January 10, 1998........................................ N-5
Condensed Consolidated Statements of Cash Flows for the
Twenty-eight Week Periods Ended January 9, 1999 and January
10, 1998.................................................... N-6
Notes to Condensed Consolidated Financial Statements........ N-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... N-11
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ N-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... N-18
Item 2. Changes in Securities....................................... N-19
Item 3. Defaults upon Senior Securities............................. N-19
Item 4. Submission of Matters to a Vote of Security Holders......... N-20
Item 5. Other Information........................................... N-20
Item 6. Exhibits and Reports on Form 8-K............................ N-20
SIGNATURES........................................................... N-21
</TABLE>
N-2
<PAGE> 382
PART I. FINANCIAL INFORMATION
ITEM 1. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON REVIEW OF INTERIM
FINANCIAL INFORMATION
To the Board of Directors and Stockholders of
Randall's Food Markets, Inc.
Houston, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Randall's Food Markets, Inc. and subsidiaries as of January 9, 1999, and the
related condensed consolidated statement of income for the twelve-week period
then ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Randall's Food Markets, Inc. and
subsidiaries as of June 27, 1998, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated August 14, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of June 27, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
February 10, 1999
N-3
<PAGE> 383
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 9, 1999 AND JUNE 27, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
UNAUDITED AUDITED
JANUARY 9, JUNE 27,
1999 1998
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 18,252 $ 36,243
Receivables, net.......................................... 54,324 44,187
Merchandise inventories, net.............................. 189,864 166,332
Prepaid expenses and other................................ 6,601 5,986
Deferred tax assets....................................... 8,987 11,792
-------- --------
Total current assets.............................. 278,028 264,540
Property and equipment, net................................. 432,054 365,853
Goodwill, net............................................... 214,531 217,968
Other assets, net........................................... 37,000 35,386
-------- --------
Total............................................. $961,613 $883,747
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and obligations under
capital leases......................................... $ 4,553 $ 4,544
Accounts payable.......................................... 134,847 135,834
Accrued expenses and other................................ 134,815 136,477
Accrued income taxes...................................... 5,831 --
-------- --------
Total current liabilities......................... 280,046 276,855
Long-term debt, net of current maturities................... 335,725 276,447
Obligations under capital leases, net of current
maturities................................................ 59,303 61,515
Other liabilities........................................... 30,899 32,485
-------- --------
Total liabilities................................. 705,973 647,302
-------- --------
COMMITMENTS & CONTINGENCIES (See Note 3)
REDEEMABLE COMMON STOCK, $15.44 and $13.30 redemption value
per share, 387,651 shares issued and outstanding at
January 9, 1999 and June 27, 1998......................... 5,986 5,155
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value 75,000,000 shares authorized;
29,637,521 shares issued and 29,619,139 shares outstanding
at January 9, 1999 and 29,697,979 shares issued and
29,679,597 shares outstanding at June 27, 1998............ 7,335 7,425
Additional paid-in capital.................................. 173,802 174,337
Stockholders' notes receivable.............................. (6,095) (6,213)
Retained earnings........................................... 75,139 56,506
Restricted common stock..................................... (309) (547)
Treasury stock, 18,382 shares at cost....................... (218) (218)
-------- --------
Total stockholders' equity........................ 249,654 231,290
-------- --------
Total............................................. $961,613 $883,747
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
N-4
<PAGE> 384
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWENTY-EIGHT AND TWELVE WEEK PERIODS ENDED JANUARY 9, 1999 AND
JANUARY 10, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
28 WEEKS ENDED 12 WEEKS ENDED
------------------------- -------------------------
JANUARY 9, JANUARY 10, JANUARY 9, JANUARY 10,
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES.......................... $1,394,324 $1,299,293 $627,583 $579,916
COSTS OF SALES..................... 1,006,031 945,645 453,150 422,706
---------- ---------- -------- --------
GROSS PROFIT....................... 388,293 353,648 174,433 157,210
OPERATING EXPENSES:
Selling, general and
administrative expenses....... 304,414 287,938 132,601 124,663
Depreciation and amortization.... 31,201 26,309 14,028 11,192
---------- ---------- -------- --------
Total operating
expenses............... 335,615 314,247 146,629 135,855
---------- ---------- -------- --------
OPERATING INCOME................... 52,678 39,401 27,804 21,355
INTEREST EXPENSE, net.............. 18,260 18,013 8,208 7,491
---------- ---------- -------- --------
INCOME BEFORE INCOME TAXES......... 34,418 21,388 19,596 13,864
PROVISION FOR INCOME TAXES......... 14,953 9,799 8,316 6,019
---------- ---------- -------- --------
NET INCOME......................... $ 19,465 $ 11,589 $ 11,280 $ 7,845
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
N-5
<PAGE> 385
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-EIGHT WEEK PERIODS ENDED JANUARY 9, 1999 AND JANUARY 10, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 9, JANUARY 10,
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 19,465 $ 11,589
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 31,201 26,309
Other.................................................. 2,854 3,318
Change in assets and liabilities, net.................. (28,443) 1,728
--------- --------
Net cash provided by operating activities......... 25,077 42,944
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (130,902) (36,921)
Proceeds from sale of assets.............................. 29,852 23,130
Other..................................................... 211 627
--------- --------
Net cash used in investing activities............. (100,839) (13,164)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under credit agreement............ 180,000
Repayments of debt........................................ (120,724) (3,199)
Reduction in obligations under capital leases............. (1,999) (2,111)
Other..................................................... 494 200
--------- --------
Net cash provided by (used in) financing
activities...................................... 57,771 (5,110)
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (17,991) 24,670
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 36,243 23,115
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 18,252 $ 47,785
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
N-6
<PAGE> 386
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-EIGHT AND TWELVE WEEK PERIODS ENDED
JANUARY 9, 1999 AND JANUARY 10, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Randall's Food
Markets, Inc. and subsidiaries (the "Company") at June 27, 1998 has been derived
from the Company's audited financial statements at that date. The condensed
consolidated balance sheet at January 9, 1999, the condensed consolidated
statements of income for the twenty-eight and twelve week periods ended January
9, 1999 and January 10, 1998 and the condensed consolidated statements of cash
flows for the twenty-eight week periods ended January 9, 1999 and January 10,
1998 are unaudited. In the opinion of management, such condensed consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the consolidated
financial position and results of operations of the Company for the interim
periods. Operating results for the twenty-eight and twelve week periods ended
January 9, 1999 are not necessarily indicative of the operating results that may
be expected for a full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements presented in accordance with generally accepted accounting
principles have been omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 27, 1998.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period presentation.
2. STORE CLOSING COSTS
During the fiscal year ended June 28, 1997 ("Fiscal Year 1997"), the
Company recorded a charge of approximately $32.8 million in connection with the
planned closure, replacement or sale of certain of its stores. Such charge
included $3.7 million relating to stores that were closed or sold prior to the
fourth quarter of Fiscal Year 1997 and $29.1 million relating to 20 stores that
the Company planned to close, replace or sell at various dates from June 1997 to
June 1999. The $32.8 million charge included estimated inventory losses of
approximately $3.0 million (included in cost of sales during Fiscal Year 1997),
estimated lease termination costs of approximately $11.7 million and asset
write-offs of approximately $18.1 million (both of which were included in
operating expenses during Fiscal Year 1997). The Company is proceeding as
planned with the closure, replacement or sale of the designated stores and has
not recorded any changes in estimate to the reserve. As of January 9, 1999, the
Company has closed, replaced or sold 15 of the 20 stores included in the Fiscal
Year 1997 reserve and during the 28 weeks ended January 9, 1999 charged $13.1
million of related costs against such reserve. The remaining five stores are
expected to be closed during the remainder of the fiscal year ending June 26,
1999 ("Fiscal Year 1999"). The Company does not anticipate a material impact on
its future revenues and operating results as a result of activities from such
stores that will not be continued. The aggregate revenue and operating loss for
the 12 weeks ended January 9, 1999 from the one store to be closed for which the
Company does not plan a replacement store were $3.1 million and $0.1 million,
respectively, and the revenue and operating loss
N-7
<PAGE> 387
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWENTY-EIGHT AND TWELVE WEEK PERIODS ENDED
JANUARY 9, 1999 AND JANUARY 10, 1998 (UNAUDITED)
from such store for the 28 weeks ended January 9, 1999 were $6.9 million and
$0.4 million, respectively. At January 9, 1999, the aggregate carrying value,
net of the closed store reserve, of the fixed assets of stores closed and
remaining to be closed under the plan was $3.2 million, or less than 0.4% of the
Company's total assets.
The number of stores closed, replaced or sold in connection with the plan
during each fiscal period since the plan's inception is as follows:
<TABLE>
<S> <C>
Stores to be closed per original plan....................... 20
---
Closures during the fourth quarter of Fiscal Year 1997...... (2)
Closures during Fiscal Year 1998............................ (10)
Closures during Fiscal Quarter Ended October 18, 1998....... (3)
Closures during Fiscal Quarter Ended January 9, 1999........ --
---
Total closures through January 9, 1999...................... (15)
---
Stores remaining to be closed at January 9, 1999............ 5
===
</TABLE>
Activity in the reserve since June 28, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
ASSET
LEASE WRITE-
INVENTORY TERMINATION OFFS TOTAL
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Reserve/expense recorded in FY 1997.... $ 3,000 $11,745 $18,047 $32,792
Charges to the reserve during FY
1998................................. (1,407) (1,600) (3,483) (6,490)
------- ------- ------- -------
Remaining Reserve at June 27, 1998..... 1,593 10,145 14,564 26,302
Charges to the reserve during the 16
weeks ended October 17, 1998......... (449) (1,824) (4,642) (6,915)
Charges to the reserve during the 12
weeks ended January 9, 1999.......... (27) (3,423) (2,685) (6,135)
------- ------- ------- -------
Remaining reserve at January 9, 1999... $ 1,117 $ 4,898 $ 7,237 $13,252
======= ======= ======= =======
</TABLE>
3. CONTINGENCIES
MSP Litigation -- Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP on
its date of termination (which is alleged by plaintiffs to be approximately 250
persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of fiduciary duty. The plaintiffs assert that the yearly
plan agreement executed by each participant in the MSP was a contract for a
specified retirement and death benefit set forth in such plan agreements and
that such benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that an
N-8
<PAGE> 388
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWENTY-EIGHT AND TWELVE WEEK PERIODS ENDED
JANUARY 9, 1999 AND JANUARY 10, 1998 (UNAUDITED)
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. On June 5, 1998, the Court ruled that the plan was
"unfunded", meaning that the trial of the limited class action issue will deal
only with the question of whether the MSP was "maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees." On June 16, 1998, the Court certified the case as
a class action for the limited issue of determining if the MSP was an exempt
"top hat plan". The Court defined the class as all persons who, on the date of
the termination of the MSP, were participants in the MSP and were employed by
Randall's Food Markets, Inc. On September 8, 1998, a pre-trial conference was
held to discuss burden of proof, expert testimony and meaning of "select group"
and the evidence to be considered at the trial. The trial of the limited class
action issue was conducted before the Court, sitting without a jury, on October
26, 1998. Upon order of the Court, both parties submitted post-trial briefs on
November 6, 1998. The Court has yet to rule on the limited class action issue.
Once the initial class issue is resolved, the Court will make an evaluation as
to whether any other issues should be dealt with in a class action context.
Based upon current facts, the Company is unable to estimate any meaningful range
of possible loss that could result from an unfavorable outcome of the MSP
litigation. It is possible that the Company's results of operations or cash
flows in a particular quarterly or annual period or its financial position could
be materially affected by an ultimate unfavorable outcome of the MSP litigation.
However, the Company intends to vigorously contest the MSP claim and, although
there can be no assurance, management currently does not anticipate an
unfavorable outcome based on management's independent analysis of the facts
relating to such litigation.
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, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and the contract was terminated as of
July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a transition agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
to self-distribution.
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RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWENTY-EIGHT AND TWELVE WEEK PERIODS ENDED
JANUARY 9, 1999 AND JANUARY 10, 1998 (UNAUDITED)
John Paul Mitchell Lawsuit -- On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., (together, the "Plaintiffs") $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge threw out the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. On December 18, 1998, the Plaintiffs filed a
motion for a new trial. On February 2, 1999, the trial court judge denied such
motion by operation of law. On February 16, 1999, the Plaintiffs filed their
notice of appeal with the court. Although the outcome of this matter cannot be
predicted with certainty, management believes an unfavorable outcome will not
have a material adverse effect on the Company, its operations, its financial
condition or its cash flows.
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, its financial condition or its cash flows.
4. RECENT PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities", ("SOP 98-5") which requires that costs incurred for start-up
activities should be charged to operations as incurred. Although the Company has
not fully assessed the impact of adopting SOP 98-5, the Company does not believe
that such adoption will have a material impact on its financial statements. The
Company is required to adopt SOP 98-5 in its fiscal year ending June 24, 2000.
Initial application of SOP 98-5 will be reported as a cumulative effect of an
accounting change.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 each June. Same-store sales is defined as net sales for
stores in full operation in each of the current fiscal periods and the
comparable periods of the prior fiscal year. Replacement stores are included in
the same-store sales calculation. A replacement store is defined as a store that
is opened to replace a store that is closed nearby. Identical-store sales is
defined as net sales for stores in full operation in each of the current fiscal
periods and the comparable periods of the prior fiscal year, excluding expansion
and replacement stores.
Presented below is a table showing the percentage of net sales represented
by certain items in the Company's consolidated condensed statements of income
(dollars in thousands):
<TABLE>
<CAPTION>
28 WEEKS ENDED 12 WEEKS ENDED
---------------------------------------- ------------------------------------
JANUARY 9, JANUARY 10, JANUARY 9, JANUARY 10,
1999 1998 1999 1998
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $1,394,324 100.0% $1,299,293 100.0% $627,583 100.0% $579,916 100.0%
Cost of sales........ 1,006,031 72.2% 945,645 72.8% 453,150 72.2% 422,706 72.9%
---------- ----- ---------- ----- -------- ----- -------- -----
Gross profit......... 388,293 27.8% 353,648 27.2% 174,433 27.8% 157,210 27.1%
Selling, general and
administrative
expenses........... 304,414 21.8% 287,938 22.2% 132,601 21.1% 124,663 21.5%
Depreciation and
amortization....... 31,201 2.2% 26,309 2.0% 14,028 2.2% 11,192 1.9%
---------- ----- ---------- ----- -------- ----- -------- -----
Operating income..... 52,678 3.8% 39,401 3.0% 27,804 4.4% 21,355 3.7%
Interest expense,
net................ 18,260 1.3% 18,013 1.4% 8,208 1.3% 7,491 1.3%
---------- ----- ---------- ----- -------- ----- -------- -----
Income before income
taxes.............. 34,418 2.5% 21,388 1.6% 19,596 3.1% 13,864 2.4%
Provision for income
taxes.............. 14,953 1.1% 9,799 0.8% 8,316 1.3% 6,019 1.0%
---------- ----- ---------- ----- -------- ----- -------- -----
Net income........... $ 19,465 1.4% $ 11,589 0.9% $ 11,280 1.8% $ 7,845 1.4%
========== ===== ========== ===== ======== ===== ======== =====
EBITDA............... $ 85,069 6.1% $ 66,900 5.1% $ 42,342 6.7% $ 33,057 5.7%
========== ===== ========== ===== ======== ===== ======== =====
</TABLE>
NET SALES -- Net sales for the twenty-eight weeks ended January 9, 1999
("Fiscal Year to Date 1999") increased by $95.0 million or 7.3% compared to the
twenty-eight weeks ended January 10, 1998 ("Fiscal Year to Date 1998"). Such
increase is partially attributable to additional sales of $27.4 million
generated from the opening of three new stores (excluding three replacement
stores) during Fiscal Year to Date 1999 and the operation during such period of
two stores (excluding two replacement stores) opened during the fiscal year
ended June 27, 1998 ("Fiscal Year 1998") which were not in operation during the
entire comparable period of Fiscal Year to Date 1998. In addition, the Company
experienced an increase in same-store sales of approximately $108.4 million in
Fiscal Year to Date 1999 as compared to Fiscal Year to Date 1998. These
increases were offset by a decline of approximately $40.3 million generated from
closed and temporarily closed stores that are excluded from same-store sales.
Net sales during the 12 weeks ended January 9, 1999 ("Second Quarter 1999")
increased by $47.7 million or 8.2% as compared to the 12 weeks ended January 10,
1998 ("Second Quarter 1998"). Such increase is partially attributable to
additional sales of approximately $16.0 million generated from the opening of
three new stores (excluding three replacement stores) during Fiscal Year to Date
1999 and the operation during
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Second Quarter 1999 of one store (excluding two replacement stores) opened
during Fiscal Year 1998 which was not in operation during Second Quarter 1998.
In addition, the Company experienced an increase in same-store sales of
approximately $40.9 million during Second Quarter 1999 as compared to Second
Quarter 1998. These increases were offset by a decline of $8.8 million generated
from closed and temporarily closed stores that are excluded from same-store
sales.
The Company's same-store sales during Fiscal Year to Date 1999 and Second
Quarter 1999 increased approximately 8.7% and 7.2%, respectively, compared to
increases of 1.9% and 2.2% for Fiscal Year to Date 1998 and Second Quarter 1998,
respectively. Such improvements are due primarily to the store remodeling and
expansion program, the contribution of replacement stores, the success of
merchandising, marketing and customer service initiatives and favorable economic
conditions. Identical-store sales increased approximately 6.2% and 4.0% during
Fiscal Year to Date 1999 and Second Quarter 1999, respectively, compared to
increases of 0.8% and 1.3% for Fiscal Year to Date 1998 and Second Quarter 1998,
respectively. The Company anticipates that the rate of improvement in same-store
sales and identical-store sales will decline in future periods as such sales are
compared to stronger sales of comparable periods of the previous year.
GROSS PROFIT -- Gross profit for Fiscal Year to Date 1999 and Second
Quarter 1999 increased by $34.6 million or 9.8% and $17.2 million or 11.0%,
respectively, compared to the corresponding periods of the prior year. The
dollar increases in gross profit are primarily attributable to the increased
sales volume during the Fiscal Year 1999 periods. Gross profit as a percentage
of net sales increased to 27.8% for Fiscal Year to Date 1999 from 27.2% for
Fiscal Year to Date 1998 and increased to 27.8% for Second Quarter 1999 from
27.1% for Second Quarter 1998. Such increases are primarily due to more
effective promotional efforts and higher gross margins at new and replacement
stores. Such higher gross margins at new and replacement stores are due
primarily to their more expansive specialty departments and broader range of
products and services offered by such stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $16.5 million or 5.7% during Fiscal Year to
Date 1999 and $7.9 million or 6.4% during Second Quarter 1999 compared to the
same periods of the prior year. Selling, general and administrative expenses as
a percentage of net sales decreased to 21.8% for Fiscal Year to Date 1999 from
22.2% for Fiscal Year to Date 1998 and decreased to 21.1% for Second Quarter
1999 from 21.5% for Second Quarter 1998. These decreases, as a percentage of net
sales, were due primarily to the Company's focus on expense management and the
increase in net sales. The Company does not expect selling, general and
administrative expenses as a percentage of net sales to increase compared to
corresponding periods of the prior year; however, no assurance can be given in
this regard.
EBITDA (EARNINGS BEFORE NET INTEREST EXPENSE, INCOME TAXES, DEPRECIATION,
AMORTIZATION AND LIFO PROVISION) AND OPERATING INCOME -- EBITDA for Fiscal Year
to Date 1999 and Second Quarter 1999 increased by $18.2 million or 27.2% and
$9.3 million or 28.1%, respectively, compared to the same periods of the prior
year. EBITDA as a percentage of net sales increased to 6.1% for Fiscal Year to
Date 1999 from 5.1% for Fiscal Year to Date 1998 and increased to 6.7% for
Second Fiscal Quarter 1999 from 5.7% for Second Fiscal Quarter 1998. Operating
income for Fiscal Year to Date 1999 and Second Quarter 1999 increased by $13.3
million or 33.7% and $6.4 million or 30.2%, respectively, compared to the
corresponding periods of the prior year. Such increases are primarily
attributable to the growth in sales, increases in gross profit and reduction in
the rate of selling, general and administrative expenses described above.
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DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense for
Fiscal Year to Date 1999 and Second Quarter 1999 increased by $4.9 million or
18.6% and $2.8 million or 25.3%, respectively. Depreciation and amortization
expense, as a percentage of net sales, increased to 2.2% for Fiscal Year to Date
1999 from 2.0% for Fiscal Year to Date 1998 and increased to 2.2% for Second
Quarter 1999 from 1.9% for Second Quarter 1998. Such increases are primarily due
to new store openings and the remodeling of certain existing stores in
connection with the Company's capital expenditure program that began in Fiscal
Year 1998. This trend is expected to continue as the Company continues its
capital expenditure program. See "Liquidity and Capital Resources".
INTEREST EXPENSE, NET -- Net interest expense for Fiscal Year to Date 1999
and Second Quarter 1999 increased by $0. 2 million or 1.4% and $0.7 million or
9.6%, respectively, compared to the same periods of the prior year, due
primarily to the utilization of the Company's revolving credit facility
available under its bank credit agreement.
PROVISION FOR INCOME TAXES -- The provision for income taxes for Fiscal
Year to Date 1999 and Second Quarter 1999 was $15.0 million and $8.3 million,
respectively, compared to $9.8 million and $6.0 million, respectively, for the
corresponding periods of the prior year. Such increases are primarily due to the
Company's increased pre-tax income.
NET INCOME -- Net income for Fiscal Year to Date 1999 and Second Quarter
1999 increased $7.9 million or 68.0% and $3.4 million or 43.8%, respectively,
compared to the corresponding periods of the prior year due primarily to the
combined impact of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES -- The Company is a holding company, and as
a result, its operating cash flow and its ability to service its indebtedness,
including the Company's $150.0 million aggregate principal amount outstanding of
9 3/8% Series B Senior Subordinated Notes due 2007, are dependent upon the
operating cash flow of its subsidiaries and the payment of funds by such
subsidiaries to the Company in the form of loans, dividends or otherwise.
The Company's principal sources of liquidity are expected to be cash flow
from operations, borrowings under the $225.0 million revolving credit facility
("Revolver") available under the Company's current bank credit agreement and
proceeds from lease financing agreements. As of January 9, 1999, the Company had
approximately $164.7 million available (net of approximately $0.3 million of
outstanding letters of credit) to be borrowed under the Revolver. Management
anticipates that the Company's principal uses of liquidity will be to provide
working capital, meet debt service requirements and finance the Company's
expansion and remodeling plans. Management believes that cash flows generated
from operations, borrowings under the Revolver and proceeds from lease financing
arrangements will adequately provide for the Company's working capital and debt
service needs and will be sufficient to fund its expected capital expenditures.
During Fiscal Year to Date 1999 and Fiscal Year to Date 1998, operating
activities provided net cash of approximately $25.1 million and $42.9 million,
respectively. Net cash provided by operations during Fiscal Year to Date 1999
resulted primarily from net income during the period (adjusted for the non-cash
impact of depreciation and amortization) and increases in accrued expenses,
offset to some extent by increases in accounts receivable and merchandise
inventories. Net cash provided by operations during Fiscal Year to Date 1998
resulted primarily from net income (adjusted for the non-cash impact of
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<PAGE> 393
depreciation and amortization), the collection of a $l0.0 million federal income
tax receivable, and increases in accounts payable and accrued expenses, offset
to some extent by increases in accounts receivable and merchandise inventories.
Financing activities provided approximately $57.8 million during Fiscal Year to
Date 1999, primarily from borrowings under the credit agreement offset by a
reduction of debt and capital lease obligations. During Fiscal Year to Date
1998, financing activities utilized approximately $5.1 million, primarily due to
debt reduction.
Cash used in investing activities during Fiscal Year to Date 1999 and
Fiscal Year to Date 1998 consisted primarily of capital expenditures of
approximately $130.9 million and $36.9 million, respectively, offset to some
extent by proceeds from asset sales of approximately $29.9 million and $23.1
million during Fiscal Year to Date 1999 and Fiscal Year to Date 1998,
respectively. Capital expenditures primarily include expenditures related to the
construction of new stores, the purchase of real estate, the remodeling of
existing stores, ongoing store expenditures for equipment and capitalized
maintenance, as well as expenditures relating to the Company's warehousing and
distribution network and computer equipment.
During Fiscal Year 1998, the Company embarked upon a program to accelerate
its store development and remodeling and to optimize its distribution network.
Such program has resulted in a level of capital expenditures in excess of
historical levels. During Fiscal Year to Date 1999, the Company made capital
expenditures of approximately $130.9 million primarily for the construction of
new stores, purchase of land, remodel or renovation of existing stores,
expansion of its distribution system, and computer hardware and software
expenditures. The Company currently expects to make additional expenditures of
approximately $122.0 million for such capital assets for the remainder of the
fiscal year ending June 26, 1999 ("Fiscal Year 1999"). The Company anticipates
funding its future capital expenditures and expansion program with cash flow
from operations, borrowings under the Revolver and proceeds from lease financing
arrangements, including a five-year, $50.0 million synthetic lease arrangement
that the Company entered into on September 10, 1998.
During Fiscal Year 1998, the Company commenced expansion of its
distribution system in a strategic shift toward self-distribution. The
transition to self-distribution is expected to increase the operational and
purchasing efficiencies of the Company's distribution network and lower the
Company's overall cost of sales, although no assurance can be given in this
regard. To date, the Company has completed the initial phases of the expansion
and is receiving and shipping product on a limited basis. The related systems
conversion and testing are substantially complete, and the Company has not
experienced any disruption to its supply of product as a result of such
progress. The transition to self-distribution is expected to be substantially
completed during Fiscal Year 1999. While the Company has distributed products to
its stores for many years, the anticipated expansion and move to
self-distribution present multiple risks that could potentially have an adverse
impact on the Company's financial results for a particular quarter or annual
reporting period. Such risks include, but are not limited to, increased
borrowings due to the build-up of excess inventory levels and lower sales, gross
margin and net income due to the potential disruptions of product delivery and
sourcing to the stores. Although there can be no assurance, management believes
that its extensive planning process, its progress on the transition to date and
its prior experience in distribution reduce the risks of a significant
disruption of supply for the duration of the transition.
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NEW ACCOUNTING STANDARDS -- In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities", ("SOP 98-5") which requires that costs
incurred for start-up activities should be charged to operations as incurred.
Although the Company has not fully assessed the impact of adopting SOP 98-5, the
Company does not believe that such adoption will have a material impact on its
financial statements. The Company is required to adopt SOP 98-5 in its fiscal
year ending June 24, 2000. Initial application of SOP 98-5 will be reported as a
cumulative effect of an accounting change.
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.
YEAR 2000 COMPLIANCE -- The year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year, as well as hardware designed with similar constraints. Some of
the Company's computer programs and hardware that have date-sensitive functions
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions in
operations including, among other things, a temporary inability to process
transactions, receive invoices, make payments or engage in similar normal
business activities.
In February 1997, the Company began a project, under the direction of the
Company's Chief Information Officer, to address the year 2000 issue. The Company
is utilizing both internal and external resources to identify, upgrade and test
the Company's hardware, software, systems and processes ("IT systems") for year
2000 compliance. In July 1997, the Company completed the identification phase of
its project with a comprehensive inventory and impact assessment of its IT
systems. Such phase identified various IT systems requiring upgrades in order to
be year 2000 compliant. To complete the upgrade and testing phases, the Company
developed the Y2K Migration Plan (the "Y2K Plan"). The Y2K Plan is currently
underway and expected to be substantially complete by the end of Fiscal Year
1999. Presently, approximately 60% of the Company's IT systems that were
determined to be non-compliant have been upgraded and tested, and are now
believed to be year 2000 compliant. Year 2000 upgrades have been prioritized to
complete all critical systems such as procurement in the early phases of
conversion. Currently, substantially all of the IT systems related to
procurement have been upgraded and have been found to be Year 2000 compliant.
The Company currently expects to expense approximately $2.0 million in
Fiscal Year 1999 for the cost of upgrading its IT systems under the Y2K Plan. To
date, the Company has expensed less than $1.0 million. In addition, the Company
currently expects to invest approximately $23.0 million for hardware and
software programs to replace systems that are inefficient and in need of
replacement regardless of their year 2000 compliance status. During the
twenty-eight weeks ended January 9, 1999, the Company invested approximately
$12.4 million for such hardware and software programs that are Year 2000
compliant. The Company currently expects to make additional such purchases of
approximately $10.6 million during the remainder of Fiscal Year 1999. The
Company expects to fund the Y2K Plan and hardware and software purchases with
cash flows generated from operations and borrowings under the Revolver.
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The Company is also currently assessing the year 2000 readiness of its non-
information technology systems and equipment, such as refrigeration units,
ovens, scales, safes and other equipment ("non-IT systems") which may include
imbedded technology such as microcontrollers that are not year 2000 compliant.
The Company currently intends to complete its plan to address such non-IT
systems issues by the end of Fiscal Year 1999 and expects that such systems will
be year 2000 compliant before calendar year 2000. The cost of achieving such
compliance is not currently expected to have a material impact on the Company's
financial position, results of operations or cash flows.
The Company has suppliers and other third parties that it relies on for
business operations and currently expects those suppliers and other third
parties are taking the appropriate action for year 2000 compliance. The Company
cannot provide assurance that failure of such suppliers and other third parties
to address the year 2000 issue will not have an adverse impact on the Company.
While the Company has limited ability to test and control its suppliers' and
other third parties' year 2000 readiness, the Company is contacting major
suppliers and critical other third parties and obtaining and assessing whether
they will be year 2000 compliant. Based on the responses, the Company will
develop contingency plans to reduce the impact of transactions with
non-compliant major suppliers and other critical parties. Although there can be
no assurance that multiple business disruptions caused by technology failures
can be adequately anticipated, the Company is identifying second and third
sources of supply for major suppliers to minimize the risk of business
interruptions.
The Company intends for its year 2000 date conversion project for both its
IT systems and non-IT systems to be completed on a timely basis so as to not
significantly impact business operations. However, if the Company or any
critical third parties do not complete necessary upgrades as planned, the year
2000 issue may have a material impact on the Company, including, among other
things, a temporary inability to procure and distribute product, process
transactions, receive invoices, make payments, refrigerate perishable products
or engage in similar normal business activities. The Company is currently
assessing the potential impact of such year 2000-related issues and will develop
contingency plans to mitigate the risk of any scenario that may have a material
impact on the Company. The Company intends to formalize such contingency plans
by the fourth quarter of calendar year 1999.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed below,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report, including, without
limitation, in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in the Company's related press release and in oral
statements made by authorized officers of the Company. When used in this report,
any press release or oral statements, the words "looking forward", "estimate,"
"project," "anticipate," "expect," "intend," "believe" and similar expressions
are intended to identify forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions made by
management of the Company, which, although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be placed upon such
estimates and statements. No assurance can be given that any of such statements
or estimates will be realized and actual results will differ from those
contemplated by such forward-looking statements. Accordingly, the Company hereby
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identifies the following important factors which could cause the Company's
financial results to differ materially from any such results which might be
projected, forecast, estimated or budgeted by the Company in forward-looking
statements: heightened competition, including specifically the intensification
of price competition and the expansion, renovation and opening of new stores by
competitors; failure to obtain new customers or retain existing customers;
inability to carry out strategies to accelerate new store development and
remodeling programs, reduce operating costs, differentiate products and
services, leverage the frequent shopper program and increase private label
sales; insufficiency of financial resources to renovate and expand the store
base; increase in leverage and interest expense due to the expansion and
remodeling program; outcome of the MSP Litigation and the John Paul Mitchell
Litigation; issues arising in connection with the Y2K Plan; prolonged dispute
with labor; economic downturn in the State of Texas; loss or retirement of key
executives; higher selling, general and administrative expenses occasioned by
the need for additional advertising, marketing, administrative or management
information systems expenditures; adverse publicity and news coverage.
The foregoing review of the factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to
this filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the 16 weeks ended October 17, 1998, the Company entered into two
interest rate swap agreements to hedge interest rate costs and risks associated
with variable interest rates. Such agreements effectively convert variable-rate
debt, to the extent of the notional amount, to fixed-rate debt with effective
per annum interest rates of 5.493% and 5.295%, with respect to the London
Interbank Offered Rate portion of such borrowings. The aggregate notional
principal amount of such agreements is $100.0 million, $50.0 million of which
became effective August 25, 1998 and matures August 25, 2001, and $50.0 million
of which became effective September 2, 1998 and matures September 2, 2001. The
counterparty to such agreements can terminate either agreement after two years,
at its sole discretion. The counterparty to such agreements is a major financial
institution, and therefore, credit losses from counterparty nonperformance are
not anticipated.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MSP Litigation -- Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP on
its date of termination (which is alleged by plaintiffs to be approximately 250
persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of fiduciary duty. The plaintiffs assert that the yearly
plan agreement executed by each participant in the MSP was a contract for a
specified retirement and death benefit set forth in such plan agreements and
that such benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that an
expert for the plaintiffs, assuming class certification, may testify that the
damages allegedly sustained by the plaintiff class may range from approximately
$18.0 million to $37.2 million and, assuming that a court were to award
additional damages based on a rate of return achieved by an equity index over
the relevant period, such damages may range from approximately $37.4 million to
$70.6 million. On December 30, 1997, the Court issued an order denying the
plaintiffs' summary judgment motion on the plaintiffs' claim that the MSP was
not an exempt "top hat plan" (a plan which is unfunded and maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees). The order also
granted the Company's summary judgment motions on two of the plaintiffs'
ancillary claims, but did not address the plaintiffs' request for certification
as a class action. On June 5, 1998, the Court ruled that the plan was
"unfunded", meaning that the trial of the limited class action issue will deal
only with the question of whether the MSP was "maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees." On June 16, 1998, the Court certified the case as
a class action for the limited issue of determining if the MSP was an exempt
"top hat plan". The Court defined the class as all persons who, on the date of
the termination of the MSP, were participants in the MSP and were employed by
Randall's Food Markets, Inc. On September 8, 1998, a pre-trial conference was
held to discuss burden of proof, expert testimony and meaning of "select group"
and the evidence to be considered at the trial. The trial of the limited class
action issue was conducted before the Court, sitting without a jury, on October
26, 1998. Upon order of the Court, both parties submitted post-trial briefs on
November 6, 1998. The Court has yet to rule on the limited class action issue.
Once the initial class issue is resolved, the Court will make an evaluation as
to whether any other issues should be dealt with in a class action context.
Based upon current facts, the Company is unable to estimate any meaningful range
of possible loss that could result from an unfavorable outcome of the MSP
litigation. It is possible that the Company's results of operations or cash
flows in a particular quarterly or annual period or its financial position could
be materially affected by an ultimate unfavorable outcome of the MSP litigation.
However, the Company intends to vigorously contest the MSP claim and, although
there can be no assurance, management currently
N-18
<PAGE> 398
does not anticipate an unfavorable outcome based on management's independent
analysis of the facts relating to such litigation.
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, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and that the contract was terminated as
of July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a Transition Agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
into self-distribution.
John Paul Mitchell Lawsuit -- On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., (together, the "Plaintiffs") $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge threw out the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. On December 18, 1998, the Plaintiffs filed a
motion for a new trial. On February 2, 1999, the trial court judge denied such
motion by operation of law. On February 16, 1999, the Plaintiffs filed their
notice of appeal with the court. Although the outcome of this matter cannot be
predicted with certainty, management believes an unfavorable outcome will not
have a material adverse effect on the Company, its operations, its financial
condition or its cash flows.
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, its financial condition or its cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
N-19
<PAGE> 399
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on November 17,
1998, at which time the shareholders voted on the re-election of the following
to the Board of Directors to serve until the 1999 Annual Meeting of Shareholders
or until their respective successors are duly elected or appointed and
qualified:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C> <C>
Robert R. Onstead 29,131,388 -- --
R. Randall Onstead,
Jr. 29,131,388 -- --
Henry R. Kravis 29,131,388 -- --
George R. Roberts 29,131,388 -- --
Paul E. Raether 29,131,388 -- --
James H. Greene, Jr. 29,131,388 -- --
Nils P. Brous 29,131,388 -- --
A. Benton Cocanougher 29,131,388 -- --
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
15.1 Letter in lieu of consent of Deloitte & Touche LLP,
independent accountants
27 Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
None.
N-20
<PAGE> 400
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RANDALL'S FOOD MARKETS, INC.
(Registrant)
Date: February 19, 1999 /s/ R. RANDALL ONSTEAD, JR.
----------------------------------
R. Randall Onstead, Jr.,
Chairman and Chief Executive
Officer
Date: February 19, 1999 /s/ MICHAEL M. CALBERT
----------------------------------
Michael M. Calbert,
Senior Vice President and
Chief Financial Officer
N-21
<PAGE> 401
ANNEX O
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 333-35457.
---------------------------------
RANDALL'S FOOD MARKETS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
TEXAS 74-2134840
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
3663 BRIARPARK, HOUSTON, TEXAS 77042
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (INCLUDING ZIP CODE)
(713) 268-3500
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock, par
value $0.25 per share, as of April 13, 1999 was 30,022,252 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
O-1
<PAGE> 402
RANDALL'S FOOD MARKETS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Independent Accountants' Report............................. O-3
Condensed Consolidated Balance Sheets at April 3, 1999 and
June 27, 1998............................................... O-4
Condensed Consolidated Statements of Income for the Forty
and Twelve Week Periods Ended April 3, 1999 and April 4,
1998........................................................ O-5
Condensed Consolidated Statements of Cash Flows for the
Forty Week Periods Ended April 3, 1999 and April 4, 1998.... O-6
Notes to Condensed Consolidated Financial Statements for the
Forty and Twelve Week Periods Ended April 3, 1999 and April
4, 1998..................................................... O-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. O-12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ O-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... O-20
Item 2. Changes in Securities....................................... O-21
Item 3. Defaults upon Senior Securities............................. O-22
Item 4. Submission of Matters to a Vote of Security Holders......... O-22
Item 5. Other Information........................................... O-22
Item 6. Exhibits and Reports on Form 8-K............................ O-22
SIGNATURES........................................................... O-23
</TABLE>
O-2
<PAGE> 403
PART I. FINANCIAL INFORMATION
ITEM 1. INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Randall's Food Markets, Inc.
Houston, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Randall's Food Markets, Inc. and subsidiaries as of April 3, 1999, and the
related condensed consolidated statement of income for the twelve-week period
then ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Randall's Food Markets, Inc. and
subsidiaries as of June 27, 1998, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated August 14, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of June 27, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
April 30, 1999
O-3
<PAGE> 404
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 3, 1999 AND JUNE 27, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
APRIL 3, JUNE 27,
1999 1998
----------- --------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 43,259 $ 36,243
Receivables, net.......................................... 54,729 44,187
Merchandise inventories, net.............................. 194,786 166,332
Prepaid expenses and other................................ 6,579 5,986
Deferred tax assets....................................... 6,279 11,792
---------- --------
Total current assets.............................. 305,632 264,540
Property and equipment, net................................. 457,136 365,853
Goodwill, net............................................... 213,059 217,968
Other assets, net........................................... 36,091 35,386
---------- --------
Total............................................. $1,011,918 $883,747
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and obligations under
capital leases......................................... $ 4,553 $ 4,544
Accounts payable.......................................... 142,976 135,834
Accrued expenses and other................................ 129,748 136,477
Accrued income taxes...................................... 5,474 --
---------- --------
Total current liabilities......................... 282,751 276,855
Long-term debt, net of current maturities................... 375,653 276,447
Obligations under capital leases, net of current
maturities................................................ 58,452 61,515
Other liabilities........................................... 28,533 32,485
---------- --------
Total liabilities................................. 745,389 647,302
---------- --------
CONTINGENCIES (See Note 3)
REDEEMABLE COMMON STOCK, $17.24 and $13.30 redemption value
per share, 387,651 shares issued and outstanding at April
3, 1999 and June 27, 1998................................. 6,683 5,155
---------- --------
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value 75,000,000 shares authorized;
29,654,690 shares issued and 29,636,308 shares outstanding
at April 3, 1999 and 29,697,979 shares issued and
29,679,597 shares outstanding at June 27, 1998............ 7,414 7,425
Additional paid-in capital.................................. 173,908 174,337
Stockholders' notes receivable.............................. (6,299) (6,213)
Retained earnings........................................... 85,254 56,506
Restricted common stock..................................... (213) (547)
Treasury stock, 18,382 shares at cost....................... (218) (218)
---------- --------
Total stockholders' equity........................ 259,846 231,290
---------- --------
Total............................................. $1,011,918 $883,747
========== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
O-4
<PAGE> 405
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS ENDED 12 WEEKS ENDED
------------------------ --------------------
APRIL 3, APRIL 4, APRIL 3, APRIL 4,
1999 1998 1999 1998
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
NET SALES........................ $1,997,241 $1,851,817 $602,917 $552,524
COSTS OF SALES................... 1,442,535 1,345,145 436,504 399,500
---------- ---------- -------- --------
GROSS PROFIT..................... 554,706 506,672 166,413 153,024
OPERATING EXPENSES:
Selling, general and
administrative expenses..... 429,037 412,698 124,623 124,760
Depreciation and
amortization................ 45,996 37,969 14,795 11,660
---------- ---------- -------- --------
Total operating
expenses............. 475,033 450,667 139,418 136,420
---------- ---------- -------- --------
OPERATING INCOME................. 79,673 56,005 26,995 16,604
INTEREST EXPENSE, net............ 26,424 25,612 8,164 7,599
---------- ---------- -------- --------
INCOME BEFORE INCOME TAXES....... 53,249 30,393 18,831 9,005
PROVISION FOR INCOME TAXES....... 22,974 13,942 8,021 4,143
---------- ---------- -------- --------
NET INCOME....................... $ 30,275 $ 16,451 $ 10,810 $ 4,862
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
O-5
<PAGE> 406
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 3, APRIL 4,
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 30,275 $ 16,451
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 45,996 37,969
Other.................................................. 5,016 4,372
Change in assets and liabilities, net.................. (35,147) 11,132
--------- --------
Net cash provided by operating activities......... 46,140 69,924
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (176,137) (64,040)
Proceeds from sale of assets.............................. 39,954 23,230
Other..................................................... 211 596
--------- --------
Net cash used in investing activities............. (135,972) (40,214)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 263,000
Repayments of long-term debt.............................. (163,798) (3,269)
Reduction in obligations under capital leases............. (2,830) (2,933)
Other..................................................... 476 694
--------- --------
Net cash provided by (used in) financing
activities...................................... 96,848 (5,508)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 7,016 24,202
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 36,243 23,115
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 43,259 $ 47,317
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
O-6
<PAGE> 407
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Randall's Food
Markets, Inc. and subsidiaries (the "Company") at June 27, 1998 has been derived
from the Company's audited financial statements at that date. The condensed
consolidated balance sheet at April 3, 1999, the condensed consolidated
statements of income for the forty and twelve week periods ended April 3, 1999
and April 4, 1998 and the condensed consolidated statements of cash flows for
the forty week periods ended April 3, 1999 and April 4, 1998 are unaudited. In
the opinion of management, such condensed consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the consolidated financial position and
results of operations of the Company for the interim periods. Operating results
for the forty and twelve week periods ended April 3, 1999 are not necessarily
indicative of the operating results that may be expected for a full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements presented in accordance with generally accepted accounting
principles have been omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 27, 1998.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period presentation.
2. STORE CLOSING COSTS
During the fiscal year ended June 28, 1997 ("Fiscal Year 1997"), the
Company recorded a charge of approximately $32.8 million in connection with the
planned closure, replacement or sale of certain of its stores. Such charge
included $3.7 million relating to stores that were closed or sold prior to the
fourth quarter of Fiscal Year 1997 and $29.1 million relating to 20 stores that
the Company planned to close, replace or sell at various dates from June 1997 to
June 1999. The $32.8 million charge included estimated inventory losses of
approximately $3.0 million (included in cost of sales during Fiscal Year 1997),
estimated lease termination costs of approximately $11.7 million and asset
write-offs of approximately $18.1 million (both of which were included in
operating expenses during Fiscal Year 1997).
As of April 3, 1999, 15 out of the 20 stores included in the Fiscal Year
1997 reserve had been closed, replaced or sold. During the 40 weeks ended April
3, 1999, the Company charged against the reserve $0.5 million for inventory
write-offs, $5.3 million for lease termination costs and $7.3 million for asset
write-offs, or a total of $13.1 million related to the 15 stores closed,
replaced or sold as of April 3, 1999.
During the twelve weeks ended April 3, 1999, the Company decided not to
close two of the 20 stores included in the Fiscal Year 1997 reserve. The related
reserve for such stores amounted to $4.3 million representing $0.6 million in
inventory write-offs, $0.4 million in lease termination costs and $3.3 million
in asset write-offs. The reserve was
O-7
<PAGE> 408
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998 (UNAUDITED)
adjusted for such amounts resulting in a reduction in selling, general and
administrative expenses during the 12 weeks ended April 3, 1999.
Of the three remaining stores, as of April 3, 1999, included in the Fiscal
Year 1997 reserve, one was closed on April 10, 1999 and the remaining two stores
are expected to be closed during the fourth quarter of the fiscal year ending
June 26, 1999 ("Fiscal Year 1999"). The Company does not anticipate a material
impact on its future revenues and operating results as a result of activities
from the closing of such stores . The aggregate revenue and operating loss for
the 12 weeks ended April 3, 1999 from the one store to be closed for which the
Company does not plan a replacement store were $2.7 million and $0.3 million,
respectively, and the revenue and operating loss from such store for the 40
weeks ended April 3, 1999 were $9.7 million and $0.8 million, respectively. At
April 3, 1999, the aggregate carrying value, net of the closed store reserve, of
the fixed assets of stores closed and remaining to be closed under the plan was
$0.8 million, or less than 0.1% of the Company's total assets.
The number of stores closed, replaced or sold in connection with the plan
during each fiscal period since the plan's inception is as follows:
<TABLE>
<S> <C>
Stores to be closed per original plan....................... 20
Closures during the fourth quarter of Fiscal Year 1997...... (2)
Closures during Fiscal Year 1998............................ (10)
Closures during Fiscal Quarter Ended October 18, 1998....... (3)
Closures during Fiscal Quarter Ended January 9, 1999........ --
Closures during Fiscal Quarter Ended April 3, 1999.......... --
Stores not closing.......................................... (2)
---
Stores remaining to be closed at April 3, 1999.............. 3
===
</TABLE>
Activity in the reserve since June 28, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
LEASE ASSET
INVENTORY TERMINATION WRITE-OFFS TOTAL
--------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Reserve/expense recorded in FY 1997... $ 3,000 $11,745 $ 18,047 $ 32,792
Charges to the reserve during FY
1998................................ (1,407) (1,600) (3,483) (6,490)
------- ------- -------- --------
Remaining reserve at June 27, 1998.... 1,593 10,145 14,564 26,302
------- ------- -------- --------
Charges to the reserve during the 16
weeks ended October 17, 1998........ (449) (1,824) (4,642) (6,915)
Charges to the reserve during the 12
weeks ended January 9, 1999......... (27) (3,423) (2,685) (6,135)
Charges to the reserve during the 12
weeks ended April 3, 1999........... -- (38) -- (38)
Reversal of unused reserves........... (556) (401) (3,295) (4,252)
------- ------- -------- --------
Charges to the reserve during the 40
weeks ended April 3, 1999........... (1,032) (5,686) (10,622) (17,340)
------- ------- -------- --------
Remaining reserve at April 3, 1999.... $ 561 $ 4,459 $ 3,942 $ 8,962
======= ======= ======== ========
</TABLE>
During the 12 weeks ended April 3, 1999, the Company recorded a charge of
approximately $3.7 million relating to three stores, not included in the Fiscal
Year 1997
O-8
<PAGE> 409
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998 (UNAUDITED)
reserve, that the Company will close or replace during the remainder of Fiscal
Year 1999. The $3.7 million charge included approximately $0.7 million charged
to cost of sales for estimated inventory losses and $3.0 million charged to
selling, general and administrative expenses, including estimated lease
termination costs of approximately $0.6 million, asset impairment of
approximately $1.9 million and other expenses associated with store closings of
approximately $0.5 million. Two of these three stores were closed on April 10,
1999 and the remaining store, which will be replaced, is currently scheduled to
be closed during the fourth quarter of Fiscal Year 1999. The aggregate revenue
and operating loss for the 12 weeks ended April 3, 1999 from the two stores that
the Company does not plan to replace were $5.4 million and $0.6 million,
respectively, and the revenue and operating loss from such stores for the 40
weeks ended April 3, 1999 were $20.3 million and $2.1 million, respectively. At
April 3, 1999, the aggregate carrying value, net of the closed store reserve, of
the fixed assets of these three stores was $3.9 million, or less than 0.4% of
the Company's total assets.
3. CONTINGENCIES
MSP Litigation -- Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP on
its date of termination (which is alleged by plaintiffs to be approximately 250
persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of fiduciary duty. The plaintiffs assert that the yearly
plan agreement executed by each participant in the MSP was a contract for a
specified retirement and death benefit set forth in such plan agreements and
that such benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that an
expert for the plaintiffs, assuming class certification, may testify that the
damages allegedly sustained by the plaintiff class may range from approximately
$18.0 million to $37.2 million and, assuming that a court were to award
additional damages based on a rate of return achieved by an equity index over
the relevant period, that such damages may range from approximately $37.4
million to $70.6 million. On June 16, 1998, the Court certified the case as a
class action for the limited issue of determining if the MSP was 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 Court defined the class as all persons
who, on the date of the termination of the MSP, were participants in the MSP and
were employed by Randall's Food Markets, Inc. The trial of the limited class
action issue was conducted before the Court, sitting without a jury, on October
26, 1998. Upon order of the Court, both parties submitted post-trial briefs on
November 6, 1998. On February 18, 1999, the Court ruled on the limited class
action issue finding that the MSP was not an
O-9
<PAGE> 410
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998 (UNAUDITED)
exempt top hat plan. In addition, the Court requested on the same date a joint
statement from the parties concerning future scheduling. The parties submitted
the requested joint statement, but the Court has not yet issued any scheduling
orders. On March 4, 1999, the Company filed a motion requesting that the Court
amend its order to allow an interim appeal and confirm that the Company did not
stipulate that it bore the burden of proof at the trial. On March 26, 1999, the
Court denied the motion for an interim appeal and confirmed that the Company
bore the burden of proof at the trial. When the Court certified the limited
class issue, it stated that once that issue was resolved, it would make an
evaluation as to whether any other issues should be dealt with in a class action
context. On April 8, 1999, the Plaintiffs filed a new Motion for Class
Certification, seeking class action treatment on all remaining issues. In
addition, on April 8, 1999, the plaintiffs filed a new damages model in which
they appear to seek total damages of approximately $65.1 million with
prejudgment interest of approximately $28.0 million. Supplementally, the
plaintiffs have provided to the Company an additional schedule indicating that
damages allegedly sustained may range from $65.1 million to $72.4 million, and
assuming reinvestment, that such damages may approximate $200 million. The
Company filed its brief in opposition to the Motion on April 28, 1999 and will
oppose the request by the Plaintiffs for class certification of further issues.
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.
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, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and the contract was terminated as of
July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a transition agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
to self-distribution.
John Paul Mitchell Lawsuit -- On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., (together, the "Plaintiffs") $3.25 million in joint and several damages
from the Company
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RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998 (UNAUDITED)
and Jade, $4.5 million in exemplary damages from the Company and $3.0 million in
actual damages and $4.5 million in exemplary damages from Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge overturned the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. On December 18, 1998, the Plaintiffs filed a
motion for a new trial. On February 2, 1999, the trial court judge denied such
motion by operation of law. On February 16, 1999, the Plaintiffs filed their
notice of appeal with the court. Both parties will now file briefs with the
Austin Court of Appeals. Although the outcome of this matter cannot be predicted
with certainty, management believes an unfavorable outcome will not have a
material adverse effect on the Company, its operations, its financial condition
or its cash flows.
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, its financial condition or its cash flows.
4. RECENT PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities", ("SOP 98-5") which requires that costs incurred for start-up
activities should be charged to operations as incurred. Although the Company has
not fully assessed the impact of adopting SOP 98-5, the Company does not believe
that such adoption will have a material impact on its financial statements. The
Company is required to adopt SOP 98-5 in its fiscal year ending June 24, 2000.
Initial application of SOP 98-5 will be reported as a cumulative effect of an
accounting change.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company currently operates a chain of 114 supermarkets primarily under
the Randalls and Tom Thumb banners in the Houston, Dallas/Fort Worth and Austin
metropolitan areas. The Company operates on a 52 or 53 week fiscal year ending
on the last Saturday of each June. Same-store sales is defined as net sales for
stores in full operation in each of the current fiscal periods and the
comparable periods of the prior fiscal year. Replacement stores are included in
the same-store sales calculation. A replacement store is defined as a store that
is opened to replace a store that is closed nearby. Identical-store sales is
defined as net sales for stores in full operation in each of the current fiscal
periods and the comparable periods of the prior fiscal year, excluding expansion
and replacement stores.
Presented below is a table showing the percentage of net sales represented
by certain items in the Company's condensed consolidated statements of income
(dollars in thousands):
<TABLE>
<CAPTION>
40 WEEKS ENDED 12 WEEKS ENDED
--------------------------------------- -----------------------------------
APRIL 3, APRIL 4, APRIL 3, APRIL 4,
1999 1998 1999 1998
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $1,997,241 100.0% $1,851,817 100.0% $602,917 100.0% $552,524 100.0%
Cost of sales........ 1,442,535 72.2% 1,345,145 72.6% 436,504 72.4% 399,500 72.3%
---------- ----- ---------- ----- -------- ----- -------- -----
Gross profit......... 554,706 27.8% 506,672 27.4% 166,413 27.6% 153,024 27.7%
Selling, general and
administrative
expenses........... 429,037 21.5% 412,698 22.3% 124,623 20.7% 124,760 22.6%
Depreciation and
amortization....... 45,996 2.3% 37,969 2.1% 14,795 2.5% 11,660 2.1%
---------- ----- ---------- ----- -------- ----- -------- -----
Operating income..... 79,673 4.0% 56,005 3.0% 26,995 4.5% 16,604 3.0%
Interest expense,
net................ 26,424 1.3% 25,612 1.4% 8,164 1.4% 7,599 1.4%
---------- ----- ---------- ----- -------- ----- -------- -----
Income before income
taxes.............. 53,249 2.7% 30,393 1.6% 18,831 3.1% 9,005 1.6%
Provision for income
taxes.............. 22,974 1.2% 13,942 0.8% 8,021 1.3% 4,143 0.7%
---------- ----- ---------- ----- -------- ----- -------- -----
Net income........... $ 30,275 1.5% $ 16,451 0.9% $ 10,810 1.8% $ 4,862 0.9%
========== ===== ========== ===== ======== ===== ======== =====
EBITDA............... $ 127,669 6.4% $ 95,674 5.2% $ 42,600 7.1% $ 28,774 5.2%
========== ===== ========== ===== ======== ===== ======== =====
</TABLE>
NET SALES -- Net sales for the forty weeks ended April 3, 1999 ("Fiscal
Year to Date 1999") increased by $145.4 million or 7.9% compared to the forty
weeks ended April 4, 1998 ("Fiscal Year to Date 1998"). Such increase is
partially attributable to additional sales of $47.4 million generated from the
opening of three new stores (excluding three replacement stores) during Fiscal
Year to Date 1999 and the operation during such period of two stores (excluding
two replacement stores) opened during the fiscal year ended June 27, 1998
("Fiscal Year 1998") which were not in operation during the entire comparable
period of Fiscal Year to Date 1998. In addition, the Company experienced an
increase in same-store sales of approximately $144.4 million in Fiscal Year to
Date 1999 as compared to Fiscal Year to Date 1998. These increases were offset
by a decline of approximately $44.9 million generated from closed and
temporarily closed stores that are excluded from same-store sales.
Net sales during the 12 weeks ended April 3, 1999 ("Third Quarter 1999")
increased by $50.4 million or 9.1% as compared to the 12 weeks ended April 4,
1998 ("Third Quarter 1998"). Such increase is partially attributable to
additional sales of approximately
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$20.0 million generated from the opening of three new stores (excluding three
replacement stores) during Fiscal Year to Date 1999 and the operation during
Third Quarter 1999 of one store (excluding two replacement stores) opened during
Fiscal Year 1998 which was not in operation during Third Quarter 1998. In
addition, the Company experienced an increase in same-store sales of
approximately $36.0 million during Third Quarter 1999 as compared to Third
Quarter 1998. These increases were offset by a decline of $4.6 million generated
from closed and temporarily closed stores that are excluded from same-store
sales.
The Company's same-store sales during Fiscal Year to Date 1999 and Third
Quarter 1999 increased approximately 8.1% and 6.6%, respectively, compared to
increases of 2.5% and 3.9% for Fiscal Year to Date 1998 and Third Quarter 1998,
respectively. Such improvements are due primarily to the store remodeling and
expansion program, the contribution of replacement stores, the success of
merchandising, marketing and customer service initiatives and favorable economic
conditions. Such sales increases were also favorably impacted by the Easter
holiday falling in Third Quarter 1999 versus the fourth quarter of the fiscal
year ended June 27, 1998. Identical-store sales increased approximately 5.4% and
3.5% during Fiscal Year to Date 1999 and Third Quarter 1999, respectively,
compared to increases of 1.5% and 3.3% for Fiscal Year to Date 1998 and Third
Quarter 1998, respectively. The Company anticipates that the rate of improvement
in same-store sales and identical-store sales will decline in future periods as
such sales are compared to stronger sales of comparable periods of the previous
year.
GROSS PROFIT -- Gross profit for Fiscal Year to Date 1999 and Third Quarter
1999 increased by $48.0 million or 9.5% and $13.4 million or 8.7%, respectively,
compared to the corresponding periods of the prior year. The dollar increases in
gross profit are primarily attributable to the increased sales volume during the
Fiscal Year 1999 periods. Gross profit as a percentage of net sales increased to
27.8% for Fiscal Year to Date 1999 from 27.4% for Fiscal Year to Date 1998. Such
increases are primarily due to more effective promotional efforts and higher
gross margins at new and replacement stores. Such higher gross margins at new
and replacement stores are due primarily to their more expansive specialty
departments and broader range of products and services offered by such stores.
Gross profit as a percentage of net sales decreased to 27.6% for Third Quarter
1999 from 27.7% for Third Quarter 1998. Such decrease during the Third Quarter
1999 was primarily due to a charge for estimated inventory losses in the amount
of $0.7 million relating to three stores that the Company has decided to close
or replace during the remainder of fiscal year ending June 26, 1999 ("Fiscal
Year 1999") and to an increase of $0.3 million in the LIFO provision.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $16.3 million or 4.0% during Fiscal Year to
Date 1999 and as a percentage of net sales decreased to 21.5% for Fiscal Year to
Date 1999 from 22.3% for Fiscal Year to Date 1998. This decrease, as a
percentage of net sales, was due primarily to the Company's focus on expense
management and the increase in net sales. Selling, general and administrative
expenses decreased $0.1 million or 0.1% during Third Quarter 1999 compared to
the same period of the prior year and as a percentage of sales, decreased to
20.7% for Third Quarter 1999 from 22.6% for Third Quarter 1998. These Third
Quarter 1999 decreases resulted from the factors discussed above as well as from
approximately $1.6 million awarded the Company in two lawsuits. Selling, general
and administrative expenses for Fiscal Year to Date 1999 and Third Quarter 1999
were also reduced by approximately $4.3 million due to the reversal of a portion
of a reserve that was recorded in the fiscal year ended June 28, 1997 ("Fiscal
Year 1997") for planned store closures.
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This reversal relates to two stores which the Company decided not to close that
were part of the Fiscal Year 1997 reserve. These decreases in selling, general
and administrative expenses were offset to some degree by a charge of
approximately $3.0 million relating to three stores, not included in the Fiscal
Year 1997 reserve, that the Company has decided to close or replace during the
remainder of Fiscal Year 1999. Of these three stores, two were closed on April
10, 1999 and the remaining store is expected to be closed during the remainder
of Fiscal Year 1999. The aggregate revenue and operating loss for Third Quarter
1999 from the two of these three stores that the Company does not plan to
replace were $5.4 million and $0.6 million, respectively, and the revenue and
operating loss from such stores for Fiscal Year to Date 1999 were $20.3 million
and $2.1 million, respectively. At April 3, 1999, the aggregate carrying value,
net of the closed store reserve, of the fixed assets of these three stores was
$3.9 million, or less than 0.4% of the Company's total assets.
EBITDA (EARNINGS BEFORE NET INTEREST EXPENSE, INCOME TAXES, DEPRECIATION,
AMORTIZATION AND LIFO PROVISION) AND OPERATING INCOME -- EBITDA for Fiscal Year
to Date 1999 and Third Quarter 1999 increased by $32.0 million or 33.4% and
$13.8 million or 48.1%, respectively, compared to the same periods of the prior
year. EBITDA as a percentage of net sales increased to 6.4% for Fiscal Year to
Date 1999 from 5.2% for Fiscal Year to Date 1998 and increased to 7.1% for Third
Quarter 1999 from 5.2% for Third Quarter 1998. Operating income for Fiscal Year
to Date 1999 and Third Quarter 1999 increased by $23.7 million or 42.3% and
$10.4 million or 62.6%, respectively, compared to the corresponding periods of
the prior year. Such increases are primarily attributable to the growth in
sales, increases in gross profit and reduction in the rate of selling, general
and administrative expenses described above.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense for
Fiscal Year to Date 1999 and Third Quarter 1999 increased by $8.0 million or
21.1% and $3.1 million or 26.9%, respectively, compared to the same periods of
the prior year. Depreciation and amortization expense, as a percentage of net
sales, increased to 2.3% for Fiscal Year to Date 1999 from 2.1% for Fiscal Year
to Date 1998 and increased to 2.5% for Third Quarter 1999 from 2.1% for Third
Quarter 1998. Such increases are primarily due to new store openings, the
remodeling of certain existing stores and the expansion of the Company's
distribution network in connection with the Company's capital expenditure
program that began in Fiscal Year 1998. This trend is expected to continue as
the Company continues its capital expenditure program. See "Liquidity and
Capital Resources".
INTEREST EXPENSE, NET -- Net interest expense for Fiscal Year to Date 1999
and Third Quarter 1999 increased by $0.8 million or 3.2% and $0.6 million or
7.4%, respectively, compared to the same periods of the prior year, due
primarily to increased utilization of the Company's revolving credit facility
available under its bank credit agreement.
PROVISION FOR INCOME TAXES -- The provision for income taxes for Fiscal
Year to Date 1999 and Third Quarter 1999 was $23.0 million and $8.0 million,
respectively, compared to $13.9 million and $4.1 million, respectively, for the
corresponding periods of the prior year. Such increases are primarily due to the
Company's increased pre-tax income.
NET INCOME -- Net income for Fiscal Year to Date 1999 and Third Quarter
1999 increased $13.8 million or 84.0% and $5.9 million or 122.3%, respectively,
compared to the corresponding periods of the prior year due primarily to the
combined impact of the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES -- The Company is a holding company, and as
a result, its operating cash flow and its ability to service its indebtedness,
including the Company's $150.0 million aggregate principal amount outstanding of
9 3/8% Series B Senior Subordinated Notes due 2007, are dependent upon the
operating cash flow of its subsidiaries and the payment of funds by such
subsidiaries to the Company in the form of loans, dividends or otherwise.
The Company's principal sources of liquidity are expected to be cash flow
from operations, borrowings under the $225.0 million revolving credit facility
("Revolver") available under the Company's current bank credit agreement and
proceeds from lease financing agreements. As of April 3, 1999, the Company had
approximately $124.7 million available (net of approximately $0.3 million of
outstanding letters of credit) to be borrowed under the Revolver. Management
anticipates that the Company's principal uses of liquidity will be to provide
working capital, meet debt service requirements and finance the Company's
expansion and remodeling plans. Management believes that cash flows generated
from operations, borrowings under the Revolver and proceeds from lease financing
arrangements will adequately provide for the Company's working capital and debt
service needs and will be sufficient to fund its expected capital expenditures.
During Fiscal Year to Date 1999 and Fiscal Year to Date 1998, operating
activities provided net cash of approximately $46.1 million and $69.9 million,
respectively. Net cash provided by operations during Fiscal Year to Date 1999
resulted primarily from net income during the period (adjusted for the non-cash
impact of depreciation and amortization) and increases in accounts payable,
offset to some extent by increases in merchandise inventories and accounts
receivable. Net cash provided by operations during Fiscal Year to Date 1998
resulted primarily from net income (adjusted for the non-cash impact of
depreciation and amortization), the collection of a $10.0 million federal income
tax receivable, and increases in accounts payable and accrued expenses, offset
to some extent by increases in merchandise inventories and accounts receivable.
Financing activities provided approximately $96.8 million during Fiscal Year to
Date 1999, primarily from borrowings under the credit agreement offset by a
reduction of debt and capital lease obligations. During Fiscal Year to Date
1998, financing activities utilized approximately $5.5 million, primarily due to
debt reduction.
Cash used in investing activities during Fiscal Year to Date 1999 and
Fiscal Year to Date 1998 consisted primarily of capital expenditures of
approximately $176.1 million and $64.0 million, respectively, offset to some
extent by proceeds from asset sales of approximately $40.0 million and $23.2
million during Fiscal Year to Date 1999 and Fiscal Year to Date 1998,
respectively. Capital expenditures primarily include expenditures related to the
construction of new stores, the purchase of real estate, the remodeling of
existing stores, ongoing store expenditures for equipment and capitalized
maintenance, as well as expenditures relating to the Company's warehousing and
distribution network and computer equipment.
During Fiscal Year 1998, the Company embarked upon a program to accelerate
its store development and remodeling and to optimize its distribution network.
Such program has resulted in a level of capital expenditures in excess of
historical levels. During Fiscal Year to Date 1999, the Company made capital
expenditures of approximately $176.1 million primarily for the construction of
new stores, purchase of land, remodel or renovation of existing stores,
expansion of its distribution network, and computer hardware and software
expenditures. The Company currently expects to make additional expenditures of
approximately $72.0 million for such capital assets for the remainder of the
fiscal
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year ending June 26, 1999 ("Fiscal Year 1999"). The Company anticipates funding
its future capital expenditures and expansion program with cash flow from
operations, borrowings under the Revolver and proceeds from lease financing
arrangements, including a five-year, $50.0 million synthetic lease arrangement
that the Company entered into on September 10, 1998.
During Fiscal Year 1998, the Company commenced expansion of its
distribution network in a strategic shift toward self-distribution. The
transition to self-distribution is expected to increase the operational and
purchasing efficiencies of the Company's distribution network and lower the
Company's overall cost of sales, although no assurance can be given in this
regard. To date, the Company has completed the transition to its new
distribution center in Roanoke, Texas, including the receipt and shipment of dry
grocery inventory previously purchased from The Fleming Companies, Inc.
("Fleming") distribution center in Dallas, Texas. With the exception of a new
freezer, the Company has also completed the expansion of the Telge Road facility
in Houston, Texas and is beginning to transition the receipt and shipment of dry
grocery inventory from the Fleming distribution center in Houston, Texas. The
Company has not experienced any disruption to its supply of product as a result
of such progress. While the Company has distributed products to its stores for
many years, the expansion and move to self-distribution present multiple risks
that could potentially have an adverse impact on the Company's financial results
for a particular quarter or annual reporting period. Such risks include, but are
not limited to, increased borrowings due to the build-up of excess inventory
levels and lower sales, gross margin and net income due to the potential
disruptions of product delivery and sourcing to the stores. Although there can
be no assurance, management believes that its extensive planning process,
progress on the transition to date and prior experience in distribution reduce
the risks of a significant disruption of supply for the duration of the
transition.
NEW ACCOUNTING STANDARDS -- In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities", ("SOP 98-5") which requires that costs
incurred for start-up activities should be charged to operations as incurred.
Although the Company has not fully assessed the impact of adopting SOP 98-5, the
Company does not believe that such adoption will have a material impact on its
financial statements. The Company is required to adopt SOP 98-5 in its fiscal
year ending June 24, 2000. Initial application of SOP 98-5 will be reported as a
cumulative effect of an accounting change.
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.
YEAR 2000 COMPLIANCE -- The year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year, as well as hardware designed with similar constraints. Some of
the Company's computer programs and hardware that have date-sensitive functions
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions in
operations including, among other things, a temporary inability to process
transactions, receive invoices, make payments or engage in similar normal
business activities.
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In February 1997, the Company began a project, under the direction of the
Company's Chief Information Officer, to address the year 2000 issue. The Company
is utilizing both internal and external resources to identify, upgrade and test
the Company's hardware, software, systems and processes ("IT systems") for year
2000 compliance. In July 1997, the Company completed the identification phase of
its project with a comprehensive inventory and impact assessment of its IT
systems. Such phase identified various IT systems requiring upgrades in order to
be year 2000 compliant. To complete the upgrade and testing phases, the Company
developed the Y2K Migration Plan (the "Y2K Plan"). The Y2K Plan is currently
underway and expected to be substantially complete by the end of Fiscal Year
1999. Presently, approximately 75% of the Company's IT systems that were
determined to be non-compliant have been upgraded and tested, and are now
believed to be year 2000 compliant. Year 2000 upgrades have been prioritized to
complete all critical systems in the early phases of the Y2K Plan.
The Company currently expects to expense approximately $2.0 million in
Fiscal Year 1999 for the cost of upgrading its IT systems under the Y2K Plan. To
date, the Company has expensed less than $1.5 million. In addition, the Company
currently expects to invest approximately $23.0 million for hardware and
software programs to replace systems that are inefficient and in need of
replacement regardless of their year 2000 compliance status. During the forty
weeks ended April 3, 1999, the Company invested approximately $17.6 million for
such hardware and software programs that are Year 2000 compliant. The Company
currently expects to make additional such purchases of approximately $5.0
million during the remainder of Fiscal Year 1999. The Company expects to fund
the Y2K Plan and hardware and software purchases with cash flows generated from
operations and borrowings under the Revolver.
The Company is also currently assessing the year 2000 readiness of its non-
information technology systems and equipment, such as refrigeration units,
ovens, scales, safes and other equipment ("non-IT systems") which may include
imbedded technology such as microcontrollers that are not year 2000 compliant.
The Company currently intends to complete its plan to address such non-IT
systems issues by the end of Fiscal Year 1999 and expects that such systems will
be year 2000 compliant before calendar year 2000. The cost of achieving such
compliance is not currently expected to have a material impact on the Company's
financial position, results of operations or cash flows.
The Company has suppliers and other third parties, such as utility
companies, that it relies on for business operations and currently expects those
suppliers and other third parties are taking the appropriate action for year
2000 compliance. The Company cannot provide assurance that the failure of such
suppliers and other third parties to address the year 2000 issue will not have
an adverse impact on the Company. While the Company has limited ability to test
and control its suppliers' and other third parties' year 2000 readiness, the
Company is contacting major suppliers and critical other third parties and
obtaining and assessing whether they will be year 2000 compliant. Based on the
responses, the Company will develop contingency plans to reduce the impact of
transactions with non-compliant major suppliers and other critical parties.
Although there can be no assurance that multiple business disruptions caused by
technology failures can be adequately anticipated, the Company is identifying
second and third sources of supply for major suppliers to minimize the risk of
business interruptions.
The Company intends for its year 2000 date conversion project for both its
IT systems and non-IT systems to be completed on a timely basis so as to not
significantly impact business operations. However, if the Company or any
critical third parties do not complete
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necessary upgrades as planned, the year 2000 issue may have a material impact on
the Company, including, among other things, a temporary inability to procure and
distribute product, process transactions, receive invoices, make payments,
refrigerate perishable products or engage in similar normal business activities.
The Company is currently assessing the potential impact of such year
2000-related issues and will develop contingency plans to mitigate the risk of
any scenario that may have a material impact on the Company. The Company intends
to formalize such contingency plans by the fourth quarter of calendar year 1999.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed below,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report, including, without
limitation, in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in the Company's related press release and in oral
statements made by authorized officers of the Company. When used in this report,
any press release or oral statements, the words "looking forward", "estimate,"
"project," "anticipate," "expect," "intend," "believe" and similar expressions
are intended to identify forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions made by
management of the Company, which, although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be placed upon such
estimates and statements. No assurance can be given that any of such statements
or estimates will be realized and actual results will differ from those
contemplated by such forward-looking statements. Accordingly, the Company hereby
identifies the following important factors which could cause the Company's
financial results to differ materially from any such results which might be
projected, forecast, estimated or budgeted by the Company in forward-looking
statements: heightened competition, including specifically the intensification
of price competition and the expansion, renovation and opening of new stores by
competitors; failure to obtain new customers or retain existing customers;
inability to carry out strategies to accelerate new store development and
remodeling programs, reduce operating costs, differentiate products and
services, leverage the frequent shopper program and increase private label
sales; insufficiency of financial resources to renovate and expand the store
base; increase in leverage and interest expense due to the expansion and
remodeling program; outcome of the MSP Litigation and the John Paul Mitchell
Litigation; issues arising in connection with the Y2K Plan; prolonged dispute
with labor; economic downturn in the State of Texas; loss or retirement of key
executives; transition to self distribution; higher selling, general and
administrative expenses occasioned by the need for additional advertising,
marketing, administrative or management information systems expenditures;
adverse publicity and news coverage.
The foregoing review of the factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to
this filing.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the 16 weeks ended October 17, 1998, the Company entered into two
interest rate swap agreements to hedge interest rate costs and risks associated
with variable interest rates. Such agreements effectively convert variable-rate
debt, to the extent of the notional amount, to fixed-rate debt with effective
per annum interest rates of 5.493% and 5.295%, with respect to the London
Interbank Offered Rate portion of such borrowings. The aggregate notional
principal amount of such agreements is $100.0 million, $50.0 million of which
became effective August 25, 1998 and matures August 25, 2001, and $50.0 million
of which became effective September 2, 1998 and matures September 2, 2001. The
counterparty to such agreements can terminate either agreement after two years,
at its sole discretion. The counterparty to such agreements is a major financial
institution, and therefore, credit losses from counterparty nonperformance are
not anticipated.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MSP Litigation -- Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP on
its date of termination (which is alleged by plaintiffs to be approximately 250
persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of fiduciary duty. The plaintiffs assert that the yearly
plan agreement executed by each participant in the MSP was a contract for a
specified retirement and death benefit set forth in such plan agreements and
that such benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that an
expert for the plaintiffs, assuming class certification, may testify that the
damages allegedly sustained by the plaintiff class may range from approximately
$18.0 million to $37.2 million and, assuming that a court were to award
additional damages based on a rate of return achieved by an equity index over
the relevant period, that such damages may range from approximately $37.4
million to $70.6 million. On June 16, 1998, the Court certified the case as a
class action for the limited issue of determining if the MSP was 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 Court defined the class as all persons
who, on the date of the termination of the MSP, were participants in the MSP and
were employed by Randall's Food Markets, Inc. The trial of the limited class
action issue was conducted before the Court, sitting without a jury, on October
26, 1998. Upon order of the Court, both parties submitted post-trial briefs on
November 6, 1998. On February 18, 1999, the Court ruled on the limited class
action issue finding that the MSP was not an exempt top hat plan. In addition,
the Court requested on the same date a joint statement from the parties
concerning future scheduling. The parties submitted the requested joint
statement, but the Court has not yet issued any scheduling orders. On March 4,
1999, the Company filed a motion requesting that the Court amend its order to
allow an interim appeal and confirm that the Company did not stipulate that it
bore the burden of proof at the trial. On March 26, 1999, the Court denied the
motion for an interim appeal and confirmed that the Company bore the burden of
proof at the trial. When the Court certified the limited class issue, it stated
that once that issue was resolved, it would make an evaluation as to whether any
other issues should be dealt with in a class action context. On April 8, 1999,
the Plaintiffs filed a new Motion for Class Certification, seeking class action
treatment on all remaining issues. In addition, on April 8, 1999, the plaintiffs
filed a new damages model in which they appear to seek total damages of
approximately $65.1 million with prejudgment interest of approximately $28.0
million. Supplementally, the plaintiffs have provided to the Company an
additional schedule indicating that damages allegedly sustained may range from
$65.1 million to $72.4 million, and assuming reinvestment, that such damages may
approximate $200 million. The Company filed its brief in opposition to the
Motion on April 28, 1999 and will oppose the request by the Plaintiffs for class
certification of further issues. Based upon current facts, the Company is
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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.
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, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and that the contract was terminated as
of July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a Transition Agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
into self-distribution.
John Paul Mitchell Lawsuit -- On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., (together, the "Plaintiffs") $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge threw out the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. On December 18, 1998, the Plaintiffs filed a
motion for a new trial. On February 2, 1999, the trial court judge denied such
motion by operation of law. On February 16, 1999, the Plaintiffs filed their
notice of appeal with the court. Both parties will now file briefs with the
Austin Court of Appeals. Although the outcome of this matter cannot be predicted
with certainty, management believes an unfavorable outcome will not have a
material adverse effect on the Company, its operations, its financial condition
or its cash flows.
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, its financial condition or its cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
15.1 Letter in lieu of consent of Deloitte & Touche LLP,
independent accountants
27 Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
On March 8, 1999, The Company filed a Form 8-K reporting developments in
the Company's MSP Litigation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RANDALL'S FOOD MARKETS, INC.
(Registrant)
<TABLE>
<S> <C>
Date: May 17, 1999 /s/ R. RANDALL ONSTEAD, JR.
--------------------------------------------------------
R. Randall Onstead, Jr.,
Chairman and Chief Executive Officer
Date: May 17, 1999 /s/ MICHAEL M. CALBERT
--------------------------------------------------------
Michael M. Calbert,
Senior Vice President and Chief Financial Officer
</TABLE>
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